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Universal Banking in India

UNIVERSAL BANKING IN INDIA

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Chapter 1 Indian Banking System

Contents:1.1) Definition of bank 1.2) Banking structure in India 1.3) Indian banking system 1.4) Broad classification of banks in India 1.5) Role of the banks

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1.1) DEFINITION OF BANK:“A financial institution that is licensed to deal with money and its substitutes by accepting time and demand deposits, making loans, and investing in securities. The bank generates profits from the difference in the interest rates charged and paid.”

1.2) BANKING STRUCTURE IN INDIA:Today’s dynamic world banks are inevitable for the development of a country. Banks play a pivotal role in enhancing each and every sector. They have helped bring a draw of development on the world’s horizon and developing country like India is no exception. Banks fulfills the role of a financial intermediary. This means that it acts as a vehicle for moving finance from those who have surplus money to (however temporarily) those who have deficit. In everyday branch terms the banks channel funds from depositors whose accounts are in credit to borrowers who are in debit. Without the intermediary of the banks both their depositors and their borrowers would have to contact each other directly. This can and does happen of course. This is what has lead to the very foundation of financial institution like banks. Before few decades there existed some influential people who used to land money. But a substantially high rate of interest was charged which made borrowing of money out of the reach of the majority of the people so there arose a need for a financial intermediate. The Bank have developed their roles to such an extent that a direct contact between the depositors and borrowers in now known as disintermediation. Banking industry has always revolved around the traditional function of taking deposits, money transfer and making advances. Those three are closely related to each other, the objective being to lend money, which is the profitable activity of the three. Taking deposits generates funds for lending and money transfer services are necessary for the attention of deposits.

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The Bank have introduced progressively more sophisticated versions of these services and have diversified introduction in numerable areas of activity not directly relating to this traditional trinity.

1.3) INDIAN BANKING SYSTEM:-

Reserve Bank of India

Schedule Banks

Non-Schedule Banks

State co-op Banks

Commercial Banks

Central co-op Banks and Primary Cr. Societies

Commercial Banks

Indian

Foreign

Public Sector Banks

Private Sector Banks

HDFC, ICICI etc.

State Bank of India and its Subsidiaries

Other Nationalized Banks

Regional Rural Banks

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1.4) BROAD CLASSIFICATION OF BANKS IN INDIA:(1) The RBI: The RBI is the supreme monetary and banking authority in the country and has the responsibility to control the banking system in the country. It keeps the reserves of all scheduled banks and hence is known as the “Reserve Bank”. (2) Public Sector Banks:  State Bank of India and its Associates (8)  Nationalized Banks (19)  Regional Rural Banks Sponsored by Public Sector Banks (196) (3) Private Sector Banks:  Old Generation Private Banks (22)  Foreign New Generation Private Banks (8)  Banks in India (40) (4) Co-operative Sector Banks:  State Co-operative Banks  Central Co-operative Banks  Primary Agricultural Credit Societies  Land Development Banks  State Land Development Banks (5) Development Banks: Development Banks mostly provide long term finance for setting up industries. They also provide short-term finance (for export and import activities)  Industrial Finance Co-operation of India (IFCI)  Industrial Development of India (IDBI)  Industrial Investment Bank of India (IIBI)  Small Industries Development Bank of India (SIDBI)

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 National Bank for Agriculture and Rural Development (NABARD)  Export-Import Bank of India

1.5) ROLE OF THE BANKS:Banks play a positive role in economic development of a country as repositories of community’s savings and as purveyors of credit. Indian Banking has aided the economic development during the last fifty years in an effective way. The banking sector has shown a remarkable responsiveness to the needs of planned economy. It has brought about a considerable progress in its efforts at deposit mobilization and has taken a number of measures in the recent past for accelerating the rate of growth of deposits. As recourse to this, the commercial banks opened branches in urban, semi-urban and rural areas and have introduced a number of attractive schemes to foster economic development. The activities of commercial banking have growth in multi-directional ways as well as multi-dimensional manner. Banks have been playing a catalytic role in area development, backward area development, extended assistance to rural development all along helping agriculture, industry, international trade in a significant manner. In a way, commercial banks have emerged as key financial agencies for rapid economic development. By pooling the savings together, banks can make available funds to specialized institutions which finance different sectors of the economy, needing capital for various purposes, risks and durations. By contributing to government securities, bonds and debentures of term-lending institutions in the fields of agriculture, industries and now housing, banks are also providing these institutions with an access to the common pool of savings mobilized by them, to that extent relieving them of the responsibility of directly approaching the saver. This intermediation role of banks is particularly important in the early stages of economic development and financial specification. A country like India, with different regions at different

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stages of development, presents an interesting spectrum of the evolving role of banks, in the matter of inter-mediation and beyond. Mobilization of resources forms an integral part of the development process in India. In this process of mobilization, banks are at a great advantage, chiefly because of their network of branches in the country. And banks have to place considerable reliance on the mobilization of deposits from the public to finance development programmes. Further, deposit mobilization by banks in India acquired greater significance in their new role in economic development. Commercial banks provide short-term and medium-term financial assistance. The short-term credit facilities are granted for working capital requirements. The medium-term loans are for the acquisition of land, construction of factory premises and purchase of machinery and equipment. These loans are generally granted for periods ranging from five to seven years. They also establish letters of credit on behalf of their clients favoring suppliers of raw materials/machinery (both Indian and foreign) which extend the banker’s assurance for payment and thus help their delivery. Certain transaction, particularly those in contracts of sale of Government Departments, may require guarantees being issued in lieu of security earnest money deposits for release of advance money, supply of raw materials for processing, full payment of bills on the assurance of the performance etc. Commercial banks issue such guarantees also.

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Chapter 2 Universal Banking

Contents:2.1) 2.2) 2.3) 2.4) 2.5) Definition Concept of universal banking Universal banking models Universal banking pros – cons “SWOT” analysis in universal banking.

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WHAT IS UNIVERSAL BANKING?
Universal Banking is a multi-purpose and multi-functional financial supermarket (a company offering a wide range of financial services e.g. stock, insurance and realestate brokerage) providing both banking and financial services through a single window. In a nutshell, a Universal Banking is a superstore for financial products under one roof. Corporate can get loans and avail of other handy services, while can deposit and borrow. It includes not only services related to savings and loans but also investments.

2.1) DEFINITION OF UNIVERSAL BANKING:As per the World Bank, "In Universal Banking, large banks operate extensive network of branches, provide many different services, hold several claims on firms(including equity and debt) and participate directly in the Corporate Governance of firms that rely on the banks for funding or as insurance underwriters". RBI guidelines on Universal Banking As per RBI guidelines of April 2001, FIs have an option to transform into a bank provided they ensure compliance with the following: Reserve requirements (CRR/SLR):- Compliance with the cash reserve ratio and statutory liquidity ratio requirements would be mandatory for an FI after its conversion into a universal bank. Permissible activities:- Any activity of an FI currently undertaken but not permissible for a bank under Section 6(1) of the B. R. Act, 1949, may have to be stopped or divested after its conversion into a universal bank.

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Disposal of non-banking assets:- Any immovable property, howsoever acquired by an FI, would, after its conversion into a universal bank, be required to be disposed of within the maximum period of 7 years from the date of acquisition, in terms of Section 9 of the B. R. Act.

Composition of the Board:- Composition of the Board of Directors to ensure compliance with the provisions of Section 10(A) of the B. R. Act, which requires at least 51% of the total number of directors to have special knowledge and experience.

