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Chapter 1

INTRODUCTION
(i)

MEANING & DEFINITIONS:
A universal bank participates in many kinds of banking activities and is both

a commercial bank and an investment bank as well as providing other financial services such as
insurance. These are also called full-service financial firms, although there can also be fullservice investment banks which provide wealth and asset management, trading, underwriting,
researching as well as financial advisory.
The concept is most relevant in the United Kingdom and the United States, where
historically there was a distinction drawn between pure investment banks and commercial banks.
In the US, this was a result of the Glass–Steagall Act of 1933. In both countries, however, the
regulatory barrier to the combination of investment banks and commercial banks has largely
been removed, and a number of universal banks have emerged in both jurisdictions. However, at
least until the global financial crisis of 2008, there remained a number of large, pure investment
banks.
In other countries, the concept is less relevant as there is no regulatory distinction
between investment banks and commercial banks. Thus, banks of a very large size tend to
operate as universal banks, while smaller firms specialized as commercial banks or as investment
banks. This is especially true of countries with a European Continental banking tradition.
Notable examples of such universal banks include BNP Paribas, Credit and Society
General of France; HSBC, Standard
Kingdom; Deutsche

Chartered and RBS and Barclays of

Bank of Germany; ING

Bank of

the

the Netherlands; Bank

United
of

America, Citigroup, JPMorgan Chase and Wells Fargo of the United States; and UBS and Credit
Suisse of Switzerland. Examples of pure Investment Banks generally don't exist except in
America like Goldman Sachs and Morgan Stanley.
Universal banking and private banking often coexist, but can exist independently. The
provision of many services by universal banks can lead to long-term relationships between
universal banks and firms.

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According to Investopedia,” banking system in which banks provide a wide variety of
financial services, including both commercial and investment services. Universal banking is
common in some European countries, including Switzerland. In the United States, however,
banks are required to separate their commercial and investment banking services. Proponents of
universal banking argue that it helps banks better diversify risk. Detractors think dividing up
banks' operations is a less risky strategy.

Universal banks may offer credit, loans, deposits, asset management, investment
advisory, payment processing, securities transactions, underwriting and financial analysis. While
a universal banking system allows banks to offer a multitude of services, it does not require them
to do so. Banks in a universal system may still choose to specialize in a subset of banking
services”
According to General Knowledge Today (Magazine),” Universal banking is a system
of banking where banks undertake a blanket of financial services like investment banking,
commercial banking, development banking, insurance and other financial services including
functions of merchant banking, mutual funds, factoring, housing finance, insurance etc. In simple
words, Universal Banking means that Financial Institutions (FIs) and Banks are allowed to
undertake all kinds of activity of banking, financing and related businesses.
As per the World Bank, the definition of the Universal Bank is as follows: In Universal
banking, the 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. So we can
say that Universal bank is a Financial Supermarket which provides all financial products under
one roof. Apart from savings and loans, the Universal banks provides services such as investing
in securities, credit cards, project finance, remittances, payment systems, project counselling,
merchant banking, forex operations, insurance and so on. 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. Universal Banking is usually undertaken by large banks who can
manage the cost of such widespread operations.

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The concept was culmination of reports submitted by Narasimham Committee and S.H.
Khan Committee which had suggested to consolidate the financial industry of India via medium
of merging financial activities carried by different types of financial institutions.
The practice of universal banking is common in European countries in which it is found in three
forms:

In-house universal banks

Universal banking through separate subsidiaries

Universal banking through holding companies

Relevance of Universal Banking by GK Today Magazine:
The relevance and importance of these institutions can be gauged from the host of
economic functions they cater to. They share high value of investors’ trust as they generally have
equity stakes in many firms which gives a boost to investors to invest in these firms. RBI favors
the system as it is able to reach economies of scale as all services are provided under one roof
and handled by financial experts who can deal with different products. Even the marketing
efforts and costs are reduced by in-house selling of new services to existing customers which
then take it to new ones by word-of-the-mouth marketing technique. There are some flip-flops
which need to be handled well for better performance.
Even though there is a range of financial services available but each of these have to
satisfy a unique set of regulations which often makes the operations cumbersome. Also, as
universal banking is a ball-game of the big players in banking, it thus is always open to fears of
monopolizing the markets. In addition, if these banks fail, it will be a severe jolt to the banking
system and the investor confidence. While some feel that such banking helps in diversifying risk,
others are of the view that separately handling of different banking services is less risky.
Some Committee have stated Universal Banking as, “Universal banking is a
combination of Commercial banking, Investment banking, Development banking, Insurance and
many other financial activities. It is a place where all financial products are available under one
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they suggested a Universal banking.roof. loans. Factoring. That is. and other similar activities. Mutual Funds. Investors have defined Universal Banking as. the Narasimham Committee Report and the S. banks are not limited to just loans. ln India. The notion is that they would benefit from economies of scale in information technology and access to capital to serve companies and retail customers around the world. Khan Committee Report. To illustrate. they advised a combination of all banking and financial activities. suppose bank XYZ offers universal banking services. etc. They are. In universal banking. Retail loans. XYZ's combined retail 4 . wholesale and investment banking services under one roof and reaping synergies between them. checking and savings accounts.) have customarily been housed in separate banking institutions: investment banks and retail banks.” A financial service conglomerate combining retail. Both these reports advised to consolidate (bring together) the banking industry through mergers and integration of financial activities. etc. Credit cards. Commonly practiced by European banks. a universal bank is a bank which offers commercial bank functions plus other functions such as Merchant Banking. respectively. How it works/Example: Investment services and retail banking services (savings and checking accounts. mortgages. two reports in 1998 mentioned the concept of universal banking. In 2000. ICICI asked permission from RBI to become a universal bank. Financial Times have defined Universal Banking as. Universal banking brings retail and investment services together in the same bank for client convenience and higher revenues. Auto loans.H. Housing Finance. RBI wants some big domestic financial institutions to become universal banks. but are allowed to offer investment services as well. “A system of banking where banks are allowed to provide a variety of services to their customers. So. Insurance. Universal banking is less common in the United States than in Europe” Universal banking refers to the practice of offering clients retail banking as well as investment services. That is. Current clients who hold only a checking or savings account can also learn about and take advantage of investment services should they wish to open their own investment portfolio.

In India it came to discussion after the submission of the report by the Committee on capital Account Convertibility (Tarapore Committee). The concept has been suggested as a solution to the problem of high Non Performing Assets and related matters. banks have been concentrating on their traditional functions of acceptance of deposits from the ‘public’ and investing them in selected number of restricted securities. which may increase their profitability as these Banks do have enough potential to withstand any short term crisis also. (ii) EVOLUTION: The fabric of financial institutions is closely linked to the economic stature of a country. development of customer centric skills. this system restrains Banks from going into more risky business or advances. Why it Matters: Universal banking benefits both banks and their clients. economic. financial and the mindset of the financial system were the deterrent factors in developing economies like India. It requires better knowledge management. risk free assets or alternatively it is one whose demand deposits are matched by safe and liquid assets. The Committee proposed that incremental resources of these narrow banks should be restricted only to investments in government securities. sound credit appraisal mechanisms. The ‘Narrow Bank’ in its narrow sense. it was suggested that the Banks should go in for Universal Banking. The integration of retail and investment services benefits banks by providing them with more ways to generate revenue. To overcome this problem. these banks are expected to remove the problems of bank failure and the consequent risk and loss to depositors. Due to this pattern of deployment of funds. (iii) UNIVERSAL BANKING V/S NARROW BANKING The concept of narrow banking was widely discussed in the late 1980’s and early 1990’s in the United States following the failure of large number of insured institutions in the savings and loan crisis. not to switch over to ‘broad based’ activities. Lack of infrastructure. globally acceptable standards banking practices. may be defined as the one which places its funds only in short-term. However. while it benefits clients by providing them with the convenience of accessing a full range of banking services from a single provider presumably trust. For many years.and investment banking services allow its clients to fulfill all of their banking needs in the same place. 5 .

the near monopoly of public sector banks faced the competition by the more customer-focused private sector entrants. The member of foreign banks operating in India has increased significantly and their share of total assets has also increased. There is a continuous reforms and modernization is in process. The problem of NPA (nonperforming assets). Year 1992 was the golden period of Indian Banking system due to the scam-tainted stock market. Nationalized Banks are also attempting to get on the path of automation. continuous mergers in the banking. Foreign Banks are focusing on corporate and on the middle class consumer and providing them better service. The main challenges facing the banking sector is the deployment of funds in quality assets and the management of revenues and costs. Large proportion of household saving moved into the banking system. modernizing backroom operation in the banks and competition pave the path of growth of Indian banking. increasing adoption of technology.7 percent of the total net profit of commercial banking sector in India. In the year 2001 estimated foreign bank account for 14.Chapter 2 CHALLENGES IN BANKING SECTOR After the nationalization of Banks. The financial sector reforms have to go hand in hand with the overall economic reform process. 6 . A number of recommendations of two Narasimham committees have been implemented. Strong Banks will acquire the weaker banks. But along with the continuous growth and modernization. This competition forced older and nationalized banks to revitalize their operations. overall credit recovery system still exist. By the mid-1990. which recorded an annual growth of 20 percent in deposit. The Reserve Bank of India’s recently released report on Trend and Progress of Banking (2003-04) once again highlights the major issues in Indian banking in the light of increasing global competition. there are several challenges confronting the banking sector.

But now the RBI has taken a view that the standards will apply to all the banks.To achieve this. Indian banks are not major practices as per international standards. No doubt. Some cooperative banks are facing challenges created by a few badly managed banks. The Basel Accord is something that has to be adopted if Indian Banks are interested in becoming global players. greater accountability and market discipline among the participants. a taskforce has been formed to examine the related issues. 7 . The operations of the Indian banks are mostly in the domestic sector. Initially RBI had taken a view that the standards will apply only to a few select banks depending on the strength of the institutions. banks of world class stature. The major challenge before the cooperative banks is technology. asset liability management and Basel I norms. That means corporate borrowing is yet to pick up significantly in spite of rise in investment demand. There is also huge cost involved for putting in place proper automation system needed to switch over to the Basel II model. UCBs have to be more professional in their approach in order to face new realities. Due to new practices. Accordingly. the Indian financial system is now moving closer to global standards. Public sector banks in the past have adapted themselves to international practices such as computerization. Accordingly. The report has pointed out that as much as two-thirds of the recent growth in credit has been on account of retail loans. Some of them have a few foreign branches but they are not exposed to significant lending or investments in the overseas market. Indian banks are taking steps under the overall regulatory and supervisory framework of the RBI. for maintaining orderly growth. These banks have to use technology for value addition and cost reduction. an elaborate roadmap has been drawn to move the Indian banks closer to Basel II norms. No bank is big enough to rank among the top 100 banks of the world. Since the banks have been exposed to competition at home and also at global level. for easing the work of the bank staff and to attract customers. a number of suggestions have been put forward from time to time. Under the circumstances it should not be difficult for banks to adopt the Basel II norms as it provides opportunity to Indian banks to raise their standard of banking Indian banks have smaller asset bases and volume of operations in comparison with international standards. Finally. there are some problems in this respect.

