UNIVARSAL BANKING

CHAPTER: 1
INTRODUCTION

The banking scenario in India has been changing at fast pace from being just the

borrowers and lenders traditionally, the focus has shifted to more differentiated and

customized product/service provider from regulation to liberalization in the year 1991,

from planned economy to market.

The Indian banking has come a long way from being a sleepy business institution to a

highly proactive and dynamic entity. This transformation has been largely brought about

by the large dose of liberalization and economic reforms that allowed banks to explore

new business opportunities rather than generating revenues from conventional streams

(i.e. borrowing and lending). The stalwarts of India's financial community nodded their

heads sagaciously when Prime Minister Manmohan Singh said in a speech: "If there is

one aspect in which we can confidentially assert that India is ahead of China, it is in the

robustness and soundness of our banking system." Indian banks have been rated higher

than Chinese banks by international rating agency Standard & Poor's.

The competition heated up with the entry of private and foreign banks deregulation and

globalization resulted in increased competition that refined the traditional way of doing

business. They have realized the importance of a customer centric approach, brand

building and IT enabled solutions. In the fierce battle for market share and mind share,

the most potent weapon is a strong, well recognized and trusted brand name. Brands

attract and convince people that they will get what is promised. Banking today has

transformed into a technology intensive and customer friendly model with a focus on

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convenience. The companies have redoubled their efforts to woo the customers and

establish themselves firmly in the market. It is no longer an option for a company to

provide good customer service, it is expected.

Reforms are continuing as part of the overall structural reforms aimed at improving the

productivity and efficiency of the economy. The sector is set to witness the emergence of

financial supermarkets in the form of universal banks providing a suite of services from

retail to corporate banking and industrial lending to investment banking. The financial

services market has become a battle ground with the marketers with the latest and the

most sophisticated weapons.

Currently overall, banking in India is considered as fairly mature in terms of supply,

product range and reach-even though reach in rural India still remains a challenge for the

private sector and foreign banks. Even in terms of quality of assets and capital adequacy,

Indian banks are considered to have clean, strong and transparent balance sheets-as

compared to other banks in comparable economies in its region. The Indian banking

industry is currently in a transition phase. On the one hand, the public sector banks,

which are the mainstay of the Indian banking system, are in the process of consolidating

their position by capitalizing on the strength of their huge networks and customer bases.

On the other, the private sector banks are venturing into a whole new game of mergers

and acquisitions to expand their bases. The use of technology has placed Indian banks at

par with their global peers. It has also changed the way banking is done in India.

‘Anywhere banking’ and ‘Anytime banking’ have become a reality. The financial sector

now operates in a more competitive environment than before and intermediates relatively

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large volume of international financial flows. The introduction of Basel II norms from

2009 and the fair level playing field that will be available to foreign banks from 2010 will

further enhance the solidarity of the Indian banking sector and open new avenues.

1.1 HISTORY OF BANKING IN INDIA

Without a sound and effective banking system in India it cannot have a healthy economy.

The banking system of India should not only be hassle free but it should be able to meet

new challenges posed by the technology and any other external and internal factors. For

the past three decades India's banking system has several outstanding achievements to its

credit. The most striking is its extensive reach. It is no longer confined to only

metropolitans or cosmopolitans in India. In fact, Indian banking system has reached even

to the remote corners of the country. This is one of the main reasons of India's growth

process. The government's regular policy for Indian bank since 1969 has paid rich

dividends with the nationalization of 14 major private banks of India.Not long ago, an

account holder had to wait for hours at the bank counters for

getting a draft or for withdrawing his own money. Today, he has a choice. Gone are days

when the most efficient bank transferred money from one branch to other in two days.

Now it is simple as instant messaging or dial a pizza. Money has become the order of the

day. The first bank in India, though conservative, was established in 1786. From 1786 till

today, the journey of Indian Banking System can be segregated into three distinct phases.

They are as mentioned below:

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1) Pre-Nationalization Era.

2) Nationalization Stage.

3) Post Liberalization Era.

1) Pre-Nationalization Era:

In India the business of banking and credit was practices even in very early times. The

remittance of money through Hundies, an indigenous credit instrument, was very popular.

The hundies were issued by bankers known as Shroffs, Sahukars, Shahus or Mahajans in

different parts of the country.

The modern type of banking, however, was developed by the Agency Houses of Calcutta

and Bombay after the establishment of Rule by the East India Company in 18 th and 19th

centuries.

During the early part of the 19th Century, ht volume of foreign trade was relatively small.

Later on as the trade expanded, the need for banks of the European type was felt and the

government of the East India Company took interest in having its own bank. The

government of Bengal took the initiative and the first presidency bank, the Bank of

Calcutta (Bank of Bengal) was established in 180. In 1840, the Bank of Bombay and IN

1843, the Bank of Madras was also set up. These three banks also known as “Presidency

Bank”. The Presidency Banks had their branches in important trading centers but mostly

lacked in uniformity in their operational policies. In 1899, the Government proposed to

amalgamate these three banks in to one so that it could also function as a Central Bank,

but the Presidency Banks did not favor the idea. However, the conditions obtaining

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during world war period (1914-1918) emphasized the need for a unified banking

institution, as a result of which the Imperial Bank was set up in1921. The Imperial Bank

of India acted like a Central bank and as a banker for other banks.

The RBI (Reserve Bank of India) was established in 1935 as the Central Bank of the

Country. In 1949, the Banking Regulation act was passed and the RBI was nationalized

and acquired extensive regulatory powers over the commercial banks.

In 1950, the Indian Banking system comprised of the RBI, the Imperial Bank of India,

Cooperative banks, Exchange banks and Indian Joint Stock banks.

2) Nationalization Stages:

After Independence, in 1951, the All India Rural Credit survey, committee of Direction

with Shri. A. D. Gorwala as Chairman recommended amalgamation of the Imperial Bank

of India and ten others banks into a newly established bank called the State Bank of India

(SBI). The Government of India accepted the recommendations of the committee and

introduced the State Bank of India bill in the Lok Sabha on 16 th April 1955 and it was

passed by Parliament and got the president’s assent on 8th May 1955. The Act came into

force on 1st July 1955, and the Imperial Bank of India was nationalized in 1955 as the

State Bank of India.

The main objective of establishing SBI by nationalizing the Imperial Bank of India was

“to extend banking facilities on a large scale more particularly in the rural and semi-urban

areas and to diverse other public purposes.”

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In 1959, the SBI (Subsidiary Bank) act was proposed and the following eight state-

associated banks were taken over by the SBI as its subsidiaries.

Name of the Bank Subsidiary with effect from

1. State Bank of Hyderabad 1st October 1959

2. State Bank of Bikaner 1st January 1960

3. State Bank of Jaipur 1st January 1960

4. State Bank of Saurashtra 1st May 1960

5. State Bank of Patiala 1st April 1960

6. State Bank of Mysore 1st March 1960

7. State Bank of Indore 1st January 1968

8. State Bank of Travancore 1st January 1960

With effect from 1st January 1963, the State Bank of Bikaner and State Bank of Jaipur

with head office located at Jaipur. Thus, seven subsidiary banks State Bank of India

formed the SBI Group.

The SBI Group under statutory obligations was required to open new offices in rural and

semi-urban areas and modern banking was taken to these unbanked remote areas.