2.2) THE CONCEPT OF UNIVERSAL BANKING:The entry of banks into the realm of financial services was followed very soon after the introduction of liberalization in the economy. Since the early 1990s structural changes of profound magnitude have been witnessed in global banking systems. Large scale mergers, amalgamations and acquisitions between the banks and financial institutions resulted in the growth in size and competitive strengths of the merged entities. Thus, emerged new financial conglomerates that could maximize economies of scale and scope by building the production of financial services organization called Universal Banking. By the mid-1990s, all the restrictions on project financing were removed and banks were allowed to undertake several in-house activities. Reforms in the insurance sector in the late 1990s, and opening up of this field to private and foreign players also resulted in permitting banks to undertake the sale of insurance products. At present, only an 'arm's length relationship between a bank and an insurance entity

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has been allowed by the regulatory authority, i.e. IRDA (Insurance Regulatory and Development Authority). The phenomenon of Universal Banking as a distinct concept, as different from Narrow Banking came to the forefront in the Indian context with the Narsimham Committee (1998) and later the Khan Committee (1998) reports recommending consolidation of the banking industry through mergers and integration of financial activities.

2.3) UNIVERSAL BANKING MODELS:According to one school of thought, there are four different types of universal banks in the world (Saunders and Walters-1994): Fully integrated universal banks:One institution offering the complete range of services.  Partly integrated financial conglomerates:One which offers range of services, but some of the range (for example mortgage banking leasing and insurance) are provided through wholly owned or partially owned subsidiaries.  Bank subsidiary structure:One which focuses essentially on commercial banking and other functions like investment banking and insurance, which are carried out through legally separate subsidiaries of the bank.  Bank holding company structure: One financial holding company owns both banking and non-banking subsidiaries that are legally separate and individually capitalized in so far as financial services other than banking are permitted by law. Generally the concept of universal banking is based on two financial

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models viz., Fully Integrated Universal Banks (FIUB) model and Financial Conglomerates (FC) model. Under FIUB model, big banks provided a wide range of banking services including commercial banking, securities related services, insurance related business services, etc. under one roof. The FIUB model is being practiced in Germany. This model is also known as German type financial model of Universal Banking. Under FC model the different financial services are provided through separate subsidiaries. This model is popularly known as the British American type model of Universal Banking. The FC model is being practiced in US and the UK.

2.4) UNIVERSAL BANKING – PROS AND CONS:The solution of Universal Banking was having many factors to deal with, which can be further analyzed by the pros and cons.

ADVANTAGES OF UNIVERSAL BANKING: Economies of Scale: The main advantage of Universal Banking is that it results in greater economic efficiency in the form of lower cost, higher output and better products. Many Committees and reports by Reserve Bank of India are in favor of Universal banking as it enables banks to explit economies of scale and scope.  Profitable Diversions: By diversifying the activities, the bank can use its existing expertise in one type of financial service in providing other types.

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So, it entails less cost in performing all the functions by one entity instead of separate bodies.  Resource Utilization: A bank possesses the information on the risk characteristics of the clients, which can be used to pursue other activities with the same clients. A data collection about the market trends, risk and returns associated with portfolios of Mutual Funds, diversifiable and non diversifiable risk analysis, etc, is useful for other clients and information seekers. Automatically, a bank will get the benefit of being involved in the researching.  Easy Marketing on the Foundation of a Brand Name: A bank's existing branches can act as shops of selling for selling financial products like Insurance, Mutual Funds without spending much efforts on marketing, as the branch will act here as a parent company or source. In this way, a bank can reach the client even in the remotest area without having to take resource to an agent.  One-stop shopping: The idea of 'one-stop shopping' saves a lot of transaction costs and increases the speed of economic activities. It is beneficial for the bank as well as its customers.  Investor Friendly Activities: Another manifestation of Universal Banking is bank holding stakes in a form: a bank's equity holding in a borrower firm, acts as a signal for other investor on to the health of the firm since the lending bank is in a better position to monitor the firm's activities.

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DISADVANTAGES OF UNIVERSAL BANKING: Grey Area of Universal Bank: The path of universal banking for DFIs is strewn with obstacles. The biggest one is overcoming the differences in regulatory requirement for a bank and DFI. Unlike banks, DFIs are not required to keep a portion of their deposits as cash reserves.  No Expertise in Long term lending: In the case of traditional project finance, an area where DFIs tread carefully, becoming a bank may not make a big difference to a DFI. Project finance and Infrastructure finance are generally long- gestation projects and would require DFIs to borrow longterm. Therefore, the transformation into a bank may not be of great assistance in lending long-term.  NPA Problem Remained Intact: The most serious problem that the DFIs have had to encounter is bad loans or Non-Performing Assets (NPAs). For the DFIs and Universal Banking or installation of cutting-edge-technology in operations are unlikely to improve the situation concerning NPAs.

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“SWOT” ANALYSIS IN UNIVERSAL BANKING

Universal Banking

Internal

External

Strengths

Weakness

Opportuniti es

Threats

2.5) “SWOT” ANALYSIS IN UNIVERSAL BANKING:The solution of Universal Banking was having many factors to deal with which further categorized under Strengths, Weaknesses, Opportunities and Threats. STRENGTHS:-

* Economies Of Scale:The main advantage of Universal Banking is that it results in greater economic efficiency in the form of lower cost, higher output and better products. Various Reserve Banks Committees and reports in favor of Universal Banking, is that it enables banks to exploit economies of scale and scope. It means a bank can reduce average costs and thereby improve spreads if it expands its scale of operations and diversifying activities.

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* Profitable Diversions:By diversifying the activities, the bank can use its existing expertise in one type of financial service in providing other types. So, it entails less cost in performing all the functions by one entity instead of separate bodies.

* Resource Utilization:A bank possesses the information on the risk characteristics of the clients, which it can use to pursue other activities with the same client. A data collection about the market trends, risk and returns associated with portfolios of Mutual Funds, diversifiable and non diversifiable risk analysis, etc are useful for other clients and information seekers. Automatically, a bank will get the benefit of being involved in Research.

* Easy marketing on the foundation a of Brand name:A bank has an existing network of branches, which can act as shops for selling products like Insurance, Mutual Fund without much efforts on marketing, as the branch will act here as a parent company or source. In this way a bank can reach the remotest client without having to take recourse to an agent.

* One stop shopping:The idea of 'one stop shopping' saves a lot of transaction costs and increases the speed of economic activities. It is beneficial for the bank as well as customers.

* Investor friendly activities:Another manifestation of Universal Banking is bank holding stakes in a firm. A bank's equity holding in a borrower firm, acts as a signal for other investors on to the health of the firm, since the lending bank is in a better position to monitor the

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firm's activities.

WEAKNESSES:-

* Grey area of Universal Bank:The path of Universal Banking for DFIs is strewn with obstacles. The biggest one is overcoming the differences in regulatory requirements for a bank and DFI. Unlike banks, DFIs are not required to keep a portion of their deposits as cash reserves.

* No expertise in long term lending:In the case of traditional project finance an area where DFIs tread carefully, becoming a bank may not make a big difference. Project finance and Infrastructure Finance are generally long gestation projects and would require DFIs to borrow long term. Therefore, the transformation into a bank may not be of great assistance in lending long-term.