opening of the sector to private participation. Some of the major initiatives during this period deregulation of interest rates. the Basel Committee is made up of central banking officials from leading industrial nations including the U. These measures along with Reserve Bank of India (RBI) efforts to adopt international Banking standards and best practices as prescribed in the Basel Accords have no doubt helped the domestic banking industry enter a new era. The banking sector in India has undergone remarkable changes since the economic reforms were initiated in 1991-92. increased competition and product innovation has all put the banking sector on a high growth trajectory. banks would handle (a) Working Capital (b) Long term Capital (Term Loans) meant for industrial development. introduction of ‘Universal Banking’. permission to foreign banks to expand their operations through subsidiaries. France. greater emphasis on risk management by allowing banks to participate in instruments such as interest rate swaps. cross country forward contracts. asset classification and provisioning. Japan and the U. The period has been marked by a slew of reforms in the sector. lowering of reserve requirements in terms of Statutory Liquidity Ratio (SLR) and Cash reserve ratio (CRR).. (i) BASEL COMMITTEE Founded in 1974.S. which provided the much-needed impetus for the growth of the sector as a whole. and the introduction of Real Time Gross Settlement (RTGS). adoption of prudential norms in terms of capital adequacy. Germany. Canada.K. The ongoing reforms process. a host of new generation private banks have entered the scene. growing use of technology. Growing competition The opening of the banking sector to private as well as foreign banks has been a major milestone in the history of the industry in the country. This along with the permission to foreign banks to expand their operations in the country through subsidiaries has 8 . liberalization of FDI norms in banks.The Changing Landscape of Banking Sector Under Universal Banking. Further it has pushed banks to put greater emphasis on risk management and corporate governance areas that were until now ignored. dilution of government equity holding in Public Sector Banks (PSBs). However significant challenge lie ahead for the banks in the country as they gear unto embrace international standards and best practices in line with BASEL II norms. Italy. liquidity adjustment facility. among others. As a result of the deregulation of the sector.

Today. it is attracting existing banks. insurance. . A majority of these banks are now widening and running their operations almost branchless. (ii) UNIVERSAL BANKING – THE NEW GROWTH AVENUE Another notable change that has taken place in the banking environment of the country is the introduction of “Universal Banking”. which is allowing them to stay competitive even as competition is heating up. there is a greater emphasis on customer convenience. using technology platforms like ATMs. The entry of new generation private sector and foreign banks is rewriting the rules of banking in the country. it is not unlikely that many banks especially PSBs will find some of their branches unproductive and unsustainable. (iii) CONSOLIDATION – THE INEVITABLE As the competition increases. thereby offering different services to their customers under one roof. Internet banking. investment banking. it will make consolidation in the sector inevitable. Several banks are now foraying into areas such as credit cards. Further. mutual funds. Technology has emerged as a key enabler to achieve this objective. which has opened up new avenues of growth for them. DEMAT services. mortgage financing. Also. Today. etc. many banks have begun to migrate to the universal Banking model. The proliferation of ATMs of both private and foreign banks in the towns and cities of India prove that. It is also helping transform the financial institutions in the country that were facing bleak prospects as their traditional sources of lending dried up and became virtually non-existent. Signs of consolidation have already begun to emerge. insurance. This is also fueling the growth of these banks. which is the key to success. It is helping new generation banks overcome the disadvantage of late entry by allowing them to achieve greater market penetration without having a ‘brick-and-mortar’ structure. and is now an integral component of any bank strategy. securitization. With the highly fragmented nature of the sector.galvanized the domestic banking sector. The high profile merger of Times Bank with HDFC Bank five years ago 9 . etc. which is time consuming and expensive. technology is helping banks in bringing down their operational costs. The greater cost competitiveness of private banks will also force PSBs with inefficient operations and high costs to either close those branches of merge with other banks to bring down the costs. which refers to cross-selling of financial products and enables a bank to act as a one-stop financial supermarket. dominated so far by the hitherto slow and lethargic public sector banks.

However. and private sector players like ICICI Bank have already made their intentions of going global clear. Further as banks in India look forward to expanding their presence outside the country and have a global reach they will be competing with global behemoths like the Citigroup. and provisioning (read: Non Performing Assets). as far as consolidation is concerned. The Union Finance Minister has also hinted that he is favourable to mergers between banks. He was recently quoted saying. in terms of strong balance sheet. For instance. etc. particularly the PSBs. the Securitization Act that came into vogue two years ago is helping banks clean their balance sheets. profitability and capital adequacy ratio of banks. size and scale to act local and seek new markets. Basel II challenges 10 . besides increasing transparency and efficiency in the system. State-owned banks like State Bank of India and Bank of Baroda. as compared to 15% in the previous fiscal. “Consolidation alone will give banks the muscle. According to Standard & Poor’s. and more recently. HSBC Bank. therefore. To acquire these capabilities Indian banks will have to look beyond organic growth. asset quality. the merger of the beleaguered Global Trust Bank with the governmentowned Oriental Bank of Commerce vindicate the argument. Industry experts opine that there may be many more mergers on the cards. as the banks have pointed out the Act suffers from certain loopholes and. especially government-owned ones. Improved financial health The ongoing reforms process has seen several major positive changes for the Indian banking sector. new classes of borrowers. though it needs to be further improved. Many of the PSU Banks have shown improved Capital Adequacy Ratio (CAR) for the fiscal 2002-03 as against the previous fiscal. Deregulation has enabled banks in India to improve their financial health in terms of capital adequacy. The merger between ICICI Bank and Bank of Madura.marked the arrival of Mergers and Acquisitions (M&A) in the banking sector in the country. profitability. key structural reforms have improved the asset quality. This is an encouraging sign as the Indian banking industry has for long been suffering the chronic problem of NPAs.” This gives enough indication as to what lies in store for the banks. only eight PSBs have shown NPAs of more than 5% for the fiscal 2003. Nedungadi Bank’s merger with Punjab National Bank. the progress made on the NPA front too is encouraging. However. Further. and economies of scale and size. needs fine-tuning. A couple of recent mergers clearly send a signal that consolidation is inevitable.

banks will be required to strengthen their risk management and surveillance systems and improve their credit assessment and risk management skills. (iv) FUTURE OUTLOOK While moving ahead the banks in India face challenges on the following fronts: Financial Performance: Banks in the recent past have enjoyed strong earnings growth from treasury operations.As the process of integration of the Indian economy with the global economy gains momentum it will pose significant challenges to the banking sector in India as a whole. However. Technology: As technology emerges as the key enabler in terms of customer convenience. this will have a significant impact on their profitability. their performances will be closely watched by the markets. RBI announced that India should examine the options available under Basel II and draw a road map by the end of 2004 so that they are ready for the migration to Basel II. besides the traditions risks like credit risk. In this backdrop. banks are concerned that unless some loopholes are plugged it will be difficult to implement the norms in their entirety. Also as more and more banks get listed on the stock exchanges. Risk Management: With increasing pace of globalization and easy flow of money across the globe. and review the progress made thereof at quarterly intervals. RBI has asked Indian banks to gear up to migrate to the new guidelines by the end of December 2004. and they could be exposed to severe punishment in terms of stock price if their financial performance does not meet market expectations. 11 . The Basel II norms will be implemented from 2006. prominently country risk. As their exposure to capital market is limited. banks in the country will be exposed to several new kinds of risk. retention and services. banks with strong IT capabilities will have an edge over competition. and operational risk. The Basel II norms relate to the new comprehensive framework for global capital standards laid down by the Basel Committee on banking supervision. Technology will also facilitate better capability in terms of managing large volume of transactions and improving and maintaining cost competitiveness. A major challenge it faces is the implementation of Basel II norms. and spreads are shrinking with the competition heating up.

reporting and disclosure norms. and improve their corporate governance practices. (v) CORPORATE GOVERNANCE With growing emphasis on the part of listed companies worldwide on creating shareholder wealth. Hence these banks will have to gear up to meet the stock market demands. and improve disclosure and reporting practices. domestic banks. they will have to gear up to embrace international best practices and standards in terms of operating. will come under intense pressure to be more transparent in their operations. which are seeing a dilution in government ownership.International Best Practices: If the banks in the country have to compete with international banks. 12 .

investment companies.Chapter 3 INDIAN FINANCIAL SYSTEM Indian Financial System is broadly classified into two groups: 1. These are not regulated by the Central Bank or the government in a systematic manner. Financial institutions 4. Primary Agriculture Credit Societies 4. Land Development Banks 13 . landlords. Banks 3. Central Co-operative Banks 3. Financial institutions sell their services to households. State Co-operative Banks 2. indigenous bankers. The providers of financial services are: 1. There are also a host of financial companies. Central bank 2. Organized sector 2. chit funds. The co-operative banking sector in India is divided into 4 components 1. traders. CO-OPERATIVE SECTOR The co-operative banking sector has been developed in the country to the supplement the village moneylender. Money and Capital markets 5. etc. etc. in the unorganized sector. lending pawn brokers. Informal financial enterprises The unorganized financial system comprises of moneylenders. business and government who are the users of financial services. Unorganized sector The financial system is also divided into users of financial services and providers.

SCICI Ltd.5. Industrial Development Bank of India (IDBI) 3. Primary Land Development Banks 8. Industrial Finance Corporation of India (IFCI) 2. Industrial Credit and Investment Corporation of India (ICICI) 4. State Land Development banks DEVELOPMENT BANKS Development Banks are those financial institutions that provide long-term capital for industries and agriculture namely : 1. National Housing Bank MONEY MARKET The money market is the market in which short-term funds are borrowed and lend. Small Industries Development Bank of India (SIDBI) 6. 7. National Bank for Agriculture and Rural Development (NABARD) 8. Primary Agricultural Development Banks 7. Discount and Finance House of India Limited (DFHI) 2. Export Import Bank of India 9. Securities Trading Corporation of India (STCI) FINANCIAL COMPANIES Financial companies are those companies who mobilize and channel savings into investment. The leading money market institutions are : 1. Urban Co-operative Banks 6. Industrial Investment Bank of India (IIBI) 5. They are only partly controlled by the Reserve Bank and partly by the Registrar of Companies under the Companies Act. 14 .

there are more than 4. 15 .Over the years.782 institutions channelizing credit into the various areas of the economy. the structure of financial institutions in India has developed and become broad based.58. Today.