On 19th July 1969, then the Prime Minister, Mrs. Indira Gandhi announced the

nationalization of 14 major scheduled Commercial Banks each having deposits worth Rs.

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50 crore and above. This was a turning point in the history of commercial banking in

India.

Later the Government Nationalized six more commercial private sector banks with

deposit liability of not less than Rs. 200 crores on 15 th April 1980, viz.

i) Andhra Bank.

ii) Corporation Bank.

iii) New Bank if India.

iv) Oriental Bank of Commerce.

v) Punjab and Sind Bank.

vi) Vijaya Bank.

In 1969, the Lead Bank Scheme was introduced to extend banking facilities to every

corner of the country. Later in 1975, Regional Rural Banks were set up to supplement the

activities of the commercial banks and to especially meet the credit needs of the weaker

sections of the rural society.

Nationalization of banks paved way for retail banking and as a result there has been an alt

round growth in the branch network, the deposit mobilization, credit disposals and of

course employment.

The first year after nationalization witnessed the total growth in the agricultural loans and

the loans made to SSI by 87% and 48% respectively. The overall growth in the deposits

and the advances indicates the improvement that has taken place in the banking habits of

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the people in the rural and semi-urban areas where the branch network has spread. Such

credit expansion enabled the banks to achieve the goals of nationalization, it was

however, achieved at the coast of profitability of the banks.

Consequences of Nationalization:

 The quality of credit assets fell because of liberal credit extension policy.

 Political interference has been as additional malady.

 Poor appraisal involved during the loan meals conducted for credit disbursals.

 The credit facilities extended to the priority sector at concessional rates.

 The high level of low yielding SLR investments adversely affected the

profitability of the banks.

 The rapid branch expansion has been the squeeze on profitability of banks

emanating primarily due to the increase in the fixed costs.

 There was downward trend in the quality of services and efficiency of the banks.

3) Post-Liberalization Era---Thrust on Quality and Profitability:

By the beginning of 1990, the social banking goals set for the banking industry made

most of the public sector resulted in the presumption that there was no need to look at the

fundamental financial strength of this bank. Consequently they remained

undercapitalized. Revamping this structure of the banking industry was of extreme

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importance, as the health of the financial sector in particular and the economy was a

whole would be reflected by its performance.

The need for restructuring the banking industry was felt greater with the initiation of the

real sector reform process in 1992. the reforms have enhanced the opportunities and

challenges for the real sector making them operate in a borderless global market place.

However, to harness the benefits of globalization, there should be an efficient financial

sector to support the structural reforms taking place in the real economy. Hence, along

with the reforms of the real sector, the banking sector reformation was also addressed.

The route causes for the lackluster performance of banks, formed the elements of the

banking sector reforms. Some of the factors that led to the dismal performance of banks

were.

 Regulated interest rate structure.

 Lack of focus on profitability.

 Lack of transparency in the bank’s balance sheet.

 Lack of competition.

 Excessive regulation on organization structure and managerial resource.

 Excessive support from government.

Against this background, the financial sector reforms were initiated to bring about a

paradigm shift in the banking industry, by addressing the factors for its dismal

performance.

In this context, the recommendations made by a high level committee on financial sector,

chaired by M. Narasimham, laid the foundation for the banking sector reforms. These

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reforms tried to enhance the viability and efficiency of the banking sector. The

Narasimham Committee suggested that there should be functional autonomy, flexibility

in operations, dilution of banking strangulations, reduction in reserve requirements and

adequate financial infrastructure in terms of supervision, audit and technology. The

committee further advocated introduction of prudential forms, transparency in operations

and improvement in productivity, only aimed at liberalizing the regulatory framework,

but also to keep them in time with international standards. The emphasis shifted to

efficient and prudential banking linked to better customer care and customer services.

1.2 BANKING STRUCTURE IN INDIA

In today’s dynamic world banks are inevitable for the development of a country. Banks

play a pivotal role in enhancing each and every sector. They have helped bring a draw of

development on the world’s horizon and developing country like India is no exception.

Banks fulfills the role of a financial intermediary. This means that it acts as a vehicle for

moving finance from those who have surplus money to (however temporarily) those who

have deficit. In everyday branch terms the banks channel funds from depositors whose

accounts are in credit to borrowers who are in debit.

Without the intermediary of the banks both their depositors and their borrowers would

have to contact each other directly. This can and does happen of course. This is what has

lead to the very foundation of financial institution like banks.

Before few decades there existed some influential people who used to land money. But a

substantially high rate of interest was charged which made borrowing of money out of the

reach of the majority of the people so there arose a need for a financial intermediate.

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The Bank have developed their roles to such an extent that a direct contact between the

depositors and borrowers in now known as disintermediation.

Banking industry has always revolved around the traditional function of taking deposits,

money transfer and making advances. Those three are closely related to each other, the

objective being to lend money, which is the profitable activity of the three. Taking

deposits generates funds for lending and money transfer services are necessary for the

attention of deposits. The Bank have introduced progressively more sophisticated

versions of these services and have diversified introduction in numerable areas of activity

not directly relating to this traditional trinity

INDIAN BANKING SYSTEM

Reserve Bank of India

Schedule Banks Non-Schedule Banks

Central co-op
State co-op Commercial Banks and Commercial Banks
Banks Banks Primary Cr.
Societies

Indian Foreign

Public Sector
Banks Private Sector HDFC,
Banks ICICI etc.
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State Bank of Other Nationalized Regional Rural

India and its Banks Banks
Subsidiaries

1.3 Broad Classification of Banks in India

1) The RBI: The RBI is the supreme monetary and banking authority in the country

and has the responsibility to control the banking system in the country. It keeps

the reserves of all scheduled banks and hence is known as the “Reserve Bank”.

2) Public Sector Banks:

 State Bank of India and its Associates (8)

 Nationalized Banks (19)

 Regional Rural Banks Sponsored by Public Sector Banks (196)

(3) Private Sector Banks:

 Old Generation Private Banks (22)

 Foreign New Generation Private Banks (8)

 Banks in India (40)

(4) Co-operative Sector Banks:

 State Co-operative Banks

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 Central Co-operative Banks

 Primary Agricultural Credit Societies

 Land Development Banks

 State Land Development Banks

(5) Development Banks: Development Banks mostly provide long term finance for

setting up industries. They also provide short-term finance (for export and import

activities)

 Industrial Finance Co-operation of India (IFCI)

 Industrial Development of India (IDBI)

 Industrial Investment Bank of India (IIBI)

 Small Industries Development Bank of India (SIDBI)

 National Bank for Agriculture and Rural Development (NABARD)

 Export-Import Bank of India

Role of Banks:

Banks play a positive role in economic development of a country as repositories of

community’s savings and as purveyors of credit. Indian Banking has aided the economic

development during the last fifty years in an effective way. The banking sector has shown

a remarkable responsiveness to the needs of planned economy. It has brought about a

considerable progress in its efforts at deposit mobilization and has taken a number of

measures in the recent past for accelerating the rate of growth of deposits. As recourse to

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this, the commercial banks opened branches in urban, semi-urban and rural areas and

have introduced a number of attractive schemes to foster economic development.

The activities of commercial banking have growth in multi-directional ways as well as

multi-dimensional manner. Banks have been playing a catalytic role in area development,

backward area development, extended assistance to rural development all along helping

agriculture, industry, international trade in a significant manner. In a way, commercial

banks have emerged as key financial agencies for rapid economic development.