* NPA problem remained intact:The most serious problem of DFIs have had to encounter is bad loans or Non Performing Assets (NPA). For the DFIs and Universal Banking or installation of cutting-edge-technology in operations are unlikely to improve the situation concerning NPAs. Most of the NPAs came out of loans to commodity sectors, such as steel, chemicals, textiles, etc. the improper use of DFI funds by project promoters, a sharp change in operating environment and poor appraisals by DFIs combined to destroy the viability of some projects. So, instead of improving the situation Universal Banking may worsen the situation, due to the expansion in activities banks will fail to make thorough study of the actual need of the party concerned,

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the prospect of the business, in which it is engaged, its track record, the quality of the management, etc. ICICI suffered the least in this section, but the IDBI has got worst hit of NPAs, considering the negative developments at Dabhol Power Company (DPC)

THREATS:-

* Big Empires:Universal Banking is an outcome of the mergers and acquisitions in the banking sector. The Finance Ministry is also empathetic towards it. But there will be big empires which may put the economy in a problem. Universal Banks will be the largest banks, by their asset base, income level and profitability there is a danger of 'Price Distortion'. It might take place by manipulating interests of the bank for the self interest motive instead of social interest. There is a threat to the overall quality of the products of the bank, because of the possibility of turning all the strengths of the Universal Banking into weaknesses. (e.g. - the strength of economies of scale may turn into the degradation of qualities of bank products, due to over expansion. If the banks are not prudent enough, deposit rates could shoot up and thus affect profits. To increase profits quickly banks may go in for riskier business, which could lead to a full in asset quality. Disintermediation and securitization could further affect the business of banks.

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OPPORTUNITIES:-

* To increase efficiency and productivity:Liberalization offers opportunities to banks. Now, the focus will be on profits rather than on the size of balance sheet. Fee based incomes will be more attractive than mobilizing deposits, which lead to lower cost funds. To face the increased competition, banks will need to improve their efficiency and productivity, which will lead to new products and better services.

* To get more exposure in the global market:In terms of total asset base and net worth the Indian banks have a very long road to travel when compared to top 10 banks in the world. (SBI is the only Indian bank to appear in the top 100 banks list of 'Fortune 500' based on sales, profits, assets and market value. It also ranks II in the list of Forbes 2000 among all Indian companies) as the asset base sans capital of most of the top 10 banks in the world are much more than the asset base and capital of the entire Indian banking sector. In order to enter at least the top 100 segment in the world, the Indian banks need to acquire a lot of mass in their volume of operations. Pure routine banking operations alone cannot take the Indian banks into the league of the Top 100 banks in the world. Here is the real need of universal banking, as the wide range of financial services in addition to the Commercial banking functions like Mutual Funds, Merchant banking, Factoring, Insurance, credit cards, retail, personal loans, etc. will help in enhancing overall profitability.

* To eradicate the 'Financial Apartheid' :A recent study on the informal sector conducted by Scientific Research Association for Economics (SRA), a Chennai based association, has found out that, 'Though having a large number of branch network in rural areas and urban areas,

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the lowest strata of the society is still out of the purview of banking services. Because the small businesses in the city, 34% of that goes to money lenders for funds. Another 6.5% goes to pawn brokers, etc.

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Chapter 3 Universal Banking in India – Review & Literature

Contents:3.1) History of Universal Banking in India. 3.2) Universal banking in India. 3.3) Khan committee on universal banking & fis. 3.4) Approach to universal banking.

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3.1) HISTORY OF UNIVERSAL BANKING IN INDIA:Historically, India followed a very compartmentalized financial intermediaries allowed to operate strictly in their own respectively fields. However, in the 1980sbanks were allowed to undertake various non-traditional activities through subsidiaries. This trend got momentum in the early 1990s i.e., after initiation of economic reforms with banks allowed undertaking certain activities, such as, hire-purchase and leasing in housing. While this in a way represented a gradual move towards universal banking, the current debate about universal banking in India started with the demand from the DFIs that they should be allowed to undertake banking activity in-house. In the wake of this demand, the Reserve Bank of India constituted in December 1997, a working group under the chairmanship of Shri S.H. Khan, the Chairman & the Managing Director of IDBI (hereafter referred to as Khan Working Group-KWG). The KWG, which submitted its report in May1998, recommended a progressive move towards universal banking.

(Mr. M.Narsinham) The Second Narsinham Committee appointed by Government in 1998 also echoed the same sentiment. In January 1999, the Reserve Bank issued a Discussion Paper setting out issues arising out of recommendations of the KWG and the Second Narsinham Committee. Since then a debate has been going on about universal

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banking in general and conversion of DFIs into universal banks in particular. With the opening up of the insurance sector to the private participation, the debate has gone beyond the narrow concept of universal banking.

3.2) UNIVERSAL BANKING IN INDIA:In India Development financial institutions (DFIs) and refinancing institutions (RFIs) were meeting specific sectoral needs and also providing long-term resources at concessional terms, while the commercial banks in general, by and large, confined themselves to the core banking functions of accepting deposits and providing working capital finance to industry, trade and agriculture. Consequent to the liberalization and deregulation of financial sector, there has been blurring of distinction between the commercial and investment banking. Reserve Bank of India constituted on December 8, 1997, a Working Group under the Chairmanship of Shri S.H. Khan to bring about greater clarity in the respective roles of banks and financial institutions for greater harmonization of facilities and obligations. Also report of the Committee on Banking Sector Reforms or Narasimham Committee (NC) has major bearing on the issues considered by the Khan group. The issue of universal banking resurfaced in Year 2000, when ICICI gave a presentation to RBI to discuss the time frame and possible options for transforming itself into an universal bank. Reserve Bank of India also spelt out to Parliamentary Standing Committee on Finance, its proposed policy for universal banking, includinga case-by-case approach towards allowing Domestic financial institutions tobecome the universal banks. Now RBI has asked FIs, which are interested to convert itself into a universal bank, to submit their plans for transition to a universal bank for consideration and further discussions. FIs need to formulate a road map for the transition path and strategy for smooth conversion into a universal bank over a specified time frame.

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3.3) KHAN COMMITTEE ON UNIVERSAL BANKING & FIS:The khan committee on harmonizing the role and operations of development financial institutions and banks submitted its report on April 24, 1998 with following recommendations: -

Give banking license to DFIs Merge banks with banks, DFIs Bring down CRR progressively Phase out SLR Redefine priority sector Set up a super regulator to coordinate regulators activities Develop risk-based supervisory framework Usher in legal reforms in debt recovery State level FIs is allowed to go public and come under RBI DFIs be permitted to have wholly-owned banking subsidiaries Remove cap on FIs resources mobilization Grant authorized dealers license to DFIs Set up a standing committee to coordinate lending policies

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3.4) APPROACH TO UNIVERSAL BANKING:The Narsimham Committee II suggested that Development Financial Institutions (DFIs) should convert ultimately into either commercial banks or nonbank finance companies. The Khan Working Group held the view that DFIS should be allowed to become banks at the earliest. The RBI released a 'Discussion Paper' (DP) in January 1999 for wider public debate. The feedback on the discussion paper indicated that while the universal banking is desirable from the point of view of efficiency of resource use, there is need for caution in moving towards such a system by banks and DFIs. The principle of "Universal Banking" is a desirable goal and some progress has already been made by permitting banks to diversify into investments and longterm financing and the DFIs to lend for working capital, etc. However, banks have certain special characteristics and as such any dilution of RBI's prudential and supervisory norms for conduct of banking business would be inadvisable.

(Narsinham Committee appointed by Government in 1998 )

Though the DFIs would continue to have a special role in the Indian financial System, until the debt market demonstrates substantial improvements in terms of liquidity and depth, any DFI, which wishes to do so, should have the option to transform into bank (which it can exercise), provided the prudential norms as applicable to banks are fully satisfied. To this end, a DFI would need to

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prepare a transition path in order to fully comply with the regulatory requirement of a bank.

The DFI concerned may consult RBI for such transition arrangements. Reserve Bank will consider such requests on a case-by-case basis. Financing requirements, which is necessary. In due course, and in the light of evolution of the financial system, Narasimham Committee's recommendation that, ultimately there should be only banks and Restructured NBFCs can be operationalised.