Bank of Baroda. Allahabad Bank. Out of such transactions the commercial bank makes profit. General Utility Services  Providing safe deposit vaults or locker to the customer for keeping their valuable and maintaining in the safe custody of bank.Chapter 4 COMMERCIAL BANKING V/S DEVELOPMENT BANKING Commercial Banks Commercial banks are profit making institutions. Indian Bank. Bank of India. collection of bills. Canara Bank. fixed deposits etc). Primary Functions These functions includes accepting of different deposits (current deposits. the mode and frequency of repayments. (ii) Saving and purchasing of security and shares. Functions of Commercial Banks (CB) There are three types of functions of CB. school fees. 3. giving loans (short term loans and medium term loans). Oriental Bank of Commerce. Indian Overseas Bank. security papers. pension. United Commercial Bank. 16 . cheques. 2. Secondary and Subsidiary Functions (i) Agency services rendered by the commercial banks such as making payment of insurance. 1. payment. savings deposits. dividend etc. Punjab National Bank. (iii) Undertaking and executing the trust. demand draft etc. wills and sealed packets on behalf of customers  Securing of traveler’s confidential status report about the customers on the basis of balance in their accounts. salary collection. agreements and wills etc. Examples of commercial banks are. Union Bank of India. State Bank of India and its subsidiaries. (iv) Carrying transactions as an agent to government to local authority. shares. A commercial bank accepts money from those who have to save and disburse loans to those who need them. Vijaya Bank etc. documents. United Bank. Dena Bank. rent.

the rate rising with the length of the period. Higher interests are paid on them. Besides. also known as current accounts. The amount of permissible overdraft varies with the financial position of the borrowers. Accepting Deposits Banks attract the idle savings of people in the form of deposits. 2. We discuss all of them below:1. Usually no interest is paid on them because the banks cannot utilize short-term deposits and must keep almost cent per cent reserve against them. they borrow to lend. Money is advanced by the banks in any one of the following ways: By allowing overdraft: Customers are given the right to over-draw their accounts. They borrow in the form of deposits and lend in the form of advances.The description of above functions is as follows: Commercial banks act as intermediaries between those who have surplus money and those who need it. These are repayable on demand without any notice. a small interest is paid to the people who keep large balances. The rate of interest is less than that on fixed deposits. To receive deposits and advance loans are thus the two main functions of all commercial banks. This is so because the bank must keep itself ready to meet the demand of the depositors who have deposited money for short periods. Fixed Deposits or Time deposits These deposits can be withdrawn only after the expiry of the period for which these deposits are made. On the other hand. there are other incidental functions which have developed according to the needs of society. Granting LoansAfter collecting money. Savings Bank Deposits These deposits stand midway between current and fixed deposit accounts. By creating a Deposit 17 . but they have to pay interest on the extra amount which has to be repaid within a short period. In short. a bank invests it or lends it out. a little commission is charged for the service rendered. In other words they can get more than they have deposited. Money is lent to businessmen and traders usually for short periods only. Occasionally. These deposits may be of any of the following types: Demand Deposits.

He shows this letter to banks in other countries which make the payment to him and debit the bank which has issued the letter of credit. on payment of a small sum per year. Thus. Letters of credit: In order to help the travelers the banks issue letters of credit. They receive payments on their behalf. When required they supply this information confidentially. or it may be satisfied with the borrower’s personal security. They pay insurance premium and make other payments as instructed by their depositors. e. When a person is in need of a loan from a bank. They collect rents. This is done when their customers want to establish business connections with some new firms within or outside the country.Cash credit is another way of lending by the banks. They accept bills of exchange on behalf of their customers. References: They give references about the financial position of their customers. rate of interest are settled and the loan is advanced. Then details about time. etc. A man who is going abroad takes with him a letter of credit from his bank. They pass bill of lading or railway receipts to the purchases of goods when they pay for them. After that the banker may require a tangible security. Usually such security is accepted as can be easily disposed of in the market. risk of theft is avoided. This amount is passed on the suppliers of goods. in its strong room fitted with lockers. It is mentioned there that he can be paid sums up to a certain limit. 18 . Safe Custody: Ornaments and valuable documents can be kept in safe deposit with a bank. dividends on shares. Agency Functions: The bank works as an agent of their constituents. government securities or shares of approved concerns. he has to satisfy the banker about his ability to repay.g. the soundness of his venture and his honesty of purpose.

and Industrial Development Bank of India (IDBI) as the apex bank 1964. In Asia. The birth of International bank for Reconstruction and Development to reconstruct the liberated underdeveloped economies was the first phase of development. Growth as envisioned was a distant dream.Chapter 5 DEVELOPMENT BANKS After the independence of India from the yoke of British rule. the Industrial Bank of Japan founded in 1902 assisted not only in the development of the domestic capital markets. 1951. Industrial Credit and Investment Corporation (ICICI) in 1955. Origin and Nature Development Financial Institutions (DFIs) or development banks provide long term credit for projects. To resolve the dearth of long term funds and the perceived socially unjustified risk aversion of creditors specialized financial institutions were set up in India: Industrial Finance Corporation in 1948 followed by the setting up of State Financial Corporations (SFCs) at the state level under the State Finance Corporation Act. Protectionism coupled with excessive control over foreign interference had resulted in lop-sided development all around. but also obtained equity for the industrial firms in Japan. and in France institutions such as Credit Froncier and Credit Mobiliser were created during 1848-1852. Jawaharlal Nehru was to industrialize the nation and also to make India a self-reliant one. The policies pursued by him. The investment by the private entrepreneurs had no place and infact. were to encourage state participation in infusing funds into the economy. one of the primary visions of the then Prime Minister Pt. Consequent result is bureaucratic regime. 19 . mired in the rigmarole of unimaginable rules. The Netherlands set up an institution in 1822. totally discouraged. Many of these institutions were sponsored by national governments and international organizations. The rapid industrialization of continental Europe in the 19 th century has been facilitated with the emergence of DFIs.

These institutions played an important role in acquiring and disseminating skills necessary to assess investment projects and borrowers’ creditworthiness. These are Unit Trust of India (1964) and LIC and GIC and its subsidiaries.There are investment institutions which mobilize resources and provide medium to long term investment. (i) DEVELOPMENT FINANCIAL INSTITUTIONS Industrial Development Bank of India (IDBI) The Industrial Development Bank of India (IDBI) which was established in 1964 under an Act of Parliament is the principal financial institution for providing credit and other facilities for development of industry. IDBI has been providing financial assistance to large and medium industrial units. and specialized institutions like the Technology and Information Company of India Ltd (TDICI) and Tourism Finance Corporation of India (TFCI) and Small Industries Development Bank of India (SIDBI) to serve in their specified areas. Industrial Credit and Investment Corporation of India (ICICI) 20 . An umbrella limit for the financial institutions has been prescribed by RBI. coordinating working of institutions engaged in financing. term deposits and intercorporate deposits. Reserve bank made available funds at concessional rates for long-term financing from its Long Term Operations (LTO) funds. CDs. multilateral and bilateral agencies and issue bonds. FIs make available term loans of 5 to 7 years and even exceeding 10 years. They also make available foreign exchange loans out of funds made available by foreign agencies to meet the foreign exchange component of project. The funds from multilateral and bilateral agencies to FIs were guaranteed by the Government and carried low coupon rates. Financial institutions also raise term money borrowings. promoting or developing industrial units and assisting development of such institutions. Finally the bonds issued by FIs qualified for SLR investment by banks thus ensuring a captive market. Sources of Term Loans The sources of funds of financial institutions were Reserve Bank of India.

financial assistance is available to units in the corporate and co-operative sectors for new units. discounting of bill of exchange and guarantees. Industrial Finance Corporation of India (IFCI) IFCI was set up under a statute in 1948 but has been converted into public limited company to give flexibility to its operations. It functions as the principal financial institution for promotion.ICICI was established in 1955 as a public limited company to encourage and assist industrial units in the country. State Financial Corporations have been set up under State Finance Corporations Act 1951. diversification and modernization programme in the form of rupee loans and foreign currency loans. makes direct subscription to the issues and guarantees payment for credit made by others. Along with the all India financial institutions they form an integral part of the development financing institutions in the country. underwriting and direct subscription to shares. debentures. Small Industries Development Bank of India (SIDBI) SIDBI has been established in 1989 to function as an apex bank for tiny and small scale industries. Shipping Credit and Investment Company of India (SCICI) 21 . financial services and promotional services. guarantees for deferred payments and foreign currency loans. State Financial Corporations (SFCs) At the state level. There are 18 IFCs in the country. They provide financial assistance to small and medium enterprises by term loans. IFCI provides to industrial units project finance. financing and development of industrial concerns in small scale sector and will also coordinate functions of institutions engaged in promotion. It provides term loans in Indian and foreign currencies. financing and developing industrial concerns in this sector. Under its project finance. underwrites issues of shares and debentures. direct subscription to equity/debentures. expansion. From 1993 SIDBI is extending direct assistance to small scale units on a selective basis.

The entire assets and liabilities of IRBI were transferred to IIBI. National Bank for Agriculture & Rural Development (NABARD) NABARD is a apex credit institution set up on July 12. (TFCI) TFCI was sponsored by IFCI which commenced operations in 1989 to sanction project loans. fishing and related industries and financing projects on the strength of their financial viability after careful elaboration of the project Industrial Investment Bank of India IIBI was formed on 27.) 22 .1997 under the Companies Act as a development financial institution by reconstructing the erstwhile Industrial Reconstruction Bank of India with adequate operational flexibility and functional autonomy. Apart from the conventional tourism projects in the accommodation and hospitality segments. Tourist Financial Corporation of India Ltd. lease assistance and direct subscription to shares. assistance sanctioned by TFCI has enabled non-conventional tourism projects like amusement parks. car rental services and air taxi passenger facilities.The SCICI was set up in 1987 by ICICI for the development of shipping.3. 1982 under the National Bank for Agricultural and Rural Development Act 1981 (Act 61 of 1981). It was established by merging the Agricultural Credit Department and the Rural Planning and Credit Cell of the RBI and Agricultural Refinance & Development Corporation (ARDC.

monitoring and managing the market risk of a bank.management functions extend to liquidity risk management. It has been implemented with effect from April 01.liability.liability. trading risk management. the assets. Residual maturity: Residual maturity is the time period which a particular asset or liability will still take to mature i. management of market risk. funding and capital planning and growth projection. for implementation of ALM. Doing so disguised possible risks arising from how the assets and liabilities were structured. life insurance policies or annuities.management is of recent origin. It is the management of structure of balance sheet (liability and assets) in such a way that the net earning from interest is minimized within the risk-preference (present and future) of the institutions. All assets and liabilities were held at book value. 1999. They would invest the proceeds from these liabilities in assets such as loans. say in case of term loan). become due for payment (once at a time. it is the whole subject of asset/liability management”. say in case of a term deposit or in installments. (ii) SCOPE OF ALM: The assets. They would take on liabilities. The Reserve Bank of India issued guidelines on February 10.Chapter 6 ASSET LIABILITY MANAGEMENT Paul S. banks and insurance companies used accrual accounting for essentially all their assets and liabilities.e. Maturity buckets: 23 . bonds or real estate. 1999. such as deposits. (i) WHAT IS ALM? Assets liability management is a comprehensive and dynamic framework for measuring. Nadler said“ If there is any area of banking that has undergone drastic change. Traditionally. ASSETS-LIABILITY MANAGEMENT IN BANKS (ALM) In India.