By pooling the savings together, banks can make available funds to specialized

institutions which finance different sectors of the economy, needing capital for various

purposes, risks and durations. By contributing to government securities, bonds and

debentures of term-lending institutions in the fields of agriculture, industries and now

housing, banks are also providing these institutions with an access to the common pool of

savings mobilized by them, to that extent relieving them of the responsibility of directly

approaching the saver. This intermediation role of banks is particularly important in the

early stages of economic development and financial specification. A country like India,

with different regions at different stages of development, presents an interesting spectrum

of the evolving role of banks, in the matter of inter-mediation and beyond.

Mobilization of resources forms an integral part of the development process in India. In

this process of mobilization, banks are at a great advantage, chiefly because of their

network of branches in the country. And banks have to place considerable reliance on the

mobilization of deposits from the public to finance development programmes. Further,

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deposit mobilization by banks in India acquired greater significance in their new role in

economic development.

Commercial banks provide short-term and medium-term financial assistance. The short-

term credit facilities are granted for working capital requirements. The medium-term

loans are for the acquisition of land, construction of factory premises and purchase of

machinery and equipment. These loans are generally granted for periods ranging from

five to seven years. They also establish letters of credit on behalf of their clients

favouring suppliers of raw materials/machinery (both Indian and foreign) which extend

the banker’s assurance for payment and thus help their delivery. Certain transaction,

particularly those in contracts of sale of Government Departments, may require

guarantees being issued in lieu of security earnest money deposits for

release of advance money, supply of raw materials for processing, full payment of bills

on the assurance of the performance etc. Commercial banks issue such guarantees also.

1.4 The Role of Reserve Bank of India (RBI) – Banker’s Bank

The Reserve Bank of India (RBI) is the central bank of India, and was established on

April 1, 1935 in accordance with the provisions of the Reserve Bank of India Act, 1934.

Since its inception, it has been headquartered in Mumbai. Though originally privately

owned, RBI has been fully owned by the Government of India since nationalization in

1949.

RBI is governed by a central board (headed by a Governor) appointed by the Central

Government. RBI has 22 regional offices across India. The Reserve Bank of India was

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set up on the recommendations of the Hilton Young Commission. The commission

submitted its report in the year 1926, though the bank was not set up for nine years

Main Objective:

Monetary Authority

 Formulates implements and monitors the monetary policy.

 Objective: maintaining price stability and ensuring adequate flow of credit to

productive sectors.

Regulator and supervisor of the financial system

 Prescribes broad parameters of banking operations within which the country’s

banking and financial system functions.

 Objective: maintain public confidence in the system, protect depositors’ interest

and provide cost-effective banking services to the public. The Banking

Ombudsman Scheme has been formulated by the Reserve Bank of India (RBI) for

effective redressal of complaints by bank customers

Manager of Exchange Control

 Manages the Foreign Exchange Management Act, 1999.

 Objective: to facilitate external trade and payment and promote orderly

development and maintenance of foreign exchange market in India.

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Issuer of currency

 Issues and exchanges or destroys currency and coins not fit for circulation.

 Objective: to give the public adequate quantity of supplies of currency notes and

coins and in good quality.

Developmental role

 Performs a wide range of promotional functions to support national objectives.

Related Functions

 Banker to the Government: performs merchant banking function for the central

and the state governments; also acts as their banker.

 Banker to banks: maintains banking accounts of all scheduled banks.

 Owner and operator of the depository (SGL) and exchange (NDS) for government

bonds.

There is now an international consensus about the need to focus the tasks of a central

bank upon central banking. RBI is far out of touch with such a principle, owing to the

sprawling mandate described above.

Supervisory Functions:

In addition to its traditional central functions, the Reserve bank has certain non-monetary

functions of the nature of supervision of banks and promotion of sound banking in India.

The Reserve Bank Act, 1934, and the Banking Regulation Act, 1949 have given the RBI

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wide powers of supervision and control over commercial and cooperative banks, relating

to licensing and establishments, branch expansion, liquidity of their assets, management

and methods of working, amalgamation, reconstruction and liquidation. The RBI is

authorized to carry out periodical inspections of the banks and to call for returns and

necessary information from them. The nationalization of 14 major Indian scheduled

banks in July 1969 has imposed new responsibilities on the RBI for directing the growth

of banking and credit policies towards more rapid development of the economy and

realization of certain desired social objectives. The supervisory functions of the RBI have

helped a great deal in improving the standard of banking in India to develop on sound

lines and to improve the methods of their operation.

Promotional Functions:

With economic growth assuming a new urgency since Independence, the range of the

Reserve Bank’s functions have steadily widened. The Bank now performs a variety of

developmental and promotional functions, which, at one time, were regarded as outside

the normal scope of central banking. The Reserve Bank was asked to promote banking

habit, extend banking facilities to rural and semi-urban areas, and establish and promote

new specialized financing agencies. Accordingly, the Reserve bank has helped in the

setting up of the IFCI and the SFC: it set up the Deposit Insurance Corporation of India in

1963 and the Industrial Reconstruction Corporation of India in 1972. These institutions

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were set up directly or indirectly by the Reserve Bank to promote saving habit and to

mobilize savings, and to provide industrial finance as well as agricultural finance. As far

back as 1935, the RBI set up the Agricultural Credit Department to provide agricultural

credit. But only since 1951 the Bank’s role in this field has become extremely important.

The Bank has developed the co-operative credit movement to encourage saving, to

eliminate money-lenders from the villages and to route its short term credit to agriculture.

The RBI has set up the Agricultural Refinance and Development Corporation to provide

long-term finance to farmers.

Co-operative Banks:

The Co-operative bank has a history of almost 100 years. The Co-operative banks are an

important constituent of the Indian Financial System, judging by the role assigned to

them, the expectations they are supposed to fulfill, their number, and the number of

offices they operate. The co-operative movement originated in the West, but the

importance that such banks have assumed in India is rarely paralleled anywhere else in

the world. Their role in rural financing continues to be important even today, and their

business in the urban areas also has increased phenomenally in recent years mainly due to

the sharp increase in the number of co-operative banks.

While the co-operative banks in rural areas mainly finance agricultural based activities

including farming, cattle, milk, hatchery, personal finance etc. along with some small

scale industries and self-employment driven activities, the co-operative banks in urban

areas mainly finance various categories of people for self-employment, industries, small

scale units, home finance, consumer finance, personal finance, etc. Some of the co-

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operative banks are quite forward looking and have developed sufficient core

competencies to challenge state and private sector banks.

According to NAFCUB the total deposits & lendings of Co-operative Banks is much

more than Old Private Sector Banks & also the New Private Sector Banks. This

exponential growth of Co-operative Banks is attributed mainly to their much better local

reach, personal interaction with customers, their ability to catch the nerve of the local

clientele. Though registered under the Co-operative Societies Act of the Respective

States (where formed originally) the banking related activities of the co-operative banks

are also regulated by the Reserve Bank of India. They are governed by the Banking

Regulations Act 1949 and Banking Laws (Co-operative Societies) Act, 1965.

There are two main categories of the co-operative banks.

(a) Short term lending oriented co-operative Banks – within this category there are

three sub categories of banks viz state co-operative banks, District co-operative banks

and Primary Agricultural co-operative societies.