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Chapter 4 Research Methodology

Contents:5.1) Objective of research 5.2) Scope of research 5.3) Methodology 5.4) Limitation of research

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OBJECTIVE OF RESEARCH:
Universal banking is a term related to banks providing both investment services and savings and loan options to their customers. Many of the banks in Europe function on the basis of the the universal banking model. The main objectives of such a model are an increased participation in investment strategies, securing clients through saving and loan schemes, development of private sectors and cutting costs for financial services.

SCOPE OF RESEARCH:
Since many of the European continental banks are adopting the universal banking approach, it is essential for them to be more competitive on the global market where American and Asian banks offer better prices for providing financial services. The idea of the universal banks is to reduce the costs of their financial services by enlargement -- being able to expand their areas of expertise would empower European banks to engage in more serious price reduction strategies. The European Central Bank has already partially achieved this objective by providing low interest loans to European Union economies.

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METHODOLOGY:  Primary data: The primary data is collected through d process of survey method, among the defined sample size of 50 people  Secondary data: The secondary data is collected with the reference of various business journals, newspaper articles, books, bulletins, annual reports & also referable websites

LIMITATION OF RESEARCH:
As my project is belongs to certain or specific area and this is opinion of some banking customer. The mentioned customer opinion can be changed if this survey conducts on state or national level. It is based on opinion of 50 odd people. Therefore the conclusions drawn are with only limited to sample size of the conducted survey. So hence, The comparison & universal acceptance is not possible.

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Chapter 5 Harmonization of Banks And DFIs

Contents:4.1) Introduction 4.2) RBI guidelines for existing banks/fis for conversion into universal banks. 4.3) Khan working group recommendation on universal banking 4.4) INSIGHT -- towards universal banking.

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4.1) INTRODUCTION:The financial sector reforms ushered a significant change in the operating environment of banking and development financial institutions. The deregulation of interest rates, disintermediation and increasing participation by banks in project finance , altered the operating environment of banks, paving way for Universal Banking. The Development Financial Institution set up in the year 1948 with a view to meet the long-term financing needs of a project realized that to mitigate the inherent risk arising from a core product dominant portfolio, they have to short – term financing, the traditional operational division between banks and Development Financial Institution became increasingly blurred. In the light of a number of reforms measures adopted in the Indian Financial System since 1991 and keeping in view the need for evolving an efficient and competitive financial system. The Reserve bank constituted on December 8 th 1997, a working group for harmonizing the role and operations of DFIs and banks, under the Chairmanship of the then Chairman And Managing Director Of Industrial Development Bank Of India, Shri S. H. Khan with the following terms of reference:  To review the role, structure and operation of DFIs and Commercial Banks in emerging environment.  To suggest measure for bringing about harmonization in their role and operations.  To suggest measure for strengthening of the organization, human resources, risk management practices and other related issues in DFIs and Commercial Banks in the wake of Capital Account convertibility.  To examine whether DFIs could be given increased access to short – term funding and the regulatory framework needed for the purpose.

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4.2) RBI GUIDELINES FOR EXISTING BANKS/FIs FOR CONVERSION INTO UNIVERSL BANKS:
Salient operational and regulatory issues to be addressed by the FIs For the conversion into Universal bank are: 1) Reserve Requirements:Compliance with the cash reserve ratio and statutory liquidity ratio requirements (under Section 42 of RBI Act, 1934, and Section 24 of the Banking Regulation Act, 1949, respectively) would be mandatory for an FI after its conversion into a universal bank

2) Permissible activities:Any activity of an FI currently undertaken but not permissible for a bank under Section 6(1) of the B. R. Act, 1949, may have to be stopped or divested after its conversion into a universal bank.

3) Disposal of non-banking assets:Any immovable property, howsoever acquired by an FI, would, after its conversion into a universal bank, be required to be disposed of within the maximum period of 7 years from the date of acquisition, in terms of Section 9 of the B. R. Act.

4) Composition of the Board:Changing the composition of the Board of Directors might become necessary for some of the FIs after their conversion into a universal bank, to ensure compliance with the provisions of Section 10(A) of the B. R. Act, which requires at least 51% of the total number of directors to have special knowledge and experience?

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5) Prohibition on floating charge of assets:The floating charge, if created by an FI, over its assets, would require, after its conversion into a universal bank, ratification by the Reserve Bank of India under Section 14(A) of the B. R. Act, since a banking company is not allowed to create a floating charge on the undertaking or any property of the company unless duly certified by RBI as required under the Section.

6) Nature of subsidiaries:If any of the existing subsidiaries of an FI is engaged in an activity not permitted under Section 6(1) of the B R Act , then on conversion of the FI into a universal bank, delinking of such subsidiary / activity from the operations of the universal bank would become necessary since Section 19 of the Act permits a bank to have subsidiaries only for one or more of the activities permitted under Section6(1) of B. R. Act.

7) Restriction on investments:An FI with equity investment in companies in excess of 30 per cent of the paid up share capital of that company or 30 per cent of its own paid-up share capital and reserves, whichever is less, on its conversion into a universal bank, would need to divest such excess holdings to secure compliance with the provisions of Section 19(2) of the B. R. Act, which prohibits a bank from holding shares in a company in excess of these limits.

8) Connected lending:Section 20 of the B. R. Act prohibits grant of loans and advances by a bank on security of its own shares or grant of loans or advances on behalf of any of its directors or to any firm in which its director/manager or employee or guarantor is

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interested. The compliance with these provisions would be mandatory after conversion of an FI to a universal bank.

9) Licensing:An FI converting into a universal bank would be required to obtain a banking license from RBI under Section 22 of the B. R. Act, for carrying on banking business in India, after complying with the applicable conditions.

10) Branch network:An FI, after its conversion into a bank, would also be required to comply with extant branch licensing policy of RBI under which the new banks are required to allot at least 25 per cent of their total number of branches in semi-urban and rural areas.

9) Assets in India:An FI after its conversion into a universal bank, will be required to ensure that at the close of business on the last Friday of every quarter, its total assets held in India are not less than 75 per cent of its total demand and time liabilities in Indiaman required of a bank under Section 25 of the B R Act.

10)

Format of annual reports:-

After converting into a universal bank, an FI will be required to publish its annual balance sheet and profit and loss account in the in the forms set out in the Third Schedule to the B R Act, as prescribed for a banking company under Section29 and Section 30 of the B. R. Act.

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11)

Managerial remuneration of the Chief Executive Officers:-

On conversion into a universal bank, the appointment and remuneration of the existing Chief Executive Officers may have to be reviewed with the approval of RBI in terms of the provisions of Section 35 B of the B. R. Act. The Section stipulates fixation of remuneration of the Chairman and Managing Director of a bank by Reserve Bank of India taking into account the profitability, net NPAs and other financial parameters. Under the Section, prior approval of RBI would also be required for appointment of Chairman and Managing Director.

12)

Deposit insurance:-

An FI, on conversion into a universal bank, would also be required to comply with the requirement of compulsory deposit insurance from DICGC up to a maximum of Rs.1 lakh per account, as applicable to the banks.

13)

Authorized Dealer's License:-

Some of the FIs at present hold restricted AD license from RBI, Exchange Control Department to enable them to undertake transactions necessary for or incidental to their prescribed functions. On conversion into a universal bank, the new bank would normally be eligible for full-fledged authorized dealer license and would also attract the full rigor of the Exchange Control Regulations applicable to the banks at present, including prohibition on raising resources through external commercial borrowings.

14)

Priority sector lending:-

On conversion of an FI to a universal bank, the obligation for lending to "priority sector" up to a prescribed percentage of their 'net bank credit' would also become applicable to it.