91-180 days. For off-balance sheet exposure. the current and potential credit exposure to be measured by daily measure. From March 2001 banks with international presents have to develop methodologies for estimating and maintaining economic capital. Banks are also to adopt proper systems to measure.Maturity buckets are different time intervals (8 for the time being. requiring simultaneous decisions about the types of amounts of financial assets and liabilities – both mix and volume – with the complexities of the financial markets in which the institution operates. market and operational risk in the banking sector. 5. (iii) RISK MANAGEMENT Reserve Bank of India issued guidelines on risk management in banks on October 20 th 1999 which broadly cover management of credit. It is an integrated approach to financial management. Activities of ALCO (Assets. in which the value of a particular asset or liability is placed depending upon its residual maturity. 2. The highlights are: 1. 29-90 days. 3. Investment proposals to be subjected to same credit risk analysis as in case of loan proposals. Banks to set up a comprehensive risk rating system for counter parties. (iv) TOOLS OF ASSET LIABILITY MANAGEMENT (ALM) AND THEIR MECHANISMS 24 . Investment proposals to be included in the total risk evaluation. 3-5 years and above 5 years). 8. Benefits of ALM: It is a tool that enables Banks managements to take business decisions in a more informed framework with an eye on the risks that Banks are exposed to. monitor and control operational risk that is emerging in the wake of phenomenal increase in the volume of financial transactions. 4. 15-28 days. 6. 1-14 days. Banks are to fix a definite time frame for moving over to value-at-risk (VaR).Liability Committee) and Credit Policy Committee should be integrated. 1-3 years. 181-365 days. Banks should evaluate portfolio quality on an ongoing basis instead of near balance sheet. 7.

of differing character in accordance with predetermined terms. which may otherwise be not allowed by the authorities  Swaps are used for arbitraging in different markets  More venturesome trade (speculate) in swaps. OPTIONS Options are derivative products used for hedging the risks arising on account of wither interest rates or exchange rates. on a notional agreed principal. Currency Option Terminology Call Option: The right to buy specified amount of one currency against another currency is known as call option. These products are generally. Swaps are a common and popular product in derivative markets. An ‘interest rate swaps’ does not involve exchange of principal either at the beginning or at the end of the agreed period. in the form of agreements and both the counterparties to the contract have certain rights as well as obligations under the said contracts. A swap is a financial transaction in which two counterparties agree to exchange streams of payment over time.SWAPS ‘Swap’ literally means exchange and thus simply stated swap is nothing but exchange of liabilities between two parties. particularly in short term  Swaps have been used to raise resources abroad. Uses of Swaps:  They can raise finance at a cheaper cost  They can obtain high yield assets  The swaps are used by them to hedge against interest rate exposure  They use it as a tool for ALM (Asset-Liability Management). A ‘Currency Swap’ is a financial transaction whereby two counterparties agree to exchange specific amounts of two different currencies at the outset and periodic repayments overtime in accordance with predetermined terms. It is always good to have a right but no obligation. 25 . but does involve periodic exchange of streams of interest payments.

is called premium. the buyer has a disadvantage. American Style: An option which can be exercised at any time between the initial deal date and the expiry date. The Reserve Bank maintains a 26 . If the option has intrinsic value. the strike price is equal to the underlying spot or future rate. ATM: If by exercising option. Expiration Date: The last up to which the option can be exercised. Buyer: The person who buys the right to buy or sell specified amount of one currency against another currency. ITM: If by exercising option. (v) RELEVANCE OF ALM TO PRINTING OF CURRENCY NOTES How does the Reserve Bank of India decide about the requirement of currency notes? Under Section 22 of the Reserve Bank of India Act. European Style: An option which can be exercised only on the expiry date. Strike Price: This represents predetermined price at which the option can be exercised. the buyer has an advantage. Intrinsic Value: The difference between current exchange rate and the strike price is called ‘Intrinsic Value’. If the option has extrinsic value it is called ‘Out of the Money’.e. OTM: If by exercising option. Premium: The amount paid by the buyer of an option to the seller (writer of the option).. the Reserve Bank of India has got the sole right of printing currency notes. the option is called ‘At the Money’. the buyer has neither advantage nor disadvantage. It can print and issue currency notes of different denominations from the rupee notes ten-thousand rupee notes. Seller (Writer): The person who sells the right to buy or sell specified amount of one currency against another currency. the option is called ‘Out of the Money’.Put Option: The right to sell specified amount of one currency against another currency is known as put option. If the option has no intrinsic value i. The date on which the option can be exercised is called exercise date. Exercise Date: For delivery of foreign exchange the buyer of the option must notify the seller about his decision for taking or giving delivery and this is known as ‘exercising the option’. the option is called ‘In the Money’. it is called ‘In the Money’. it is called ‘At the Money’.

At present the assets of the issue department consists of a minimum of gold and foreign securities to the extent of Rs 200 crores (of which gold should be of value of Rs 115 crores and the balance in rupee securities).separate issue department to look after currency issue. This department maintains reserve against currency notes. The present system is known as the minimum reserve system of note issue. it becomes a must when the government meets its surplus expenditure (so-called deficit financing) by resorting to issue of currency notes. 27 . Although issue of currency notes is the monopoly of the Reserve Bank of India.

In these types of advances banks only make a commitment that in case the borrower defaults. they also become fund-based advances. there is huge untapped potential for business. When banks part with funds. There are some advances which are also called non-fund based advances. If the borrower default in non-fund based advances. Given the rising purchasing power of this class. the advances are called fund-based advances. Fund based facilities:  Cash Credit  Overdraft  Bills Purchased and discounted  Export packing credit Non-fund based facilities: (Off Balance Sheet items)  Letters of credit  Guarantees  Bills co-acceptance facility  Foreign Exchange Contracts (i) CONSUMER FINANCE: The emergence of middle class with substantial purchasing power in India during last one decade or so and its desire to spend according to the changing lifestyle has offered the Indian Banking system a ready market for mobilization and deployment of their funds. Advances are granted by banks to their customers in different forms. as it involves direct lending of funds.Chapter 7 SHORT TERM NATURE OF FUNDING Banks in their normal course of business activity deal in short term as well as long term funding and non-funding facilities. the banks will make good the loss as per terms of the contract. 28 . There are items that appear in the balance sheet of a bank and certain of the transactions that does appear outside the scope of the balance sheet known as off balance sheet items which are given below.

Conveyance Loans. Personal Loans for diverse purposes such as medical expenses. have all forced banks to be in search of alternative opportunity to deploy their funds.Objectives: Retail banking means providing services to individuals. In fact retail banking is not a new concept. 29 . declining Bank rate leading to decline in spreads. resulting in pumping in of liquidity. Retail banking is different from wholesale banking where focus is on industry and institutional clients. focusing on individual needs for different kinds of financial services. Various Segments in Retail Banking: Basically there are 2 important segments in retail banking which include: 1. (ii) NEED OF EMPHASIS FOR RETAIL BANKING: With large corporate borrowers having diversified their sources to fund their financial requirements. Loan products such as Housing Loans. safe custody etc. portfolio management. The retail banking offers considerably better spread of 3-4 percent compared to very thin spread available to banks in case of Corporate clients. Education Loans. securities etc. Rather it has come into focus only in recent times. in an integrated manner. Insurance Policies. Deposit products (convenient deposit schemes like flexi deposits) 2. Funds Investment services (including mutual funds) ancillary services like dematerialization. frequent reduction in Cash Reserve Ratio. travel abroad Advantages of Retail Banking: Banks have excellent opportunity to cross sell various retail products like Credit Cards. The objective of retail banking is to increase penetration by providing increasing level of services and increased access by offering value added services to customers by packing them with retail banking products and services. unattractive yields on Govt.

many economists and historians have argued that German-style universal banks offer advantages for industrial development and economic growth. A corollary to this view holds that countries that failed to adopt the universal-relationship system suffered as a consequence. and the efficiency of secondary markets in securities. like deposits. underwriting costs. Global experience with universal banking has been varied. More recently. economists have begun more intensive investigation of the links between financial system structure and real economic outcomes. For example. strategic decision-making. short-term and long-term loans. Particularly since World War II. Universal banking has been prevalent in different forms in many European countries. due to short-comings of the financial system that lead to relatively high costs of capital. Italy etc. spurred Germany’s rapid development at the end of the nineteenth century and again in the post-World War II reconstruction. The choice between universal and specialized banking may affect interest rates. and even the competitiveness of industry. Furthermore. Switzerland. In theory. insurance. Indian context In Indian context. and that the American economy has failed to reach its full potential. the presence or absence of formal bank relationships may affect the quality of investments undertaken. With the last Narasimham Committee and the Khan Committee reports recommending consolidation of the banking industry through mergers and integration of financial activities. they hypothesize. A universal bank is a ‘one-stop’ supplier for all financial products and activities. investment banking etc. Adherents suggest that British industry has declined over the past hundred years or more. the stage seems to be set for a debate on the entire issue. and the distribution of that capital to ultimate uses. Universal banking efficiency combined with close relationships between banks and industrial firms. the phenomenon of universal banking—as different from narrow banking—has been in the news in the recently. the organization of financial institutions partly determines the extent of competition among financial intermediaries. the quantity of financial capital drawn into the financial system.Chapter 8 UNIVERSAL BANKING: THE ROAD AHEAD The Challenges of Universal Banking in the Indian context and Universal Banking Abroad Economic historians have long emphasized the importance of financial institutions in industrialization. such as Germany. France. in 30 .

the US banned all forms of universal banking through what is known as the Glass. Research on the effects of universal banking has been inconclusive as there is no clear-cut evidence in favour of or against it anywhere. commercial banks have been selling insurance products. selling insurance products etc. the United States has once again started moving cautiously towards universal banking through the Gramm-Leach-Bliley Act of 1999 which rolled back many of the earlier restrictions. taking equity positions in borrowing firms. Hence it becomes all the more imperative to know whether we need universal banks in India.Steagall Act of 1933. What are the benefits to banks from universal banking? The standard argument given everywhere—also by the various Reserve Bank committees and reports—in favour of universal banking is that it enables banks to exploit economies of scale and scope. What it means is that a bank can reduce average costs and thereby improve spreads if it expands its scale of operations and diversifies its activities. Some recent phenomenon. 31 . After the stock market crash of 1929 and banking crisis of the 1930s. which have been referred to as Banc assurance or Allfinanz. And whether it is a more efficient concept than the traditional narrow banking.these countries. Nevertheless. The idea was to mitigate risky behaviour by restricting commercial banks to their traditional activity of accepting deposits and lending. like the merger between Citicorp (banking group) and Travelers (insurance group) confirmed the fact that universal banking is here to stay. This prohibited commercial banks from investment banking activities.

though in varying degrees.That was possible apart from other factors due to the highly professional approach some of them adopted: it helped them stay clear of the pitfalls of nationalized banking. are being forced to change organizationally and in every other way. 32 . Private banking in that context was viewed a brand new approach.Chapter 9 THE DEBATE OVER UNIVERSAL BANKING IN INDIA (i) Thoughts on Universal Banking: FIs and banks Recent trends in universal banking in open market and emerging economies. surviving the market upheavals of the 1990.Advantages and disadvantages Some of the troubling issues of universal banking. For these and certain other reasons private banking was sought to be encouraged in line with the Narasimham Committee's recommendations. to bypass the structural and other shortcomings of the public sector. in fact they became burdened with unwelcome legacies. Yet in less than a decade after the advent of these new generation banks. Public sector banks which had a useful role to play earlier on now faced deteriorating performance. tax incentives and other concessions have been unable to add to their resources (capital formation) over decades. The financial sector was crying out for reform. with subsidized funds. including networking among the vast branch network was felt. need for computerization. A few of the new ones that were promoted by the institutions such as the IDBI and ICICI did establish themselves. Who benefits after this restructuring is something that has to be asked. some of the successful ones. One key question: the financial institutions. customer service had become a casualty. It would be pertinent to recapitulate the prevailing conditions in the banking industry in the early Nineties: the nationalized sector had outlived its utility. In the early Nineties the forces of globalization were unleashed on the hitherto protected Indian environment.