(b) Long term lending oriented co-operative Banks – within the second category there

are land development banks at three levels state level, district level and village level.

Features of Cooperative Banks

Co-operative Banks are organized and managed on the principal of co-operation, self-

help, and mutual help. They function with the rule of “one member, one vote”. Function

on “no profit, no loss” basis. Co-operative banks, as a principle, do not pursue the goal of

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profit maximization. Co-operative bank performs all the main banking functions of

deposit mobilization, supply of credit and provision of remittance facilities. Co-operative

Banks provide limited banking products and are functionally specialists in agriculture

related products. However, co-operative banks now provide housing loans also.

UCBs provide working capital loans and term loan as well. The State Co-operative Banks

(SCBs), Central Co-operative Banks (CCBs) and Urban Co-operative Banks (UCBs) can

normally extend housing loans upto Rs 1 lakh to an individual. The scheduled UCBs,

however, can lend upto Rs 3 lakh for housing purposes.

The urban and non-agricultural business of these banks has grown over the years. The co-

operative banks demonstrate a shift from rural to urban, while the commercial banks,

from urban to rural. Co-operative banks are perhaps the first government sponsored,

government-supported, and government-subsidized financial agency in India. They get

financial and other help from the Reserve Bank of India NABARD, central government

and state governments. They constitute the “most favoured” banking sector with risk of

nationalization. For commercial banks, the Reserve Bank of India is lender of last resort,

but co-operative banks it is the lender of first resort which provides financial resources in

the form of contribution to the initial capital (through state government), working

Some co-operative banks are scheduled banks, while others are non-scheduled banks. For

instance, SCBs and some UCBs are scheduled banks but other co-operative bank are non-

scheduled banks. At present, 28 SCBs and 11 UCBs with Demand and Time Liabilities

over Rs 50 crore each included in the Second Schedule of the Reserve Bank of India Act.

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Co-operative Banks are subject to CRR and liquidity requirements as other scheduled and

non-scheduled banks are. However, their requirements are less than commercial banks.

Since 1966 the lending and deposit rate of commercial banks have been directly regulated

by the Reserve Bank of India. Although the Reserve Bank of India had power to regulate

the rate co-operative bank but this have been exercised only after 1979 in respect of non-

agricultural advances they were free to charge any rates at their discretion. Although the

main aim of the co-operative bank is to provide cheaper credit to their members and not

to maximize profits, they may access the money market to improve their income so as to

remain viable.

Private Sector Banks

Private banking in India was practiced since the beginning of banking system in India.

The first private bank in India to be set up in Private Sector Banks in India was Indus Ind

Bank. It is one of the fastest growing Bank Private Sector Banks in India. IDBI ranks the

tenth largest development bank in the world as Private Banks in India and has promoted a

world class institutions in India. The first Private Bank in India to receive an in principle

approval from the Reserve Bank of India was Housing Development Finance Corporation

Limited, to set up a bank in the private sector banks in India as part of the RBI's

liberalization of the Indian Banking Industry. It was incorporated in August 1994 as

HDFC Bank Limited with registered office in Mumbai and commenced operations as

Scheduled Commercial Bank in January 1995.ING Vaysya, yet another Private Bank of

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India was incorporated in the year 1930. Bangalore has a pride of place for having the

first branch inception in the year 1934. With successive years of patronage and constantly

setting new standards in banking, ING Vaysya Bank has many credits to its account.

Entry of Private Sector Banks:

There has been a paradigm shift in mindsets both at the Government level in the banking

industry over the years since Nationalization of Banks in 1969, particularly during the

last decade (1990-2000). Having achieved the objectives of Nationalization, the most

important issue before the industry at present is survival and growth in the environment

generated by the economic liberalization greater competition with a view to achieving

higher productivity and efficiency in January 1993 for the entry of Private Sector banks

based on the Nationalization Committee report of 1991, which envisaged a larger role for

Private Sector Banks.

The RBI prescribed a minimum paid up capital of Rs. 100 crores for the new bank and

the shares are to be listed at stock exchange. Also the new bank after being granted

license under the Banking Regulation Act shall be registered as a public limited company

under the companies Act, 1956.

Not only multinational groups but also some private investors from India show their

interest in this field. Some of them are as follows

Private Banks

 Indus land bank

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 ICICI bank

 HDFC

 Jammu & Kashmir bank

 Centurion bank

 City union bank

 Federal bank

 Saraswat bank

 Dhanlaksmi bank

 Kotak bank

 Cosmos bank

 Bank of Rajasthan

 Bank of Punjab

 ING VYSYA bank

 South Indian bank

FOREIGN BANKS

 Standard charted bank

 City bank

 American express bank

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 ABN Amro bank

 HSBC

 Asian development bank

 Abu Dhabi C bank

Role of Banks:

Banks play a positive role in economic development of a country as repositories of

community’s savings and as purveyors of credit. Indian Banking has aided the economic

development during the last fifty years in an effective way. The banking sector has shown

a remarkable responsiveness to the needs of planned economy. It has brought about a

considerable progress in its efforts at deposit mobilization and has taken a number of

measures in the recent past for accelerating the rate of growth of deposits. As recourse to

this, the commercial banks opened branches in urban, semi-urban and rural areas and

have introduced a number of attractive schemes to foster economic development.

commercial banks have emerged as key financial agencies for rapid economic

development by pooling the savings together, banks can make available funds to

specialized institutions which finance different sectors of the economy, needing capital

for various purposes, risks and durations. By contributing to government securities, bonds

and debentures of term-lending institutions in the fields of agriculture, industries and now

housing, banks are also providing these institutions with an access to the common pool of

savings mobilized by them, to that extent relieving them of the responsibility of directly

approaching the saver. This intermediation role of banks is particularly important in the

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early stages of economic development and financial specification. A country like India,

with different regions at different stages of development, presents an interesting spectrum

of the evolving role of banks, in the matter of inter-mediation and beyond.

Mobilization of resources forms an integral part of the development process in India. In

this process of mobilization, banks are at a great advantage, chiefly because of their

network of branches in the country. And banks have to place considerable reliance on the

mobilization of deposits from the public to finance development programmers. Further,

deposit mobilization by banks in India acquired greater significance in their new role in

economic development.

1.5 Objective of the Study

 To study what is the concept of Universal Banking

 To study in detail what a bank should do for being a Universal Bank.
 To study strategies of various banks for Universal Banking.
 To study the factors which forced banks to go for Universal Banking?
 To study what customer needs a bank has to fulfill for being a
Universal Bank.
 Critically analyzing the different products of various banks which are
now well said to be Universal Banks.
 To study how banking change into Universal Banking.
 To study the Importance Of universal banking

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1.6 Scope of the Study

1. The research would highlight the comparative position of a sample

commercial bank with respect to ICICI Bank - the first Indian Universal
Bank, which would help the concerned banks to know where it stands with
respect to Universal Bank.

2. The research would enumerate the financial health and risk exposure of
sample commercial banks in terms of the CAMEL Model. This 38 would be
helpful to understand the relative strength and risk exposure of Indian
commercial banks.

3. The research would also point out the perception of Bank Managers on
Universal banking concept and at the same time would also bring to light the
perception of customers of banks regarding the awareness and demand of
various services presently offered by the banks.