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15)

Prudential norms:-

After conversion of an FI in to a bank, the extant prudential norms of RBI for the all-India financial institutions would no longer be applicable but the norms as applicable to banks would be attracted and will need to be fully complied with.

4.3) KHAN WORKING GROUP RECOMMENDATION ON UNIVERSAL BANKING:
Mumbai, April 24: The Khan panel on harmonizing the role and operations of development financial institutions (DFIs) and banks has set the agenda for universal banking. The working group headed by IDBI chairman SH Khan, which submitted a summary of recommendations to RBI governor Bimal Jalan on Friday, made a strong pitch for "eventually" giving full banking licences to the development financial institutions (DFIs) and called for mergers between strong banks and institutions. The group also called for the establishment of a "super-regulator" to supervise and coordinate the activities of multiple regulators in order to ensure uniformity in treatment to various sections of the financial world. Among other things, it also called for bringing down the cash reserve ratio (CRR) for banks within a timeframe and phasing out the statutory liquidity ratio (SLR) in line with international practice. Stating that DFIs in India are operating on commercial considerations, the report said if these institutions are required to assume any developmental obligations, the government should provide "an appropriate level of financial support". Till the time the DFIs are given full banking licences, they should be permitted to have wholly-owned banking subsidiaries, it said. A universal bank can be a single company, a holding company with wholly-owned subsidiaries, a group of entities

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with cross-holdings or even a flagship company which may or may not have independent shareholders. The panel has argued that the appropriate corporate structure should not be imposed by the regulator. Calling for a enabling regulatory framework to ensure the transition towards universal banking, the panel said a function-specific and institution-neutral regulatory framework must be developed. "This concept of neutrality should be applicable to both foreign and local entities," it said. On the existing supervisory role of the RBI, the panel said the supervisory authority should focus on off-site supervision based on periodic reporting by banks and DFIs and on-site supervision should be undertaken only in exceptional cases. Recommending the development of a risk-based supervisory framework, in tune with international practice, the panel said banks and institutions should be supervised on a consolidated basis. On the existing reserve ratio requirements, the panel said the application of CRR should be confined to cash and cash-like instruments and it should be brought down progressively. It is also in favour of phasing out of SLR. Admitting that there is a considerable amount of overlap between the business of banks and institutions, the panel recommended the setting up of a standing committee to harmonise the roles. To start with, the group wants the RBI to waive all restrictions on institutions' resource mobilisation as they run counter to the spirit of financial sector liberalisation. Its other interim recommendations in this regard are:  Suitable level of SLR may be stipulated for institutions on incremental outstanding fixed depositsraised from public;  CRR should not be imposed as institutions as they are not permitted to access cash and cash-like instruments;

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 Inter-bank and institutional investments and deposits should be free from reserve requirements to develop the term money market;  A uniform risk-weightage of 20 per cent may be assigned for banks' investments in triple-A rated institutional bonds; and

Banks may be permitted to exclude investments in SLR securities issued by an institution while calculating the exposure to that institution.

The panel has called for redefining the priority sector by including certain industries within its ambit. "To facilitate efficient loan disbursals, the priority sector obligation should be linked to the net bank credit at the end of the previous financial year," it said while advocating non-inclusion of infrastructure lendings in the definition of "net bank credit" used in computing the priority sector obligations. The RBI constituted the working group in Decemberlast year. Headed by IDBI chairman SH Khan, the panel comprised SBI chairman MS Verma, ICICI managing director and CEO KV Kamath, IFCI chief KD Agrawal, Bank of India CMD MG Bhide, Union Bank chief AT Pannir Selvam and RBI executive director V Subrahmanyam.

4.4) INSIGHT -- TOWARDS UNIVERSAL BANKING:
The recommendations of the Khan working group echo the Narasimham committee report's observation that the financial structure is evolving towards a continuum of institutions rather than discrete specialisation. Universal banking is the model espoused by both the committees. Given this objective, the problem then becomes one of providing a level playing field between the various players in the financial sector. The Khan committee has tried to do this in various ways. One of the most interesting ones is the suggestion to explore ways of merging banks and financial institutions, which could be one solution to the problem of weak banks.

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Towards Universal Banking
THE LONG....  Give banking licenceto DFIs  Merge banks with banks, DFIs  Bring down CRR progressively  Phase out SLR  Redefine priority sector  Set up a super regulator to coordinate regulators' activities  Develop risk-based supervisory framework  Usher in legal reforms in debt recovery  Let state level institutions go public, come under Reserve Bank umbrella ... AND THE SHORT OF IT  Let DFIs have a wholly-owned banking subsidairy  Remove cap on FIs' resource mobilisation  Impose SLR on incremental FDs of DFIs  Grant authorised dealers' licence to DFIs  Set up a standing committee to coordinate lending policies (Saturday, April 25, 1998 : Indian Express Newspapers )

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Chapter 6 Issues, Needs & Future Trends of Universal Banking

Need Future Trends of UB

Contents:5.1) 5.2) 5.3) 5.4) Issues and challenges in universal banking. Need of universal banking. Future trends of universal banking. Universal banking an overview.

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5.1) ISSUES & CHALLENGES IN UNIVERSAL BANKING:I. Challenges in Universal Banking:-

There are certain challenges, which need to be effectively met by the universal banks. Such challenges need to build effective supervisory infrastructure, volatility of prices in the stock market, comprehending the nature and complexity of new financial instruments, complex financial structures, determining the precise nature of risks associated with the use of particular financial structure and transactions, increased risk resulting from asymmetrical information sharing between banks and regulators among others.

Moreover norms stipulated by RBI treat DFIs at par with the existing commercial banks. Thus all Universal banks shave to maintain the CRR and the SLR requirement on the same lines as the commercial banks. Also they have to fulfill the priority sector lending norms applicable to the commercial banks.

These are the major hurdles as perceived by the institutions, as it is very difficult to fulfill such norms without hurting the bottom-line. There are certain challenges, which need to be effectively met by the universal banks. Such challenges include weak supervisory infrastructure, volatility of prices in the stock market, comprehending the nature and complexity of new financial instruments, complex financial structures, determining the precise nature of risks associated with the use of particular financial structure and transactions, increased risk resulting from asymmetrical information sharing between banks and regulators among others.

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II.

Issues of concern for Universal Banking:-

1. Deployment of capital: If a bank were to own a full range of classes of both the firms debt and equity the bank could gain the control necessary to effect reorganization much more economically. The bank will have greater authority to intercede in the management of the firm as dividend and interest payment performance deteriorates.

2. Unhealthy concentration of power In many countries such a risk prevails in specialized institutions, particularly when they are government sponsored. Indeed public choice theory suggests that because Universal Banks serve diverse interest, they may find it difficult to combine as a political coalition even this is difficult when number of members in a coalition is large.

3. Impartial Investment Advice: There is a lengthy list of problems, involving potential conflicts between the banks commercial and investment banking roles. For example there may be possible conflict between the investment banker’s promotional role and commercial banker’s obligation to provide disinterested advice or where a Universal Banks securities department advises a bank customer to issue new securities to repay its bank loans. But a specialized bank that wants a UN profitable loan repaid also can suggest that the customer issues securities to do so.

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CURRENT ISSUES UNIVERSAL BANKING- Rising Popularity:As competition intensifies banks are likely to morph into financial supermarkets. Leading the pack is Universal banks, which offer a wide gamut of services targeted at a broader customer base. Their services range from commercial banking and investment banking to insurance and mobile banking. The popularity of universal banks has been on the rise. Few years ago, investment banks like JP Morgan, Morgan Stanley, Lehman Brothers and Merrill Lynch were the leaders in managing G-3 currency bond deals. But times have changed. Today, universal banks like Citigroup, Deutsche Bank and Barclays Capital, are dominating the markets. By gobbling up smaller banks, these banks have transformed themselves into universal banks in Asia. This has resulted in higher capital costs for companies in Asia.