It is essential to assimilate history of banking as well as the role of the financial institutions till recently. indiscreet branch expansion. Today. to face the competition. and mounting arrears in reconciliation are attributable to such branch expansion. Post nationalization. mergers are advocated. . foreign banks prospered during all these difficult days. irregularities. At the same time. utilizing the same branch network! All these pose a question to the recent merger of Bank of Madura . The insulated economy till the Nineties provided comforts to public sector banks. the risk parameters in these spheres were hazy and not quantifiable. one factor is the size and hence. most of the complaints. Even today. in areas of liquidity management while in an administered interest regime. unremunerative branches? Pertinently for all banks the RBI has already provided an exit route but there have been no takers among the public sector banks. these banks do not have branch network to speak of but in terms 33 .will the ICICI Bank decide to shed unwanted. wide gaps/inefficiency at the levels of control apart from environmental impacts. contributed to their present status. mass banking sans commercial or professional goals. for obvious reasons. Pertinent again is to note that another set of banks. The share of private sector banks which is distinctly known as old private sector banks' established before 1994 was thus not substantial while operations of foreign banks were also restricted. discretion of managements was limited and consequently. The woes of the public sector banks till date relate to handling volumes. Staff orientation especially at the branch level is a key ingredient for success and neither the older private banks nor the nationalized banks were successful in that respect. be it in the area of transactions or staff complement or branch offices. namely. this has enabled a few of the smart foreign/new private sector banks to enrich themselves by offering cash management products. the advantage of vast branch network is yet to be exploited by them while on the other hand. Talking of the PSBs it is relevant to note that except for a build up of savings accounts (as low cost deposits). The branch banking concept with which we are familiar and practised since inception is basically on certain `protected' fundamentals. lack of networking. in a market driven economy.

34 . Only a couple of new private sector banks have posed any challenge to them in the recent years.of volume. profitability they are far ahead of the public sector banks.

91 day and 14 day treasury bills and the zero coupon bond. OMO/LAF auctions. An innovative feature of ‘part payment’ was added to the auction of Government of India dated securities. 1997. In the long term segment. 35 . including repo and to facilitate information on trades with minimum time lag. Floating rate Bonds (FRBs) benchmarked to the 364 day treasury bills yields and a 10 year loan with embedded call and put options exercisable on or after 5 years from the date pf issue were introduced. screen-based electronic dealing and reporting of transactions in money market instruments. 182 day. Foreign Institutional Investors (FIIs) were allowed to set up 100 percent debt funds to invest in Government (Central and State) dated securities in both primary and secondary markets. improvements were brought in transparency of operations and data dissemination. The system of automatic monetization of budget deficit through adhoc treasury bills which hampered the development of the market was phased out over a period of three years from 1993-94 to 1996-97 and was replaced by the system of Ways and Means Advances (WMA) with effect from April 1. Since timely flow of information is a critical factor in evolving the efficient price discovery mechanism. A system of Primary Dealers (PDs) was made operational in March 1996.Chapter 10 THE ENTRY OF COMMERCIAL BANKS INTO THE SECURITIES MARKET Government Securities Market New auction based instruments were introduced with varying maturities such as 364 day. The Negotiated Dealing System (NDS) (Phase I) was operationalized in February 2002 to enable on-line electronic bidding facility in the primary auctions of Central/State Government securities. The auction system was also introduced for Government of India dated securities.

The Act has made various provisions regarding money laundering transactions which include maintenance of record of all transactions relating to money laundering. proceeds have been received from crime and there is some transaction in respect of these proceeds or the gains. Records relating to such transactions shall be preserved for 10 years from the date of cessation of the transaction between the clients and the banking company. Punishment would be rigorous imprisonment for not less than 3 years but up to 7 years and fine up to Rs. Legal Setup in India Indian parliament passed ‘The Prevention of Money Laundering Act. for prevention of money laundering. The Act also provides for confiscation of property derived from or involved in money laundering. 2002’ during December 2002. The money launderers may open deposit accounts with banks in fake names and banks will be required to be vigilant for not becoming a party to such transactions.Chapter 11 MONEY LAUNDERING What Is Money Laundering? Money laundering means acquiring. Banks may also have to train their staff appropriately to check such activities. 36 . Similarly they have to observe the norms regarding record keeping. account opening and monitoring transactions. reporting. 5 lakhs. Money laundering is a process for conversion of money obtained illegally to appear to have originated from legitimate sources. there are gains from the crime. within or outside India. Offences and Punishments: Offences would be cognizable and non-bailable. owning. (ii) ROLE OF BANKS WITH REGARD TO MONEY LAUNDERING: In India all banking companies including co-operative banks are covered under the Act. possessing or transferring any proceeds (of money) of crime or knowingly entering into any transaction that is related to the proceeds of the crime either directly or indirectly or concealing or aiding in the concealment of the proceeds or gains of crime. (i) ESSENTIAL ELEMENTS OF MONEY LAUNDERING The essential elements are that a crime is committed.

searches or arrests without recording the reasons. 37 . (iii) KNOW YOUR CUSTOMER CONCEPT (KYC) As part of Know Your Customer principle. identify money laundering and suspicious activities and for scrutiny or monitoring of large value cash transactions. the authority under the Act would be also liable to convicted for imprisonment up to 2 years and fine up to Rs. Existing Customers: Where the Banks have not adopted appropriate KYC norms at the time of opening accounts.50000 and above only by debit to customers’ accounts or against cheques and not against cash. Further. the Reserve Bank of India has issued several guidelines relating to identification of depositors and advised the Banks to put in place the systems and procedures to help control financial frauds. Since KYC is now expected to establish the identity of the customer and as the issue of Demand Draft etc. the requirement for furnishing PAN stands increased uniformly to Rs.50000 and above is by debit to account. Demand Drafts.10000 should affix PAN (Permanent Account Number) on the applications. Cash Transactions: Banks are required to issue Travelers Cheques. Mail Transfer and Telegraphic Transfer for Rs. the requisite KYC procedure for customer identification should be completed at the earliest. the applications (whether customer or not) for the above transactions for amount exceeding Rs.000. 50. New accounts: KYC procedure should be the key principle for identification of an individual or corporate while opening an account. for Rs.50000. The guidelines are applicable to all accounts including Foreign Currency accounts or transactions. The customer identification or verification should be through an introductory reference from an existing account holder or a person known to the Bank or on the basis of documents provided by the customer.For unlawful detention.

 Anywhere Banking and ATM It empowers the customers to operate their account at any of the branches of a Bank at one city and with the help of inter-city communication linkage it can be used across different cities.Chapter 12 COMPUTERS AND BANKING Banking through Computers A combination of computers and communication technologies is at present enabling international banks and financial institutions to expand their reach and offer technology based products to a wide spectrum of clientele which was unthinkable in olden days. ATMs have made it more convenient for thecustomers to transact business from nearest ATM. non availability of time for visiting bank branches etc. The commencement of shared payment network (SPN) system by IBA in Mumbai is a step in this direction.  Tele Banking It has started attracting the fancy of urban customers for convenience of facility which takes care of transport bottle-neck. Society for World Wide Inter Bank Financial Tele-communication (SWIFT) is a classic example of EFT among banks with its own standard for messages. Any branch of a commercial bank which has computerized operations can offer this facility with the help of a suitable software for this purpose. traffic jams. which ensure speed. Such electronic funds movements amounting to a few trillion dollars are settled on a daily basis at major international financial centers. reliability. If large Banks in India create such infrastructure for their branches in India. Digitalization of voice has enabled the 38 . this will lead for more efficient use of funds and contribute to excellence in customer service in remittances and collections. E-cash or Cyber-cash place a predominant role in world commerce. Banks being essentially the processors of information in large quantities use the information technology (IT) to achieve the: (i) BANKING SERVICES THROUGH INFORMATION TECHNOLOGY  Faster remittances services: Electronic funds transfer (EFT) has accelerated the movement of funds across the globe. security and accuracy.

An ALPM contains records of the customers and during transactions. saving accounts. the quality of customer services had a set-back and in order to improve this quality. account opening forms etc.introducing of this technological marvel. At a very low level the machines such as ALPM (Automated or Advanced Ledger Posting Machines) are being used to perform the functions relating to various sections of branch banking such as current accounts. Corporate clients can benefit considerably by having a remote PC terminal for this purpose in the Corporate Office itself and can handle their documentary credit related transactions. cash credit. the details of his account are available on the screen of VDU.  Home Banking It is an extended version of tele-banking whereby the customer is able to access is branch account from his home for availing a variety of services which is made available through the customers personal computer attached to a telephone line and a modem. ATMs are electronic machines which are operated by the customer himself to deposit or 39 .  Cash Management Some banks including SBI. transfer of funds. Corporation Bank introduce cash management products for Corporates to improve their quality of services. Facilities offered through telephone banking include a range of services such as Balance enquiries. the need for Bank computerization was severely felt. reduce the expenditure to attain profits and to handle volume of transactions. On-line banking facilities including normal transactions can be handled through this arrangement. (ii) BANK AUTOMATION As a result in the increase of volume of business in the Banks. salary etc. Banks are also offering services such as account opening and ordering for demand drafts. request for statements of account. enquiries of collection or specific credits and debits. The application software for such facility should incorporate suitable security features such as encryption to protect the transmission of sensitive data over telephone lines. To ensure security the system is used with the help of password of the user. The Automated Teller Machines (ATMs) on the other hand are made use of through WAN. This objective has now been achieved through networking system such as LAN and WAN.

40 . a customer requires an ATM card which is a plastic card magnetically coated and read by the machine.withdraw. For using an ATM.

hatchery. fish processing. Merchant banks can also help corporate clients to raise syndicated loans from commercial banks. 41 .  Industrial Finance Corporation of India  State Finance Corporations  IDBI. onshore and off-shore oil survey. Such loans may be obtained from a single development finance institution or a syndicate or consortium as in the case of large term loans.  State Industrial Development Corporations.  UTI.  Small Industries Development Bank of India. food processing and associated infrastructure facilities. Industrial Reconstruction Bank of India. feed mill. road and rail transportation.Chapter 13 LOAN SYNDICATION (i) LOAN SYNDICATION [DOMESTIC] Introduction Loan syndication refers to assistance rendered by merchant banks to get mainly term loans for projects. ICICI. They cover small and medium industrial units in the corporate and co-operative sectors.They finance shipping. aquaculture.  Development Financial Institutions (DFIs) or development banks like. exploration and production. LIC. Term Loans Following institutions extend term loans for the promotion and financing of fixed assets. GIC and its subsidiaries Activities  Term loans in Indian and foreign currencies  Underwrites issues of shares and debentures  Makes direct subscription to the issues  Issuance of deferred guarantees for advance made by others  Discounting of bills of exchange Shipping Credit and Investment Company of India [SCICI] . deep sea fishing.

if end use is for the intended purpose. and infra structure projects and even to finance balance of payment deficits. IFCI. project loans. security.5% and negotiable for prime clients. repayment schedule etc but consistent with the current available market terms. However. (ii) LOAN SYNDICATION [EXTERNAL] Guidelines A cap is put on the External Commercial Borrowing [ECB] to ensure that it remains within manageable limits. Loan Syndication 42 . there should be no counter guarantee by any institution abroad. lease assistance and direct subscription to shares. and Reserve Bank of India’s approval is pre condition before drawing loan. Govt of India. In short Loan syndication is an alternative to Consortium Lending. would ensure meeting such conditions inter alia applicability of withholding tax. tourism projects like amusement parks. All Indian financial institutions (IDBI.  Free to negotiate choice of currency. Approvals Department of Economic Affairs. Govts and Govt related borrowers resorted to Euro-credit market for industries. Applicants are  Free to raise commercial loans from any internationally recognized source including commercial banks. car rental services and taxi passenger services. export credit agencies. & ICICI) operate Exchange Rate Administration Scheme (ERAS) to cover exchange rate fluctuations.Tourism Finance Corporation of India Ltd [TFCI] – They cover hospitality segments. where the security is in the form of a guarantee from an Indian financial institution. There is no shortage of funds in euro market and further the lender would be satisfied. Foreign Currency Loans The interest rates are linked to LIBOR plus 1. The Govt while approving. ECB is defined to include supplier’s credit and credits from sponsored agencies. interest rates. fees.