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1.7 Research and Methodology

I. LITERATURE SURVEY: It means reviewing concepts and theories given by

previous researchers.
 Reviewing previous research findings.
 It is surveyed to define a problem more specifically.
 I have visited sales person, websites of different banks, project reports on
banking, and various search engines.

II. RESEARCH DESIGN: Research design is a framework in which research

resides. The research opted is Exploratory where we have tried to find out what
the basic thing forces a bank to be a Universal Bank. We also studied the
strategies adopted by different banks.

III. SAMPLING METHOD: A sample is a representative of whole population.

Researchers while conducting research has to draw certain sample for study
purpose. A sampling method is a definite plan determined before any data are
actually collected for obtaining samples for the same study. Sampling method of
my study is Random Sampling.

IV. DATA COLLECTION: The data is of two types: PRIMARY AND

SECONDRY. Data are the facts presented to the researcher from the study
environment.
 PRIMARY DATA in this research was collected through continuous
meeting with employees, retailers and consumers and also through
questionnaires.
 SECONDARY DATA was collected through the websites of different banks
and various search engines.

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1.8 LIMITATIONS OF UNIVERSAL BANKING

 LIMITATIONS

1. Failure Risk System

The larger the banks, the greater the effects of their failure on the
system. The failure of a larger institution could have serious ramifications
for the entire system in that if one universal bank were to collapse, it could
lead to a systemic financial crisis. Thus, universal banking could subject the
economy to the increased systemic risk.

2. Risk of increase in Monopoly power

Historically, an important reason for limiting combinations of
activities has been the fear that such institutions, by virtue of their sheer size,
would gain monopoly power in the market, which can have significant
undesirable consequences for economic efficiency [Borio and Filosa, 1994].
Two kinds of concentration should be distinguished, viz., the dominance of
universal banks over non-financial companies and concentration in the
market for financial services. The critics of universal banks blame universal
banking for fostering cartels and enhancing the power of large non-banking
firms.

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3. Bureaucratic and inflexible

Some critics have also observed that universal banks tend to be
bureaucratic an inflexible and hence they tend to work primarily with large
established customers and ignore or discourage smaller and newly
established businesses. Universal banks could use such practices as limit
pricing or predatory pricing to prevent smaller specialized banks from
serving the market. This argument mainly stems from the economies of scale
and scope.

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CHAPTER: 2

UNIVERSAL BANKING

Universal Banking includes not only services related to savings and loans but also

investments. However in practice the term 'universal banks' refers to those banks that

offer a wide range of financial services, beyond commercial banking and investment

banking, insurance etc. Universal banking is a combination of commercial banking,

investment banking and various other activities including insurance. If specialized

banking is the one end universal banking is the other. This is most common in European

countries.

It is a multipurpose and multi-functional financial supermarket providing both 'Banking

and Financial Services' through a single window. As per the World Bank," In Universal

Banking, large banks operate extensive network of branches, provide many different

services, hold several claims on firms (including equity and debt) and participate directly

in the Corporate Governance of firms that rely on the banks for funding or as insurance

underwriters."

In a nutshell, a Universal Banking is a superstore for financial products, under one roof.

Corporates can get loans and avail of other handy services, while individuals can bank

and borrow. It includes not only services related to savings and loans but also investment.

However in practice the term 'Universal Banking' refers to those banks that offer wide

range of financial services beyond the commercial banking functions like Mutual Funds,

Merchant Banking, Factoring, Insurance, Credit Cards, Retail loans, Housing Finance,

Auto Loans, etc.

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2.1 Universal banking in India

In India Development financial institutions (DFIs) and refinancing institutions (RFIs)

were meeting specific sectoral needs and also providing long-term resources at

concessional terms, while the commercial banks in general, by and large, confined

themselves to the core banking functions of accepting deposits and providing working

capital finance to industry, trade and agriculture. Consequent to the liberalization and

deregulation of financial sector, there has been blurring of distinction between the

commercial banking and investment banking.

Reserve Bank of India constituted on December 8, 1997, a Working Group under the

Chairmanship of Shri S.H. Khan to bring about greater clarity in the respective roles of

banks and financial institutions for greater harmonisation of facilities and obligations .

Also report of the Committee on Banking Sector Reforms or Narasimham Committee

(NC) has major bearing on the issues considered by the Khan Working Group.

The issue of universal banking resurfaced in Year 2000, when ICICI gave a presentation

to RBI to discuss the time frame and possible options for transforming itself into an

universal bank. Reserve Bank of India also spelt out to Parliamentary Standing

Committee on Finance, its proposed policy for universal banking, including a case-by-

case approach towards allowing domestic financial institutions to become universal

banks.

Now RBI has asked FIs, which are interested to convert itself into a universal bank, to

submit their plans for transition to a universal bank for consideration and further

discussions. FIs need to formulate a road map for the transition path and strategy for

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smooth conversion into an universal bank over a specified time frame. The plan should

specifically provide for full compliance with prudential norms as applicable to banks over

the proposed period.

The need behind the Advent of Universal Banking

Liberalization and the banking reforms have given new avenues to Development Finance

Institutions (DFIs) to meet the broader market. They can avail the options to involve in

deposit banking and short term lending as well. DFIs were set up with the objective of

taking care of the investment needs of industries. They have build up expertise in

Merchant Banking and Project Evaluation.

So, saddled with obligations to fund long gestation projects, the DFIs have been burdened

with serious mismatches between their assets and liabilities of the balance sheet. In this

context, the Narsimham Committee II had suggested DFIs should convert into banks or

Non-Banking Finance Companies. Converting of these DFIs into Universal Banks will

grant them ready access to cheap retail deposits and increase the coverage of the

advances to include short term working capital loans to corporates with greater

operational flexibility. At that time DFIs were in the need to acquire a lot of mass in their

volume of operations to solve the problem of total asset base and net worth. So, the

emergence of Universal Banking was the solution for the problem of banking sector

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2.2 PRODUCTS AND SERVICES OFFERED BY UNIVERSAL

BANKS

Broad Classification of Products in a Universal bank:

The different products in an universal bank can be broadly classified into:

 Retail Banking.

 Trade Finance.

 Treasury Operations.

Retail Banking and Trade finance operations are conducted at the branch level while the

wholesale banking operations, which cover treasury operations, are at the hand office or a

designated branch.

Retail Banking:

 Deposits

 Loans, Cash Credit and Overdraft

 Negotiating for Loans and advances

 Remittances

 Book-Keeping (maintaining all accounting records)

 Receiving all kinds of bonds valuable for safe keeping

Trade Finance:

 Issuing and confirming of letter of credit.

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 Drawing, accepting, discounting, buying, selling, collecting of bills of exchange,

promissory notes, drafts, bill of lading and other securities

Treasury Operations:

 Buying and selling of bullion. Foreign exchange

 Acquiring, holding, underwriting and dealing in shares, debentures, etc.

 Purchasing and selling of bonds and securities on behalf of constituents.

The banks can also act as an agent of the Government or local authority.

They insure, guarantee, underwrite, participate in managing and carrying out issue of

shares, debentures, etc.

Apart from the above-mentioned functions of the bank, the bank provides a whole lot of

other services like investment counseling for individuals, short-term funds management

and portfolio management for individuals and companies. It undertakes the inward and

outward remittances with reference to foreign exchange and collection of varied types for

the Government.