1. Relationship Business:Banking has always been a relationship business. Universal banking, focuses on fostering better relationships with customers, which is used a retention tool. Universal banks can also give advantage of lower fees to a customer who gets all his banking needs from the same bank, be it purchase of foreign exchange, managing pension funds or underwriting bonds etc. By acting as lender and underwriter, universal banks are in a better position to understand how a secondary stock offering or an acquisition will affect critical ratios and covenants in loan agreements. And, since banks conduct due diligence before making a loan, they can jump in quickly if a corporation wants to have a last-minute junk-bond offering. In Asia, bankers do have relationship lending but their approach is based on loan tying. If the bank loses money on its loans, it recoups its capital from

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other business driven out of the lending process. In contrast, the universals decide, after carefully considering the returns on capital. As long as the required return from the relationship transaction is in line with their projections, universals go in for loan tying. As opposed to this, investment banks consider returns purely on cost basis. They are more interested in synchronizing the costs of a particular department with the fees charged in the deal. So, while universal banks have the leverage to subsidize their fees with relationship loans investment banks stand deprived.

2. Universals' practice in Asia:Universals constantly look to lower their fees to grab a deal. They create special purpose entities, which allow them to write off risky assets. These special purpose entities help universals create capital against them. The proceeds from these kinds of activities enable them to charge lesser interest for extended loans. Universals like HSBC and Standard Chartered have dominated the corporate market for over three years. The capital markets have put the emphasis back on lending. Asia's loan volumes have surpassed volumes of equity and equity-linked issuance in 2002, and corporate loan volume is much higher than corporate bond issuance. This has helped universal banks make their presence in the market. Citigroup, HSBC, Standard Chartered, ING, Bank of America and ABNAMRO make wide use of special purpose entities for the simple reason that these entities will help them exploit a regulatory loophole in their funding. These entities allow banks to transfer loans from the balance sheet into a vehicle that transforms them into capital-generating assets. Since the special purpose entities remain in the banks possession, they offset loan costs at below-market rates. This strengthens the banking relationship and also the risk tied to the underlying asset disappears.

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3. Future of universal banks in Asia:Universal institutions such as HSBC, Citigroup, Standard Chartered, ABNAMRO, BNP and Barclays are increasingly dominating loan markets. The specialized investment banks don't have access to a commercial bank's varied deposits to lend from. These banks tend concentrate at their returns on equity. However, investment banks like UBS, which have massive balance sheets, have become very selective about their lending in Asia. Even universal banks like Deutsche Bank are scaling down due to pressure in its home. Universal banks tend to bond their relationship lending with successful companies. The investment banks are under increasing pressure to lend money the way the universals do. A three-year collapse of equity markets of Asia is making its impact on corporate capital structures. The regulatory considerations also affect the functioning of the business.

5.2) THE NEED OF UNIVERSAL BANKING:Now a day, there is a large market of General Insurance and Project Financing. As only a bank is not able to fund it properly, due to insufficient asset base and net worth. So, to overcome this, they form a consortium of lenders, for funding the Greenfield and Brownfield projects. (In the month June a consortium of 20 lenders led by SBI has committed a 14 year project finance term loan for a special purpose company promoted BPCL, which is starting a Greenfield project in Madhya Pradesh) The point of consideration here is the consortium partner – Bank of Baroda, Bank of Maharashtra, Central Bank of India, LIC, Indian Overseas Bank. Most of the partners are nationalized banks. It means there is a need of developing a strong domestic financial system to cater the need of the corporate sector. It is possible if banks have strong capital/asset base. It fortifies the importance of Universal Banking. Along with that, the ongoing

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clamor of Mergers and Acquisitions in the corporate sector, this needs financial assistance as well as consulting. More financial institutional investors entering in India and several Joint Ventures are being started between domestic companies and global firms. A number of issues may crop up between from the signing up of the sale purchase document and the deal actually coming up. Near about 4% could be getting aborted (e.g.-the failure of Jet Airways and Air Sahara is one of that. So, the corporate are in need of takers to insure the associated transactions of Mergers and Acquisitions) Now International insurers are offering cover in India against the loss arising out of Mergers and Acquisitions and Breakups. (E.g.-Howden India leading International brokers, which has introduced transactional insurance of M & A, is now finding takers for their insurance cover) Indian banking, with the help of Universal Banking has technology edge and better business models, compared to preliberalizations era, today they are able to attract and gain more volumes simply because they meet their customers' requirements better than anyone else. If the newer and foreign players can do that, then why can't bigger DFIs try their hands on it?

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5.3) THE FUTURE TREND OF UNIVERSAL BANKING:Universal banks have long played a leading role in Germany, Switzerland, and other Continental European countries. The principal financial institutions in these countries typically are universal banks offering the entire array of banking services. Continental European banks are engaged in deposit, real estate and other forms of lending, foreign exchange trading, as well as underwriting, securities trading, and portfolio management. In the Anglo-Saxon countries and in Japan, by contrast, commercial and investment banking tend to be separated. In recent years, though, most of these countries have lowered the barriers between commercial and investment banking, but they have refrained from adopting the Continental European system of universal banking. In the United States, in particular, the resistance to softening the separation of banking activities, as enshrined in the Glass-Steagall Act, continues to be stiff. In Germany and Switzerland the importance of universal banking has grown since the end of World War II. Will this trend continue so that universal banks could completely overwhelm the specialized institutions in the future? Are the specialized banks doomed to disappear? This question cannot be answered with a simple "yes" or "no". The German and Swiss experiences suggest that three factors will determine future growth of universal banking. First, universal banks no doubt will continue to play an important role. They possess a number of advantages over specialized institutions. In particular, they are able to exploit economies of scale and scope in banking. These economies are especially important for banks operating on a global scale and catering to customers with a need for highly sophisticated financial services. As we saw in the preceding section, universal banks may also suffer from various shortcomings.

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However, in an increasingly competitive environment, these defects will likely carry far less weight than in the past. Second, although universal banks have expanded their sphere of influence, the smaller specialized institutions have not disappeared. In both Germany and Switzerland, they are successfully coexisting and competing with the big banks. In Switzerland, for example, the specialized institutions are firmly entrenched in such areas as real estate lending, securities trading, and portfolio management. The continued strong performance of many specialized institutions suggests that universal banks do not enjoy a comparative advantage in all areas of banking. Third, universality of banking may be achieved in various ways. No single type of universal banking system exists. The German and Swiss universal banking systems differ substantially in this regard. In Germany, universality has been strengthened without significantly increasing the market shares of the big banks. Instead, the smaller institutions have acquired universality through cooperation. It remains to be seen whether the cooperative approach will survive in an environment of highly competitive and globalized banking.

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5.4) UNIVERSAL BANKING: AN OVERVIEW:-

Universal Banking includes not only services related to savings and loans but also investments. However in practice the term ³universal banks refers to those banks that offer a wide range of financial services, beyond commercial banking and investment banking, insurance etc. Universal banking is a combination of commercial banking, investment banking and various other activities including insurance. If specialized banking is the other. This is most co in European countries. Scenario in India has also changed after the Narasimham Committee (1998) and the Khan Committee (1998) reports recommended consolidation of the banking industry through mergers, and integration of financial activities. Today, the shining example is ICICI Bank, second largest bank (in India) in terms of the size of assets, which has consolidated all the services after the merger of ICICI Ltd with ICICI Bank. There are rumors of merger of IDBI with IDBI Bank. With the launch of retail banking, Kotak Mahindra has also embarked on the path of Universal banking.