Judgement currency clauses are necessary because courts in several countries render judgement in domestic currency only. First relates to jurisdiction. New York is often chosen because of the extensive case law on banking matters even in cases involving lenders and borrowers not residents of the U. commitment fees.Sovereign risks do arise in international lending. EURO and other currencies are also granted. Borrowers normally receive funds in the place of their choice. front-end fees and sometimes an annual agent’s fee. Loan document clauses cover pricing.A. premium. managing banks and participating banks. The loans are normally denominated in US$. In the case of loans to multinational companies. Grace period is one of the factors that determine the cost of the loan. interest payment dates. Beyond LIBOR is the ‘Spread’. Guarantee Clause 43 . In a syndicate there are three levels of banks. Place & Method of Payment Payment of principal and interest on loan is normally affected means of transfer of funds from one bank account to another in the country of the currency in which the loan is denominated. amortization dates. affiliates are regarded as obligators of the parent company. Common type of syndicated loan is a term loan with a grace period before repayment of principal commences. CHF. Lead banks assemble a management group of other banks to underwrite the loan and to market shares in it to other participating banks. The borrower may be in one country. Loan Agreement Provisions Euro loan agreements are simple and contain fewer restrictive covenants. JY. The mandate to organize the loan is awarded by the borrower to one or two major banks after competitive bidding procedure.S. The other aspect in the loan document reflects the international character of the loan. the booking of loan in another country and the funding another country. lead banks. Pricing Interest on syndicated loans is altered every three or six months bearing fixed relationship to the LIBOR. The roll over euro dollars bear a rate tied directly to money market and interbank cost of funds.

The syndicated loans have no collateral. bright bars. technocrats and non-residents. hand operated sewing machines. drums and barrels. Euro-Bonds. A bank guarantee is required and the bank should satisfy capital adequacy norms. Reserve Requirement Clause [RRC] The lending banks in the Eurodollar markets are free of any reserve regulations imposed by central bank. tin and metal containers.5% and negotiable for prime clients. import substitution. These bonds are issued by a borrower who is of a nationality different from the country of the capital market. The projects should not fall under negative list which includes. black boards and flush doors. 44 . Free and Clear of Taxes Lending banks insist on payments. commercially proven indigenous technology. conveyor belting. calcium carbide. modernization. Priority Sectors. and rural development. LP Gas cylinders.Financing Projects contributing to infrastructural facilities in centrally declared backward areas. of principal and interest free of taxes. flexible than bonds and allow for switching of currencies and early payment. non-conventional sources of energy and projects promoted by new entrepreneurs. agriculture. Companies and Governments prefer to raise a bank loan or a syndicated loan rather than tap the international debt market. Euro Dollar Availability clause permits the bank to call for prepayment if sufficient dollar funds are not available. energy conservation. The RRC stipulates that the borrower has to absorb any additional cost the lender incurs when interest free reserve requirements are imposed. Loans are cheaper. & ICICI) operate Exchange Rate Administration Scheme (ERAS) to cover exchange rate fluctuations. IFCI. tubular poles. Besides larger amounts can be raised. beer. commercial and decorative veneers. Hamilton poles. cosmetics. toilet. alcohol. HDPE woven socks. cigarettes. Foreign Currency Loans The interest rates are linked to LIBOR plus 1. All Indian financial institutions (IDBI. In short Loan syndication is an alternative to Consortium Lending. plywood.are usually for duration of 10 to 15 year period. fan and V belts etc. export units.

advisor or rendering corporate advisory service in relation to such issue management”. as a commercial activity. The services range from investment research to investor service on the one side and from preparation of offer documents to legal compliances and post issue monitoring on the other. Merchant Banking. desirous of mobilizing capital. The main service offered at that time to the corporate enterprises by the merchant banks included the management of public issues and some aspects of financial consultancy. There exists a long lasting relationship between the Issuer company and the Investment banker. A “Merchant Banker” could be defined as “An organization that acts as an intermediary between the issuers and the ultimate purchasers of securities in the primary security market.Chapter 14 MERCHANT BANKING An investment banker is total solutions provider as far as any corporate. took shape in India through the management of Public Issues of capital and Loan Syndication. 45 . 1992 as “any person who is engaged in the business of issue management either by making arrangements regarding selling. Merchant Banker has been defined under the Securities and Exchange Board of India (Merchant Bankers) Rules. consultant. buying or subscribing to securities as manager. broker’s firms entering into the field of merchant banking. The early and mid-seventies witnessed a boom in the growth of merchant banking organizations in the country with various commercial banks. financial institutions. is concerned. It was originated in 1969 with the setting up of the Merchant Banking Division of ANZ Grindlays Bank.

 Physical presence enables. maintenance of accounts (b) facilitate payments and collections (c) electronic funds transfer through SWIFT. up-to—the minute study of the financial centers.  As client’s business becomes more multinational.  Foreign subsidiaries: A bank that is locally incorporated but partially or wholly owned by a foreign parent bank is a subsidiary bank. CHIPS  Resident Representative: (a) Business offices for providing information on creditworthiness (b) No regular banking  Bank Agencies: Is almost like a full-fledged bank except it does not deal with local deposits. They deal in investments. and Philips etc. subject to local and their head office regulations. 46 . clearing drafts. Egg. arranging loans etc. advising home clients on local regulations by being on the spot. compliance requirements of the country of origin of the bank are more professional. it can serve its domestic clients bettermaking international payments.Chapter 15 INTERNATIONAL BANKING Organization Historically banking industry has been more “multilateral” in character. IBM. first hand on the spot.  Foreign Branches: Like a local bank. Today the giant international banks have their presence in more countries than giant corporations in other industries such as Sony. involve in merger and acquisitions. despite advances in telecommunication. Functions are operating in the local money market. corporate and sovereign loans. foreign exchange markets.  Evaluation done by the bank’s own staff is more reliable than that obtained through correspondents/agencies for expediting disbursal of loans.  Consortium Banks: Joint venture of large international banks. How do they establish their presence?  Correspondent Banking: (a) a substitute for branches.

(b) Local guidelines of Central Banking authority as well as regulations of the respective foreign banks They call it the “CAMEL” Approach. Indian banks too have their branches and representative offices.c. acquired AVENTIS CROP SCIENCE an agrochemical giant of India for Rs. Morgan P. (Dec 27.P.Recently BAYER A. as a back up for issuance of Commercial Paper (CP). Deutsche Bank.e. J. 750cr Bridge loan granted by Banc of America Securities Ltd. i.2700 crAgrochem Sector and will see the emergence of an Agrochem powerhouse in India. Bayer will become the largest company in the Rs. 2001) A number of foreign banks have been allowed to open branches in India and carry on various types of banking business. C apital Adequacy Asset Quality M anagement Aspects E arnings L iquidity 47 .G.l. International Regulation of Commercial Banks: Subject to (a) stringent prudential control to ensure integrity and soundness of the entire financial systems.

.  Market initially confined to London got extended to a world-wide network. but denominated in the currency of another. developed into a longer term source of finance in course of time. keeping in view their funding procedure. Euro Currency deposit is similarly a deposit at a bank in one country.g.  Lenders in this market (source of finance with longer maturities) require adjusting their rates at regular intervals. dollar being still its major component. GBP. or spread based on assessment of the risk. Dollar deposits and loans outside the US  The traditional name for such markets is Euromarkets  Euromarkets are called as Offshore markets to avoid confusion since the single European currency has been named “Euro”  Environment of Offshore market is free from rules and regulations  This led to explosive growth of the financial market Eurocurrency Markets & Euro Credit  A deposit or borrowing domiciled outside the home country of the currency  Euro dollar is a dollar deposit at a bank outside the USA. got added and it came to be known as Eurocurrency market instead of simply as Eurodollar market. DEM. CHF etc. overhead costs and profit.  While the market originally started with Dollar..  Originally a short term market.g. other currencies e.Chapter 16 INTERNATIONAL FINANCIAL MARKET Offshore Financial Markets A major development on the international financial scene of the post-war years  The establishment and explosive growth of offshore market  What is offshore market? E.  LIBOR for short term market plus agreed margin. 48 . There is no virtual difference between the two.

mainly to the agent bank acting on behalf of all the participating banks. if any in the interest rates. creating an influence (malign or benign) on the world trade and money. It is said that the BanqueCommerciale pour I’ Europe du Nord. a Soviet owned bank in Paris. and subsequently at the borrower’s choice. ‘Spreads’ often vary rather widely depending on the reliability and integrity of the borrower and the guarantee. the borrower.” Problem of plenty The origin of Eurodollar and its market are accidental.6. that is thus rolled over. accomplishing many deposits and loan operations while lying offshore. however. Eurodollar: Origin “Eurodollars are the creation of the book keeper’s pen. Remarkable Innovation in the Eurocurrency market  Development of syndicate lending in which the participating banks agree to shoulder the risk under one loan agreement. It is the lending bank’s funding of the loan. They held substantial dollar balances. rather than the loan itself. who has to bear the impact of market fluctuations. together with its London sister unit. Paris (cable address: EUROBANK). the Moscow Narodowy Bank. although the original dollar remains as a deposit with an American bank in the USA. but the cold war tensions made them feel uneasy in holding such balances in dollars and the troubles of sterling 49 . This offshore bookvalue swings round the world unaffected by most national regulations.  Borrower need to complete only one set of documentation and pricing negotiations and to make one schedule of interest and principal payment.  In a major loan agreement. if any it is. provision is normally made for “drawdown” in agreed number of installments (say 3. involving transfer of US dollar to a foreign bank.12 months) at the beginning. was used by the communist countries to finance east-west trade. The end of each term is known as “roll-over” date.