Common Banking Products Available:

Some of common available banking products which arein universal banks are explained

below:

1) Credit Card: Credit Card is “post paid” or “pay later” card that draws from a credit

line-money made available by the card issuer (bank) and gives one a grace period to

pay. If the amount is not paid full by the end of the period, one is charged interest. A

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credit card is nothing but a very small card containing a means of identification, such as a

signature and a small photo. It authorizes the holder to change goods or services to his

account, on which he is billed. The bank receives the bills from the merchants and pays

on behalf of the card holder.

These bills are assembled in the bank and the amount is paid to the bank by the card

holder totally or by installments. The bank charges the customer a small amount for these

services. The card holder need not have to carry money/cash with him when he travels or

goes for purchasing.

Credit cards have found wide spread acceptance in the ‘metros’ and big cities. Credit

cards are joining popularity for online payments. The major players in the Credit Card

market are the foreign banks and some big public sector banks like SBI and Bank of

Baroda. India at present has about 3 million credit cards in circulation.

2) Debit Cards: Debit Card is a “prepaid” or “pay now” card with some stored value.

Debit Cards quickly debit or subtract money from one’s savings account, or if one were

taking out cash.

Every time a person uses the card, the merchant who in turn can get the money

transferred to his account from the bank of the buyers, by debiting an exact amount of

purchase from the card. To get a debit card along with a Personal Identification Number

(PIN). When he makes a purchase, he enters this number on the shop’s PIN pad. When

the card is swiped through the electronic terminal, it dials the acquiring bank system –

either Master Card or Visa that validates the PIN and finds out from the issuing bank

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whether to accept or decline the transaction. The customer never overspread because the

amount spent is debited immediately from the customers account. So, for the debit card to

work, one must already have the money in the account to cover the transaction. There is

no grace period for a debit card purchase. Some debit cards have monthly or per

transaction fees.

Debit Card holder need not carry a bulky checkbook or large sums of cash when he/she

goes at for shopping. This is a fast and easy way of payment one can get debit card

facility as debit cards use one’s own money at the time of sale, so they are often easier

than credit cards to obtain.

The major limitation of Debit Card is that currently only some 3000-4000 shops country

wide accepts it. Also, a person can’t operate it in case the telephone lines are down.

3) Automatic Teller Machine: The introduction of ATM’s has given the customers

the facility of round the clock banking. The ATM’s are used by banks for making the

customers dealing easier. ATM card is a device that allows customer who has an ATM

card to perform routine banking transaction at any time without interacting with human

teller. It provides exchange services. This service helps the customer to withdraw money

even when the banks ate closed. This can be done by inserting the card in the ATM and

entering the Personal Identification Number and secret Password.

ATM’s are currently becoming popular in India that enables the customer to withdraw

their money 24 hours a day and 365 days. It provides the customers with the ability to

withdraw or deposit funds, check account balances, transfer funds and check statement

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information. The advantages of ATM’s are many. It increases existing business and

generates new business. It allows the customers.

 To transfer money to and from accounts.

 To view account information.

 To order cash.

 To receive cash.

Advantages of ATM’s:

To the Customers

 ATM’s provide 24 hrs., 7 days and 365 days a year service.

 Service is quick and efficient

 Privacy in transaction

 Wider flexibility in place and time of withdrawals.

 The transaction is completely secure – you need to key in Personal Identification

Number (Unique number for every customer)

To Banks

 Alternative to extend banking hours.

 Crowding at bank counters considerably reduced.

 Alternative to new branches and to reduce operating expenses.

 Relieves bank employees to focus an more analytical and innovative work.

 Increased market penetration.

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ATM’s can be installed anywhere like Airports, Railway Stations, Petrol Pumps, Big

Business arcades, markets, etc. Hence, it gives easy access to the customers, for obtaining

cash.

The ATM services provided first by the foreign banks like Citibank, Grind lays bank and

now by many private and public sector banks in India like ICICI Bank, HDFC Bank, SBI,

UTI Bank etc. The ICICI has launched ATM Services to its customers in all the

Metropolitan Cities in India. By the end of 1990 Indian Private Banks and public sector

banks have come up with their own ATM Network in the form of “SWADHAN”. Over

the past year up to 44 banks in Mumbai, Vashi and Thane, have became a part of

“SWADHAN” a system of shared payments networks, introduced by the Indian Bank

4) E-Cheaques: The e-cheaques consists five primary facts. They are the consumers, the

merchant, consumer’s bank the merchant’s bank and the e-mint and the clearing process.

This cheaquring system uses the network services to issue and process payment that

emulates real world chaquing. The payer issue a digital cheaques to the payee ant the

entire transactions are done through internet. Electronic version of cheaques are issued,

received and processed. A typical electronic cheque transaction takes place in the

following manner:

 The customer accesses the merchant server and the merchant server presents its

goods to the customer.

 The consumer selects the goods and purchases them by sending an e-cheque to

the merchant.

 The merchant validates the e-cheque with its bank for payment authorisation.

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 The merchant electronically forwards the e-cheque to its bank.

 The merchant’s bank forwards the e-cheque to the clearing house for cashing.

 The clearing house jointly works with the consumer’s bank clears the cheque and

transfers the money to the merchant’s banks.

 The merchant’s bank updates the merchant’s account.

 The consumer’s bank updates the consumer’s account with the withdrawal

information.

The e-chequing is a great boon to big corporate as well as small retailers. Most major

banks accept e-cheques. Thus this system offers secure means of collecting payments,

transferring value and managing cash flows.

5) Electronic Funds Transfer (EFT): Many modern banks have computerised their

cheque handling process with computer networks and other electronic equipments. These

banks are dispensing with the use of paper cheques. The system called electronic fund

transfer (EFT) automatically transfers money from one account to another. This system

facilitates speedier transfer of funds electronically from any branch to any other branch.

In this system the sender and the receiver of funds may be located in different cities and

may even bank with different banks. Funds transfer within the same city is also

permitted. The scheme has been in operation since February 7, 1996, in India.

The other important type of facility in the EFT system is automated clearing houses.

These are the computer centers that handle the bills meant for deposits and the bills

meant for payment. In big companies pay is not disbursed by issued cheques or issuing

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cash. The payment office directs the computer to credit an employee’s account with the

person’s pay.

6) Telebanking: Telebanking refers to banking on phone services.. a customer can

access information about his/her account through a telephone call and by giving the

coded Personal Identification Number (PIN) to the bank. Telebanking is extensively user

friendly and effective in nature.

 To get a particular work done through the bank, the users may leave his

instructions in the form of message with bank.

 Facility to stop payment on request. One can easily know about the cheque status.

 Information on the current interest rates.

 Information with regard to foreign exchange rates.

 Request for a DD or pay order.

 D-Mat Account related services.

 And other similar services.

7) Mobile Banking: A new revolution in the realm of e-banking is the emergence of

mobile banking. On-line banking is now moving to the mobile world, giving everybody

with a mobile phone access to real-time banking services, regardless of their location. But

there is much more to mobile banking from just on-lie banking. It provides a new way to

pick up information and interact with the banks to carry out the relevant banking

business. The potential of mobile banking is limitless and is expected to be a big success.

Booking and paying for travel and even tickets is also expected to be a growth area.

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According to this system, customer can access account details on mobile using the Short

Messaging System (SMS) technology6 where select data is pushed to the mobile device.