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Chapter 7 Introduction of Universal Banking in India“ICICI Bank”

Contents:6.1) 6.2) 6.3) 6.4) Introduction History News On: First Indian Universal Bank Case Study By Infosys For ICICI Bank – Finacle

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6.1) INTRODUCTION:ICICI Bank is India's second-largest bank with total assets of Rs. 4,062.34 billion (US$ 91 billion) at March 31, 2011 and profit after tax Rs. 51.51 billion (US$ 1,155 million) for the year ended March 31, 2011. The Bank has a network of 2,533 branches and 6,301 ATMs in India, and has a presence in 19 countries, including India. ICICI Bank offers a wide range of banking products and financial services to corporate and retail customers through a variety of delivery channels and through its specialized subsidiaries in the areas of investment banking, life and non-life insurance, venture capital and asset management.

The Bank currently has subsidiaries in the United Kingdom, Russia and Canada, branches in United States, Singapore, Bahrain, Hong Kong, Sri Lanka, Qatar and Dubai International Finance Centre and representative offices in United Arab Emirates, China, South Africa, Bangladesh, Thailand, Malaysia and Indonesia. Our UK subsidiary has established branches in Belgium and Germany. ICICI Bank's equity shares are listed in India on Bombay Stock Exchange and the National Stock Exchange of India Limited and its American Depositary Receipts (ADRs) are listed on the New York Stock Exchange (NYSE).

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6.2) HISTORY:History ICICI Bank was originally promoted in 1994 by ICICI Limited, an Indian financial institution, and was its wholly owned subsidiary. ICICI's shareholding in ICICI Bank was reduced to 46% through a public offering of shares in India in fiscal 1998, an equity offering in the form of ADRs listed on the NYSE in fiscal 2000, ICICI Bank's acquisition of Bank of Madura Limited in an all-stock amalgamation in fiscal 2001, and secondary market sales by ICICI to institutional investors in fiscal 2001 and fiscal 2002. ICICI was formed in 1955 at the initiative of the World Bank, the Government of India and representatives of Indian industry. The principal objective was to create a development financial institution for providing medium-term and long-term project financing to Indian businesses. In the 1990s, ICICI transformed its business from a development financial institution offering only project finance to a diversified financial services group offering a wide variety of products and services, both directly and through a number of subsidiaries and affiliates like ICICI Bank. In 1999, ICICI become the first Indian company and the first bank or financial institution from non-Japan Asia to be listed on the NYSE. After consideration of various corporate structuring alternatives in the context of the emerging competitive scenario in the Indian banking industry, and the move towards universal banking, the managements of ICICI and ICICI Bank formed the view that the merger of ICICI with ICICI Bank would be the optimal strategic alternative for both entities, and would create the optimal legal structure for the ICICI group's universal banking strategy. The merger would enhance value for ICICI shareholders through the merged entity's access to low-cost deposits, greater opportunities for earning fee-based income and the ability to participate in the payments system and provide transaction-banking services. The merger would enhance value for ICICI Bank shareholders through a large capital base and scale

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of operations, seamless access to ICICI's strong corporate relationships built up over five decades, entry into new business segments, higher market share in various business segments, particularly fee-based services, and access to the vast talent pool of ICICI and its subsidiaries. In October 2001, the Boards of Directors of ICICI and ICICI Bank approved the merger of ICICI and two of its wholly owned retail finance subsidiaries, ICICI Personal Financial Services Limited and ICICI Capital Services Limited, with ICICI Bank. The merger was approved by shareholders of ICICI and ICICI Bank in January 2002, by the High Court of Gujarat at Ahmedabad in March 2002, and by the High Court of Judicature at Mumbai and the Reserve Bank of India in April 2002. Consequent to the merger, the ICICI group's financing and banking operations, both wholesale and retail, have been integrated in a single entity. ICICI Bank has formulated a Code of Business Conduct and Ethics for its directors and employees.

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6.4) NEWS ON: FIRST INDIAN UNIVERSAL BANK:Finally, first Indian Universal Bank will be born on March 31 2002. In effect, this means ICICI will become a bank on that day (provided the Reserve Bank of India gives it nod) fulfilling all the statutory requirements. In addition to RBI approval, this merger will be subject to various other approvals, including the approval of the shareholders of the respective companies, the High Courts of Mumbai and Gujarat, and the Centre. The boards of ICICI and its 46 per cent banking subsidiary ICICI Bank on 25th October approved the reverse merger of the parent into the bank, the appointed date for which has been fixed as March 31, 2002 or the date of approval of the merger by the Reserve Bank of India (RBI), whichever is later. Swap ratio will be one share of ICICI Bank for every two shares of ICICI. The ADS holders of ICICI would, consequently, get five ADS of ICICI Bank in exchange for four ADS of ICICI, as each ADS of the FI represents five domestic equity shares, while each ADS of the bank represents two domestic shares. The swap ratio was based on the recommendations of the merchant bankers JM Morgan Stanley, appointed by ICICI, DSP Merrill Lynch, appointed by ICICI Bank, and the accounting firm, Deloitte, Haskins & Sells, appointed jointly by both the entities involved in the merger. ICICI is going in bullet migration path towards universal banking instead of taking a gradual approach. sICICI had initially set an 18 month transition period for conversion into universal bank. However with the announcement that the merged entity will start off with the mandated CRR and SLR investments the transition period has now been reduced to 5 months. The merged entity, which will have 11 subsidiaries, in order to adhere to norms laid down for commercial banks by the Reserve Bank of India (RBI) pertaining to cash reserve ratio (CRR), statutory liquidity ratio (SLR) would require a hefty Rs 18,000 crore towards its CRR and SLR obligations.

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With this merger, ICICI Bank, the merged entity, will be the second largest commercial bank in the country after the State Bank of India (SBI) with assets of Rs 95,000 crore (September 30, 2001). SBI has assets of over Rs 3,16,000 crore. The combined entity would have 396 existing branches/ extension counters of the ICICI Bank, 140 retail financial offices and centres of ICICI and 8,275 employees. ICICI’s holding of 46 per cent in its banking subsidiary would not be cancelled under the scheme of amalgamation, but is proposed to be held in Trust for the benefit of the merged entity. Financial institutions would have 20 per cent in the merged entity, with the foreign holding at 47 per cent and the rest with the public. ICICI’s 46 per cent stake would correspond to a 15 per cent stake in the merged entity.

At the time of the merger, ICICI Bank would align the Indian GAAP (generally accepted accounting practices) of ICICI to those of ICICI Bank, including a higher general provision against standard assets. Further, in accordance with international best practices in accounting, ICICI Bank has decided to adopt the “purchase method” of accounting, which is mandatory under US GAAP, to account for the merger under Indian GAAP as well. After merger, N Vaghul, will be the chairman & K V Kamath will be the managing director and CEO of the bank. H N Sinor and Lalitha Gupte will hold the number two slots in the merged entity with both being designated as joint managing directors. Kalpana Morparia, S Mukherji, Chanda D Kochhar and Nachiket M Mor will retain their positions as executive directors. The retail segment will be a key driver of growth for the merged entity, with respect to both assets and liabilities.The new entity will leverage on its large capital base, comprehensive suite of products and services, extensive corporate and retail customer relationships, technology-enabled distribution architecture, strong brand franchise and vast talent pool.(From the banknetindia team )

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6.5) CASE STUDY BY INFOSYS FOR ICICI BANK – FINACLE

MEANING: Finacle universal banking products are designed to address the core banking, e-banking, Islamic, treasury, wealth management and CRM requirements of retail, corporate and universal banks. It is developed by Infosys, and is one of the major players in the arena of core banking in Indian and Asian banking domains. T.V. Mohandas Pai was closely associated with it.