Attempt to move into Swiss Francs was also discouraged by the Swiss Monetary Authority.one of optimism 50 . Accidental coincidence. Euro market in Euro Currencies. It was a coincidence that some London bankers almost around the same time. Ownership of dollar balances in the USA changes hands in between parties (mainly banks) outside the USA at rates of interest higher than those permitted in the USA. they wanted some trustworthy non-American banks willing to borrow their dollar holdings and undertaking repayment in dollars on demand. In fact.A Panacea In the circumstances. interest rate differential is the prime motivating factor in Eurodollar lending and borrowing. in Eurodollar dealings there is no such rate of exchange. entirely without security and at rates of interest which are affected by the margins between the official New York and London money market rates.also made them feel no better. World’sleading banks are now-a-days active participants in the deposit and re-deposit of Eurodollar with one another for adjustment of their liquidity position. Eurodollar rates relate to the interest rates at which deposits are accepted and lending and borrowing takes place. Future. Both the lender and the borrower are domiciled outside the USA. Factors encouraging emergence of Eurodollar market  Interest differential between the USA and other countries  US policy limiting foreign access to the New York market  Restrictions on certain types of foreign trade financing and credit squeeze  Exchange control relaxation as regards acceptance of foreign currency deposits by the British/Swiss banks encouraged Euro-dollar transactions in London and Switzerland and contributed to the emergence of Eurodollar market Operation Whereas in ‘dollar-foreign exchange’ transactions (buying & selling) the margin is the exchange difference. looked for deposits in foreign currencies (particularly US dollar for use in transactions with Latin America and Europe and they found dollars looking for borrowers.

51 . Eurodollar may be regarded as playing the role of an international currency to a limited extent. A bond issue for a foreign borrower. When the New York capital market was virtually closed to foreign borrowers. Banks engaged in Eurodollar transactions have to maintain a high degree of liquidity in as much as they do not have access to central bank assistance. European Bond Market in dollars (and later in DM) also developed. It is evident. purchased by the investor. usually through the intermediation of a group of underwriters. Dollars were both borrowed and lent for short periods but gradually the deposits started being used for slightly longer and even medium term lending. Even closed economies (Eastern Europe) operate extensively in the Eurodollar market with the Moscow Narody Bank. May be the future of Eurodollar is uncertain. however. but the market has. such transactions became a highly remunerative business over the years. Paris. co-operation have provided indirect support to the growth of this market. In its absence. in fact flourished so effectively that a thorough-going “reordering” of the world’s monetary sister might “dent its influence and usefulness” Euro Bond Markets A bond is a debt security issued by the borrower. they turned also as borrowers. and once they gained the European Bank’s confidence. London and Banque Commercial pour I’Europe du Nord. there would probably have been far more problems concerning redeployment of petrodollar flows which have had an easy outlet through this market. Initially they started as lenders. Despite some occasional losses at times with unexpected rise in the interest rates.Although the market came into existence owing to an accidental set of circumstances. that the growing Central Bank non-interference and in some cases. This too was mostly initiated by the London banks. offered in the domestic capital market of a particular country and denominated in the currency of that country.

Things changed radically during 1993. a number of Indian corporate was able to raise substantial amount of funds through GDR issues.  Unfortunately the prices plunged. 52 .  The initial impetus was provided by the desire on the part of institutional investors  To diversify their portfolios globally as foreign exchange regulations were relaxed in the advanced western economies. a closed ended mutual fund had been listed on the New York stock exchange earlier  In June 1992.  A partial recovery was made. Reliance Industries made a small issue of Global Depository Receipts. as rumours of serious trouble on the Indian Stock markets had become rampant.Chapter17 INTERNATIONAL EQUITY MARKETS Introduction  International new equity markets with globally syndicated offerings emerged during the 1980s. India Growth Fund.  Institutional investors in UK. It is estimated that around 3 billion dollars of funding was mobilized via the GDR and convertible Eurobond issues during 1993. USA. and Japan transferred huge amounts of money into foreign equities  Share of their aggregate portfolios accounted for < 10%  October 1987 crash in the major stock markets resulted in slow rate of growth globally  Cross-border equity investment was confined to stock markets of developed countries initially  The emerging stock markets of South East Asian countries have also attracted large investments Indian context  Till 1992. As a result of improvement in foreign investors’ perception of India. but this experience forced other Indian companies to postpone their plans of making their offerings in the international markets. no Indian firm had approached the world capital markets to raise equity financing.

53 .

CASE STUDY: ICICI BANK
Investment in Technology Yielding Rich Dividends
Bank Profile
Established in 1994, ICICI Bank is today the second largest bank in India and among the
top 150 in the world. In less than a decade, the bank has become a universal bank offering a welldiversified portfolio of financial services. It currently has assets of over 68.66€ billion and a
market capitalization of 7.82€ billion and services over 14 million customers through a network
of about 950 branches, 3300 ATM's and a 3200 seat call center (as of 2007). The hallmark of this
exponential growth is ICICI Bank’s unwavering focus on technology.
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 the majority of the country’s populace, state owned banks had a large branch
network, with minimal or no automation and 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's and individuals with high net-worth. Sensing an
untapped opportunity, ICICI Bank decided to target India’s burgeoning middle class and
corporate's 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, ICICI Bank 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 platform. An open systems approach
and low TCO (Total Cost of Ownership) 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
54

opened in the city of Chennai. Some of the reasons cited by the bank for its decision to select
Finacle include Finacle’s future-proof technology, best-of-breed retail and corporate banking
features, scalable architecture and proven implementation track record.
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, 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 volumes. ICICI Bank underwent a 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 process 0.27 million cheques per day
and manage 7000 concurrent users.

55

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. For
instance, in 1997, it was the first bank in India to offer Internet banking with Finacle’s e-banking
solution and established itself as a leader in the Internet and ecommerce space. The bank
followed it up with offering several e-Commerce services like Bill Payments, Funds Transfers
and Corporate Banking over the net. The internet is a critical element of ICICI Bank’s award
winning multi-channel strategy that is one of the main engines of growth for the bank. Between
2000 and 2004, the bank has been able to successfully move over 70 percent of routine banking
transactions from the branch to the other delivery channels, thus increasing overall efficiency.
Currently, only 25 percent of all transactions take place through branches and 75 percent through
other delivery channels. This reduction in routine transactions 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.

Channels

Share of transactions March

Share of transactions March

2000

2004

Branches

94%

25%

ATM’s

3%

43%

Internet & Mobile

2%

21%

Call Centers

1%

11%

Reaping the Benefits
A powerful, scalable and flexible technology platform is essential for banks to manage
growth and compete successfully. And Finacle provides just the right platform to ICICI Bank
thus fueling its growth.

56

thus not only redefining the rules of banking in India. ICICI Bank is today recognized as a clear leader in the region and has won numerous accolades worldwide for its technology-driven initiatives. Finacle offered all this and much more. In 2003. offered end to end functionality and were highly flexible and scalable. ICICI Bank 57 .” Chanda. With Finacle. Women's Account addressing working women and Bank campus targeting students. The bank has effectively used technology as a strategic differentiator.Kochhar Executive Director.The bank has successfully leveraged the power of Finacle and has deployed the solution in the areas of core banking. the bank received the best multi-channel strategy award from The Banker magazine and this year it was rated as the 2nd best retail bank in Asia by The Asian Banker Journal. consumer e-banking. but also showcasing how technology can help in transforming a bank’s business. ICICI Bank has also gained the flexibility to easily develop new products targeted at specific segments such as ICICI Bank Young Stars. corporate e-banking and CRM. View from the Top “Our objective of creating a universal bank providing end to end financial services clearly required solutions which were based on new generation technology.a product targeting children.

600 million and INR 61.3 million. ATMs. best use of available resources and reuse of developed components. Technology Driven Growth Bank Profile Federal Bank is a fast growing premier private sector bank in India with business exceeding INR 3.CASE STUDY: FEDERAL BANK Federal Bank. it was essential that:  The new solution was capable of accommodating and building upon existing products 58 . Technology has played a major part in the bank’s aim to differentiate itself to its customers. Across the globe. The bank envisaged aggressive plans for growth . Internet. earlier confined to the branches. and the team ultimately felt that the existing proprietary system was not capable of meeting requirements due to its rigidity. Federal Bank is one of the very few organizations that have accomplished these objectives. putting these into practice has been a tough task and very few organizations have accomplished these objectives on a scale that is comparable with the global standards and demonstrated perceivable benefits. Key Business Drivers One of the main challenges on the way to growth for Federal Bank's management team was to choose between a packaged core banking solution or to continue leveraging its proprietary system. Even though the objectives appear to be simple. The bank has 565 branches. The commitment to goals and an organization-wide attitude to welcome the change were most important for the final decision in this regard. and have expanded the reach of the bank’s operations. mobile banking and other channels have broken the barriers of location and time. 16 administrative offices and 460 ATMs across India with a customer base of four million across the country. As per the management at Federal Bank. to move to a new generation core banking solution.both organic and inorganic. banks focus on IT investment protection.

in different seismic zones. Once the full-fledged implementation started. the bank surmounted the change management challenges in human capital.        that the bank offers and also help bank release futuristic products The new solution significantly improves the customer's banking experience The system is capable of interfacing with various delivery channels like ATM. representing various types of retail transactions typical of Federal Bank's operational scenario. was also planned and executed. explore more of the new solution and draw more from it. The setting up of the data centre and disaster recovery site in accordance with international standards. Solution Overview Federal Bank decided to adopt a centralized architecture for better efficiency. After a rigorous selection process. A significant reduction in time-to-compliance was another key solution differentiator. more control and for meeting challenges of the future. The most important factor was getting the staff to unlearn whatever they had learnt and the staff had to be motivated to assimilate the benefits of migrating to a new environment. It promised to significantly improve the customer's banking experience and support it through various delivery channels like the Internet etc. The next step was the selection of the packaged solution. The replacement exercise began with rigorous testing of the Finacle solution using a large number of test cases. The solution was fully equipped to accommodate and build upon existing products that the bank offered to its retail customers and empower the business to introduce futuristic products as well. Federal bank started an aggressive roll out of the system in the last week of April 2007. Internet banking and so on The new solution helps the bank comply with regulatory requirements. 59 . Federal Bank framed a well-defined and clear-cut plan for selection of appropriate system identifying the strength and weakness of the recourses and infrastructure available A strong pool of experts was identified to lead the mission A thorough selection process was initiated which resulted in three shortlisted solutions Vertical and horizontal evaluation process was performed by experts taking inputs from all possible sources The bank's team mapped the capabilities of each system against the business requirements and Finacle from Infosys was selected by the bank. Federal Bank decided to adopt inventive technology by procuring Finacle universal banking solution from Infosys to fuel its retail core banking renewal initiative.