The wireless application protocol (WAP) technology, which will allow user to surf the

net on their mobiles to access anything and everything. This is a very flexible way of

transacting banking business.

Already ICICI and HDFC banks have tied up cellular service provides such as Airtel,

Orange, Sky Cell, etc. in Delhi and Mumbai to offer these mobile banking services to

their customers.

8) Internet Banking: Internet banking involves use of internet for delivery of

banking products and services. With internet banking is now no longer confirmed to the

branches where one has to approach the branch in person, to withdraw cash or deposits a

cheque or request a statement of accounts. In internet banking, any inquiry or transaction

is processed online without any reference to the branch (anywhere banking) at any time.

The Internet Banking now is more of a normal rather than an exception due to the fact

that it is the cheapest way of providing banking services. As indicated by McKinsey

Quarterly research, presently traditional banking costs the banks, more than a dollar per

person, ATM banking costs 27 cents and internet banking costs below 4 cents

approximately. ICICI bank was the first one to offer Internet Banking in India.

Benefits of Internet Banking:

 Reduce the transaction costs of offering several banking services and diminishes

the need for longer numbers of expensive brick and mortar branches and staff.

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 Increase convenience for customers, since they can conduct many banking

transaction 24 hours a day.

 Increase customer loyalty.

 Improve customer access.

 Attract new customers.

 Easy online application for all accounts, including personal loans and mortgages

Financial Transaction on the Internet:

Electronic Cash: Companies are developing electronic replicas of all existing payment

system: cash, cheque, credit cards and coins.

Automatic Payments: Utility companies, loans payments, and other businesses use on

automatic payment system with bills paid through direct withdrawal from a bank account.

Direct Deposits: Earnings (or Government payments) automatically deposited into bank

accounts, saving time, effort and money.

Stored Value Cards: Prepaid cards for telephone service, transit fares, highway tolls,

laundry service, library fees and school lunches.

Point of Sale transactions: Acceptance of ATM/Cheque at retail stores and restaurants

for payment of goods and services. This system has made functioning of the stock Market

very smooth and efficient.

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Cyber Banking: It refers to banking through online services. Banks with web site

“Cyber” branches allowed customers to check balances, pay bills, transfer funds, and

apply for loans on the Internet.

9) Demat: Demat is short for de-materialisation of shares. In short, Demat is a

process where at the customer’s request the physical stock is converted into electronic

entries in the depository system.

In January 1998 SEBI (Securities and Exchange Board of India) initiated DEMAT

ACCOUNTANCY System to regulate and to improve stock investing. As on date, to

trade on shares it has become compulsory to have a share demat account and all trades

take place through demat.

How to Operate DEMAT ACCOUNT?

One needs to open a Demat Account with any of the branches of the bank. After opening

an account with any bank, by filling the demat request form one can handover the

securities. The rest will be taken care by the bank and the customer will receive credit of

shares as soon as it is confirmed by the Company/Register and Transfer Agent. There is

no physical movement of share certification any more. Any buying or selling of shares is

done via electronic transfers.

1) If the investor wants to sell his shares, he has to place an order with his broker and

give a “Delivery Instruction” to his DP (Depository Participant). The DP will

debit hi s account with the number of shares sold by him.

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2) If one wants to buy shares, he has to inform his broker about his Depository

Account Number so that the shares bought by him are credited in to his account.

3) Payment for the electronic shares bought or sold is to be made in the same way as

in the case of physical securities.

SOME COMMENTS BY EXPERTS

According to ICICI CEO Mr. K V Kamath

He is seriously exploring merger options with the aim of becoming a Universal Banking

group. And he already has two mergers - with the Shipping Credit & Investment

Corporation of India (SCICI) in early 1997 and ITC Classic in December 1997. Both the

mergers have enabled ICICI to become bigger and better. It is proposed that the merger

between IDBI and ICICI will definitely result in a mega-institution since the combined

entity will become the second largest Indian Company in terms of income.

RBI is willing to consider the transformation of DFI’s into banks only 5 -year hence.

RBI's argument is that a 'transitional path' is needed to enable DFI’s become either -full

fledged NBFCs or banks. But the pretext of 'transitional phase' may be just a trick to

delay decision-making. The discussion paper on harmonizing the role and operations of

banks and DFI’s discusses that there is a special role for DFI’s till such time as the long

term debt market gains depth and liquidity. Therefore, one should forget about Universal

Banking since it will take a long time for long-term debt market to fully develop in India.

The biggest stumbling block to developing such a market is RBI's own s loth in

revamping its Public Debt Offices (PDO's) .

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The Reserve Bank has proposed that banks be given the power to sell the security in case

assets become non-performing. Currently, banks have to go through a long drawn legal

process before it can sell a security and recover the money from the defaulting borrower.

However, in the developed international markets like the US for instance, the bank can

foreclose the loan without any resort to the legal process.

The need for such system gains ground in India as banks and financial institutions are

unable to recover funds even though they have adequate asset cover. By the time a

decision comes through the value of the asset has depreciated and not much cash is

recovered. However, for banks and financial institutions to foreclose without resorting to

the courts or the debt recovery tribunal, an enabling legislation will have to be passed.

Regarding the realisability of the security, the rating agencies Moody's and Standard and

Poor feel that since the security is not realizable, financial intermediaries should make an

enhanced provision for NPA’s.

It is also sometimes debated that non-performing assets were due to the fact that policies

had changed. In this regard, the financial intermediaries opined that time should be given

before an asset is classified as NPA’s. The steel industry is a case in point. It has been

suggested that in case a loan is rescheduled, it must be shown separately, in order to give

transparency to the banking system.

At present, there is no formal forum for interaction between DFI’s and banks despite the

emerging overlap in their functional areas. Narasimham committee recommended

merging strong banks together, rather than strong with weak, and Khan suggests merger

between banks and DFI’s. Bu t neither committee provided any details or tackles

reducing labour or closing inefficient branches.

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2.3 Universal Banking coupled with SWOT

The solution of Universal Banking was having many factors to deal with which further

categorized under Strengths, Weaknesses, Opportunities and Threats

Strengths:

 Economies Of Scale

The main advantage of Universal Banking is that it results in greater economic efficiency

in the form of lower cost, higher output and better products. Various Reserve Banks

Committees and reports in favor of Universal Banking, is that it enables banks to exploit

economies of scale and scope. It means a bank can reduce average costs and thereby

improve spreads if it expands its scale of operations and diversifying activities.

 Profitable Diversions

By diversifying the activities, the bank can use its existing expertise in one type of

financial service in providing other types. So, it entails less cost in performing all the

functions by one entity instead of separate bodies.

 Resource Utilization

A bank possesses the information on the risk characteristics of the clients, which it can

use to pursue other activities with the same client. A data collection about the market

trends, risk and returns associated with portfolios of Mutual Funds, diversifiable and non

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diversifiable risk analysis, etc are useful for other clients and information seekers.

Automatically, a bank will get the benefit of being involved in Research.

 Easy marketing on the foundation a of Brand name

A bank has an existing network of branches, which can act as shops for selling products

like Insurance, Mutual Fund without much efforts on marketing, as the branch will act

here as a parent company or source. In this way a bank can reach the remotest client

without having to take recourse ton an agent.

 One stop shopping

The idea of 'one stop shopping' saves a lot of transaction costs and increases the speed of

economic activities. It is beneficial for the bank as well as customers.