1) KEY BUSINESS DRIVERS
ICICI Bank was set up when the process of deregulation and liberalization had just begun in India, and the Reserve Bank of India (India’s central bank) had paved the way for private players in the banking sector, which at that time was dominated by state-owned and foreign banks. Serving a majority of the country’s populace, stateowned banks had a large branch network, with minimal or no automation and had little focus on service. Foreign banks, on the other hand, deployed high-end technology, had innovative product offerings, but had a very small branch network that serviced only corporate and individuals with high net-worth. Sensing an untapped Opportunity, ICICI Bank decided to target India’s burgeoning middleclass and corporate segment by offering a high level of customer service and efficiency that rivaled the foreign banks, on a much larger scale, at a lower cost. A crucial aspect of this strategy was the emphasis on technology. ICICI Bank positioned itself as technology-savvy, customer-friendly bank. To support its technology-focused strategy, Citibank needed a robust technology platform that would help it achieve its business goals. After an intense evaluation of several global vendors, ICICI Bank identified Infosys as its technology partner and selected Finacle, the universal banking solution from Infosys, as its core banking

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platform. An open systems approach and low Total Cost of Ownership (TCO) were some of the key benefits Finacle offered the bank. Unlike most banks of that era, ICICI Bank was automated from day one, when its first branch opened in the city of Chennai. [“After evaluation of numerous products, we chose Finacle, universal banking solution from Infosys for its future-proof technology, best-of-breed retail and corporate banking features, scalable architecture and proven implementation track record. Finacle has enabled ICICI Bank to achieve competitive advantage by enabling rapid roll out of new products, faster customer service and reduced timeto-market, to cater to the ever-growing needs of customers. Its open architecture and flexibility has enabled easy integration with multiple systems.”]
Pravir Vohra Senior General Manager and Head of Retail Technology Group ICICI Bank

2) SOLUTION OVERVIEW: One of the biggest challenges for Finacle was ensuring Straight through Processing (STP) of most of the financial transactions. With the ICICI group having several companies under its umbrella,

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Finacle needed to seamlessly integrate with multiple applications such as credit cards, mutual funds, brokerage, call center and data warehousing systems. Another key challenge was managing transaction volume. ICICI Bank underwent phase of organic and inorganic growth, first by acquiring Bank of Madura followed by a reverse merger of the bank with its parent organization, ICICI Limited. The scalable and open systems-based architecture enabled Finacle to successfully manage the resultant increase in transaction levels from 400,000 transactions a day, in 2000 to nearly 2.1 million, by 2005, with an associated growth in peak volumes by 5.5 times. With Finacle, the bank currently has the ability to process0.27 million checks, per day and manages 7000 concurrent users. Over the years, the strategic partnership between ICICI Bank and Infosys that started in 1994 has grown stronger and the close collaboration has resulted in many Innovations.

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For instance, in 1997, ICICI Bank was the first bank in India to offer Interuniversal bankingwith the help of Finacle’ se-banking solution and established itself as a leader in the Internet and e-commerce space. The bank followed it up with several e-commerce services like bill payments, funds transfers and corporate banking over the Net. The Internet is a critical element of ICICI Bank’ saward-winning multi-channel strategy and is one of the main engines of growth for the bank. Between 2000and 2004, the bank has successfully been able to move over 70 percent of the routine banking transactions from the branch to other delivery channels, thus increasing overall efficiency. Currently, only 25 percent of all transactions take place through branches and 75percent through other delivery channels. This reduction in routine transaction through the branch has enabled ICICI Bank to aggressively use its branch network as customer acquisition units. On an average, ICICI Bank adds 300,000 customers a month, which is among the highest in the world.

3) REAPING THE BENEFITS:
A powerful scalable and flexible technology platform essential for banks to manage growth and compete successfully. Finacle provides just the right platform to ICICI Bank, thereby fuelling its growth. The bank has successfully leveraged the power of Finacle and has deployed the solution in the areas of core banking, consumer e-banking, corporate e-banking and CRM. With Finacle, ICICI Bank has also gained the flexibility to easily develop new products targeted at specific segments such as ICICI Bank Young Stars-– a product targeting children, Women’s Account addressing working women and Bank@ campus targeting students .ICICI Bank is today recognized as a clear leader in the region and has won numerous accolades worldwide for its technology-driven initiatives. In 2003, the bank received the best multi-channel strategy award from The Banker

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magazine and this year it has been rated the 2nd best retail bank in Asia by the Asian Banker Journal. The bank has effectively used technology as a strategic differentiator, thus not only redefining the rules of banking in India, but also showcase in how technology can help in transforming a bank’s business.

“Our objective of creating a universal bank providing end-to-end financial services, clearly required solutions which were based on new-generation technology, offered end-to-end functionality and were highly flexible and scalable. Finacle offered all this and much more.”

Chanda Kochhar Joint Managing Director ICICI Bank Limited

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Chapter 8 QUESTIONNAIRE
QUESTIONNAIRE Dear Respondent, I am student of K.E.S Shorff college of Arts & Commerce; I am doing this research to know about universal banking structure in India and services provided by them.

1. Are you aware of universal banking services offered by the banks?

2. Do you feel safe in dealing in today’s banks products?

3. Are you satisfy with your bank services?

4. What are your main transactions you would prefer to do by net? Money transfers checking of your current balance Create Fixed Deposits Online Request a Demand Draft

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Pay Bills Order a Cheque Book Request Stop Payment on a Cheque

5. Are you aware of the benefits of universal banking which are available? Yes No

6.

Are you aware of the methods which can be undertaken to make any kind of fraud? Yes No

7. Are you aware of all the methods which can be taken up to secure your transaction? Yes No

8. Does your bank educate you about the universal banking services being offered? Yes

9. Would you prefer using universal banking instead of visiting your bank branch now?

No

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10. What benefits do you see in universal banking?

Time

Personal Information Name: Age: Sex: ( ) Male ( ) Female

Contact No: Occupation

LIMITATION OF RESEARCH:

As my project is belongs to certain or specific area and this is opinion of some banking customer. The mentioned customer opinion can be changed if this survey conducts on state or national level.

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Chapter 9 CONCLUSION
From all of this, we have learnt that Universal Banking is a multi-purpose and multi-functional financial supermarket (a company offering a wide range of financial services e.g. stock, insurance and real-estate brokerage) providing both banking and financial services through a single window. A more efficient, productive banking industry is providing services of greater quality and value. Universal Banking has become a necessary survival weapon and is fundamentally changing the banking industry worldwide. The rise of universal banking is redefining business relationships and the most successful banks will be those that can truly strengthen their relationship with their customers. Banking innovation and fierce competition among existing banks have enabled a wide array of banking products and services. We learnt that the phenomenon of Universal Banking as a distinct concept, as different from Narrow Banking came to the forefront in the Indian context with the Narsimham Committee (1998) and later the Khan Committee (1998) reports recommending consolidation of the banking industry through mergers and integration of financial activities.

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Chapter 10 BIBLIOGRAPHY
BOOKS/JOURNALS: 1) Universal Banking of Vipul Publication 2) Harmonizing the Role and operations of development Financial Institutions and banks-a discussion paper of R.B.I., Mumbai. 3) Journal of Professional Banker, October 2006 pg 24-27

ARTICLES

1) Annual Report of ICICI bank 2) Indian Institute Journal 3) Indian Express Newspapers (Saturday, April 25, 1998) 4) The Financial Express (Thursday, 16/6/2009) 5) Banknetindia report (March 30 2002)

WEBLIGRAPHY 1) www.rbi.org.in 2) www.icicibank.com 3) www.banknetindia.com 4) www.indiatimes.com 5) www.economictimes.com 6) www.eximbankindia.com