A major business challenge was the seamless integration of these channels providing customers with un-interrupted service even during the transition period.Finacle solution came ready with almost all channel services. Some Federal Bank channel features integrated. well ahead of schedule Phase by phase CBS migration was successful. Some of the key benefits are highlighted below:      CBS pilot implementation target of 16 branches by March 2007 was achieved in February 2007. Every channel was integrated thought this interface. The technical team identified Finacle channel integrator Connect 24 as the starting point for channel integration. Most of the FedSoft legacy system was integrated with Financial Messaging Service (FMS) and an interface was internally developed for communicating between Fedsoft and Finacle. Currently all branches have been migrated and are running on Finacle. Federal Bank believes that technology enables banks to have better centralized control systems. Entire bank’s migration was achieved in a record speed of less than a year Bank has been able to translate a substantial number of general customers to regular and frequent customers Federal Bank conducted a customer survey and around 60 percent of customer have noticed a marked improvement in the usefulness and convenience of the features of the new banking system Improved 24/7 availability – 99 percent uptime 60 . Finacle core banking solution has positively impacted Federal Bank’s customers and staff. the speed and efficiency of banking services through effective use of technology will be essential for banks to attract and retain profitable customers. The scalability of internally developed interface was remarkable when it handled endto end transactions between FedSoft and Finacle. are listed below:  Anywhere banking  Mobile banking  FedNet (Finacle e-Banking)  E-mail alerts  FedFast  RTGS –FedFlash  FedEpay  Cash management system (CMS) Reaping The Benefits In the fast changing environment of the Indian banking space.

this also resulted in reduced support & maintenance costs Consolidated MIS is now available as per requirements on a daily basis.       Apart from acting as a tool for customer accretion. features and functionalities in Finacle helped to generate revenues by reducing transaction cost. resource mobilization. recovery etc. can be centrally administered. daily exchange rates etc.the availability of the product is simultaneous at all its branches o Also interest rate changes.The performance of the bank will improve in all spheres of activities. DC/DP switching was performed smoothly without any branch activity being affected Realignment of business processes with industry best practices which was achieved by adopting Finacle. clearing etc are centralized at a Central Processing Centre. (Complete web based (J2EE) solution developed in house ) o Products in pipe line expected to be launched soon  Savings account (4 Categories) current account (4 Categories)  Online share trading  Straight Through Processing of foreign remittance  Mobile commerce The bank expects to increase the number of customers to 4. Branches will act as service outlets and cater to the needs of the customers o Most back office jobs like account opening.6 million with the help of technology in the next 12 months without increasing any staff resources Centralized bank functions . Consolidation was earlier done monthly and trade finance business reports excluded from consolidation Highly parameterized product definition functionality permitting bank to introduce products in minimum time o The bank has already launched:  Complete straight through cash management system which handles entire clearing and collection requirements of branch (Complete web-based J2EE solution developed in house)  Online account opening and loan processing. issue of cheque books. they can concentrate on business development. 61 . customer letters. some of the advantages the bank have been able to reap by implementing a centralized solution like Finacle are: o Reduced time to launch and time to market for various products . Once field level functionaries are relieved from such drudgeries. increased speed and reduction of dependencies and there by providing comfort to the customers in the arena of banking transactions and allied services Disaster Recovery Setup (DR) became operational offering all the facilities according to international standards (Level 3+).

Nearly 25000 loan and 38000.FedNet Bill Pay online bill realization. Even during the transition period. any report can be generated centrally o With CRM module in place.   o MIS is available centrally.account opening and modifications were processed through the system during this short span Development of complete MIS system was based on Finacle data M. FedFast . Mobile Alert. Hitherto the administrative offices sought various reports from the branches. and Email Alert were successfully integrated with Finacle enabling the bank to continue to offer the unique services available in FedSoft. it is easy to segment customers and products can be designed to suit each segment of clients All channels like AWB. Venugopalan Chairman and CEO. Federal Bank 62 . entire channel service was offered to customers without any interruption New wing “Central Processing Centre” (CPC) has been set up and is fully functional. With the data residing at a central point.

visit www. Asia and Australia. all of which impacted the quality of user experience.000 employees. scalable and extensible architecture. intuitive and personalized user experiences catering to the individual needs of retail. corporate and institutional customers in over 40 countries in Europe. With over 80 years of history in India and leveraging ING’s global financial expertise. it is easily configurable and allows for seamless deployment with multiple host systems through the configurable Host Interface Layer. ING Vysya Bank was ranked among top 5 Most Trusted Brands among private sector banks in India in the Economic Times Brand Equity – Nielsen survey 2011. For more information.ingvysyabank. ING is a global financial institution of Dutch origin offering banking. The benefit Finacle Corporate e-Banking has improved customer satisfaction and service. Integrating the solution was imperative. 63 . North America and Latin America. The solution Finacle Corporate e-Banking was offered as a comprehensive multi channel offering delivering rich. With more than 97. the Bank offers a broad range of innovative and established products and services. life insurance and retirement services to meet the needs of a broad customer base. which has close to 10. * Numbers will be adjusted when the divestments of ING Direct USA is closed Overview The challenge ING Vysya bank’s existing Internet banking solution suffered from lack of integration. is also listed in Bombay Stock Exchange Limited and National Stock Exchange of India Limited. serving over 75 million* private. across its 527 branches. small to medium and large enterprise customers. investments. Built on a robust.com. such as the existence of numerous platforms. private and wholesale banking platforms that serve over two million customers. The Bank.000 employees*. but was also riddled with challenges. coding problems and architectural inefficiencies. and enabled the bank to differentiate itself from competition.CASE STUDY: ING VYSYA BANK Differentiation through Corporate Internet banking Profile ING Vysya Bank Ltd is a premier private sector bank with retail.

thereby meeting their needs and creating stickiness in the process. an ING standard for project management. one which would offer a unified channel experience to Corporate and SME clients. Solution Overview Infosys’ Corporate e-Banking promises convergence Accordingly. security and reliability. which provides a consistent. implementation capabilities and endorsement from clients. transactions. Implementation: a clear-cut approach The project mandate was issued in August 2009. The project was awarded to Infosys on the strength of its considerable project experience. the bank had disparate Internet banking delivery channels for viewing account balances. Finacle Corporate e-Banking solution promised convergence of all customer requests on one application. there was little to differentiate between them. and was commissioned in December the same year. each requiring a separate login and password. Moreover. It held out the promise of flexibility. it enabled addition of new Corporate Banking products and services on an ongoing basis. At the same time. The program followed the GPL (Generic Project Lifecycle). this did not make for great customer experience. there was intense competition between banks to serve the lucrative Corporate customer segment. A robust and integrated channel was needed. payables and receivables management and so on. This was in alignment with the Bank’s long-term vision of growing the cash management business and the decision to pursue a breakout strategy.Key business drivers Solution overview A robust and integrated internet based delivery channel Until 2009. The bank decided that the way forward lay in an integrated approach to account relationship management and innovative product development. scalability. Obviously. It was felt that the only way to maintain an edge over competition was by offering a comprehensive Internet banking solution with superior user experience which is seamless and secure. the existing platform needed frequent ethical hacking tests. the vendor selection process was initiated and 3 products were evaluated. architectural inefficiencies and interface challenges led to several data integrity issues. Its experience in marketing and interfacing also worked in its favour. Poor coding. sustainability. userfriendly framework and is based on the PRINCE2 project management method. Where others would have opted for a plain vanilla 64 . Although a range of products and services were available. In addition.

If each interface layer were custom coded to the target platform. But now. it would have added 50% to the project cost and 9 months to the project time. the new Internet banking platform. The solution was found in the form of an open standards-based EAI. Corporate clients belong to the Wholesale Banking Unit while SME clients belong to the Retail Banking Unit. IT and so on – and was followed by penetration and security testing.product. The project was now ready for pilot implementation. System Integration Testing (SIT) took 3 weeks after which the bank conducted User Acceptance Testing (UAT) for a period of 4 months. who were given access to the solution. requirement gathering and planning were completed within 8 weeks. The most important challenge was that the Internet banking channel had to be interfaced with 8 other platforms. Initiation. The project followed a typical implementation cycle. the team had to proactively identify bottlenecks to avoid adversely impacting any milestone. After a month of beta testing. The product was tested by the Bank’s internal users as well as some Preferred and Corporate customers. It went live in March 2011 and the Infosys team continued to support it for another 2 months. coding standards and underlying Operating System. which could be built around the Infosys product framework as a wrapper. the business team came up with some innovative ideas for special features. At ING Vysya Bank. operations. both Corporate and SME clients were to be serviced through the shared Internet banking platform and hence. there was a need to distinguish between the two. The Infosys team supported these activities with rigorous rounds of testing. interface definition. Because the timelines were extremely stringent. The project team members were spread out in different locations and had to be co-located to Bangalore during critical activities like UAT and User Acquaintance. ING Converge. each of which was unique in terms of architecture. The integration of RSA SecurID with the Internet banking solution also posed a problem because of platform inter-operability. was ready to be opened to the public. This involved multiple rounds of testing with various teams – business. Custom coding method was adopted to skirt this issue. A well-defined governance structure 65 . Challenges galore The project had its share of challenges. The team displayed its creativity by building an SBU-based style sheeting to display different branding for each. The User Acquaintance session and offshore development activity spanned a period of 6 to 8 months.

Operations (Centralized). The strong project management skills of both partners were clearly evident. Customer impact With the new corporate banking solution. A total of 1300 Corporate clients had signed up for ING Converge until April 2012. Business benefits: moving ahead of competition The feature-richness of ING Converge has enabled the bank to move ahead of peers. The platform has received glowing feedback from the end users owing to its differentiators like real time reporting of balances. Integrated Risk and so on. at ING Vysya Bank 66 . The first two months saw adoption rates double with 1.The project adhered to a formal governance structure with a top level steering committee which met every month and tracked progress. Technology. the Bank expects a 2-digit growth in customer base. We couldn’t have made a better choice for this very important engagement!” Aniruddha Paul Head IT Change Delivery. online reporting of accounts held with other banks and also transaction initiation capabilities. Quotes “The fact that Infosys brought deep engineering skills and sound technical consulting capabilities is a given – what was of strategic value was their desire and determination to make this transformational initiative succeed. They were drawn from teams like Product Management (Corporate and SME Banking). Weekly operational committee meetings were held and issues that threatened to throw the project out of gear were escalated on time.500 unique logins. operating in a matrix like structure. The core project team consisted of 35 members from diverse functional areas across various partner organizations.

The world is now operating without barriers. The doors are opened for Foreign Direct Investment (FDI) and Foreign Institutional Investment (FII) and dilution of Government participation in all sectors of the economy in general and banks in particular are on the cards. Protagonists may have their say. But as a professional banking outfit.with the latest infrastructure and technological support system in place. the Indian banking system can catch up with the banks in the developed world strictly adhering to the Basel II norms relating to risk management. reduction of NPAs and concentrate on innovative ideas.CONCLUSION The Indian economy is emerging as a reckoning force and it is a foregone conclusion that privatization is the panacea for overall efficient growth of the economy and to push up the GDP as pronounced in the current budget of February 2005. and if we as a nation has to be successful in our race for competition. financial sector especially the banking system must switch over from narrow banking to broad banking which is why Universal Banking has to be adopted as a choice and not as a chance. scope for mismatch of ALM is not something impossible. long term loan portfolios. Teething trouble is unavoidable as is applicable to any venture or initiative during the transition stage. in view of the fact that as a bank taking divorce from traditional banking to the innovative path of Universal banking handling short term. As Napoleon said ‘Imagination gives rise to innovation’ and in tune with that Universal Banking would soon be a reality in India. 67 . besides a host of other retail products.

com/Faculty_Column/FC405/fc405.com/forums/universal-banking/ 68 .com/terms/u/universalbanking.wikipedia.asp http://www.com/Occasional_Papers/OP157/op157.com/Term?term=universal-bank http://www.blogspot.indianmba.in/blog/universal-banking/ https://en.Bandgar (VipulPrakashan) Web: http://www.investorwords.indianmba.com/6953/universal_banking.K.gktoday.BIBLIOGRAPHY Books: Universal BankingByP.investopedia.html http://lexicon.com/2011/10/universal-banking-meaning-advantages.html http://www.html http://www.html http://www.org/wiki/Universal_bank http://kalyan-city.managementparadise.ft.