 Investor friendly activities

Another manifestation of Universal Banking is bank holding stakes in a firm. A bank's

equity holding in a borrower firm, acts as a signal for other investors on to the health of

the firm, since the lending bank is in a better position to monitor the firm's activities.

Weaknesses:

 Grey area of Universal Bank

The path of Universal Banking for DFIs is strewn with obstacles. The biggest one is

overcoming the differences in regulatory requirements for a bank and DFI. Unlike banks,

DFIs are not required to keep a portion of their deposits as cash reserves.

 No expertise in long term lending

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In the case of traditional project finance an area where DFIs tread carefully, becoming a

bank may not make a big difference. Project finance and Infrastructure Finance are

generally long gestation projects and would require DFIs to borrow long term. Therefore,

the transformation into a bank may not be of great assistance in lending long-term.

 NPA problem remained intact

The most serious problem of DFIs have had to encounter is bad loans or Non Performing

Assets (NPA). For the DFIs and Universal Banking or installation of cutting-edge-

technology in operations are unlikely to improve the situation concerning NPAs.

Most of the NPAs came out of loans to commodity sectors, such as steel, chemicals,

textiles, etc. the improper use of DFI funds by project promoters, a sharp change in

operating environment and poor appraisals by DFIs combined to destroy the viability of

some projects. So, instead of improving the situation Universal Banking may worsen the

situation, due to the expansion in activities banks will fail to make thorough study of the

actual need of the party concerned, the prospect of the business, in which it is engaged,

its track record, the quality of the management, etc.

ICICI suffered the least in this section, but the IDBI has got worst hit of NPAs,

considering the negative developments at Dabhol Power Company (DPC)

Threats:

 Big Empires

Universal Banking is an outcome of the mergers and acquisitions in the banking sector.

The Finance Ministry is also empathetic towards it. But there will be big empires which

may put the economy in a problem. Universal Banks will be the largest banks, by their

asset base, income level and profitability there is a danger of 'Price Distortion'. It might

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take place by manipulating interests of the bank for the self interest motive instead of

social interest. There is a threat to the overall quality of the products of the bank, because

of the possibility of turning all the strengths of the Universal Banking into weaknesses.

(e.g. - the strength of economies of scale may turn into the degradation of qualities of

bank products, due to over expansion.

If the banks are not prudent enough, deposit rates could shoot up and thus affect profits.

To increase profits quickly banks may go in for riskier business, which could lead to a

full in asset quality. Disintermediation and securitization could further affect the business

of banks.

Opportunities:

 To increase efficiency and productivity

Liberalization offers opportunities to banks. Now, the focus will be on profits rather than

on the size of balance sheet. Fee based incomes will be more attractive than mobilizing

deposits, which lead to lower cost funds. To face the increased competition, banks will

need to improve their efficiency and productivity, which will lead to new products and

better services.

 To get more exposure in the global market

In terms of total asset base and net worth the Indian banks have a very long road to travel

when compared to top 10 banks in the world. (SBI is the only Indian bank to appear in

the top 100 banks list of 'Fortune 500' based on sales, profits, assets and market value. It

also ranks II in the list of Forbes 2000 among all Indian companies) as the asset base sans

capital of most of the top 10 banks in the world are much more than the asset base and

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capital of the entire Indian banking sector. In order to enter at least the top 100 segment

in the world, the Indian banks need to acquire a lot of mass in their volume of operations.

Pure routine banking operations alone cannot take the Indian banks into the league of the

Top 100 banks in the world. Here is the real need of universal banking, as the wide range

of financial services in addition to the Commercial banking functions like Mutual Funds,

Merchant banking, Factoring, Insurance, credit cards, retail, personal loans, etc. will help

in enhancing overall profitability.

 To eradicate the 'Financial Apartheid'

A recent study on the informal sector conducted by Scientific Research Association for

Economics (SRA), a Chennai based association, has found out that, 'Though having a

large number of branch network in rural areas and urban areas, the lowest strata of the

society is still out of the purview of banking services. Because the small businesses in the

city, 34% of that goes to money lenders for funds. Another 6.5% goes to pawn brokers,

etc.

The respondents were businesses engaged in activities such as fruits and vegetables

vendors, laundry services, provision stores, petty shops and tea stalls. 97% of them do not

depend the banking system for funds. Not because they do not want credit from banking

sources, but because banks do not want to lend these entrepreneurs. It is a situation of

Financial Apartheid in the informal sector. It means with the help of retail and personal

banking services Universal Banking can reach this stratum easily.

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2.4 IMPACT OF UNIVERSAL BANKING

Since the early 1990s, banking systems worldwide have been going through a

rapid transformation. Mergers, amalgamations and acquisitions have been undertaken on

a large scale in order to gain size and to focus more sharply on competitive strengths.

This consolidation has produced financial conglomerates that are expected to maximize

economies of scale and scope by ‘bundling’ the production of financial services. The

general trend has been towards downstream universal banking where banks have

undertaken traditionally non-banking activities such as investment banking, insurance,

mortgage financing, securitization, and particularly, insurance. Upstream linkages, where

non-banks undertake banking business, are also on the increase. The global experience

can be segregated into broadly three models. There is the Swedish or Hong Kong type

model in which the banking corporate engages in in-house activities associated with

banking. In Germany and the UK, certain types of activities are required to be carried out

by separate subsidiaries. In the US type model, there is a holding company structure and

separately capitalized subsidiaries.

In India, the first impulses for a more diversified financial intermediation were

witnessed in the 1980s and 1990s when banks were allowed to undertake leasing,

investment banking, mutual funds, factoring, hire-purchase activities through separate

subsidiaries. By the mid-1990s, all restrictions on project financing were removed and

banks were allowed to undertake several activities in-house. In the recent period, the

focus is on Development Financial Institutions (DFIs), which have been allowed to set up

banking subsidiaries and to enter the insurance business along with banks. DFIs were also

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allowed to undertake working capital financing and to raise short-term funds within

limits. It was the Narasimham Committee II Report (1998) which suggested that the DFIs

should convert themselves into banks or non-bank financial companies, and this

conversion was endorsed by the Khan Working Group (1998). The Reserve Bank’s

Discussion Paper (1999) and the feedback thereon indicated the desirability of universal

banking from the point of view of efficiency of resource use, but it also emphasized the

need to take into account factors such as the status of reforms, the state of preparedness

of the institutions, and a viable transition path while moving in the desired direction.

Accordingly, the mid-term review of monetary and credit policy, October 1999

and the annual policy statements of April 2000 and April 2001 enunciated the broad

approach to universal banking and the Reserve Bank’s circular of April 2001 set out the

operational and regulatory aspects of conversion of DFIs into universal banks. The need

to proceed with planning and foresight is necessary for several reasons. The move

towards universal banking would not provide a panacea for the endemic weaknesses of a

DFI or its liquidity and solvency problems and/or operational difficulties arising from

undercapitalization, non-performing assets, and asset liability mismatches, etc. The

overriding consideration should be the objectives and strategic interests of the financial

institution concerned in the context of meeting the varied needs of customers, subject to

normal prudential norms applicable to banks. From the point of view of the regulatory

framework, the movement towards universal banking should entrench stability of the

financial system, preserve the safety of public deposits, improve efficiency in financial

intermediation, ensure healthy competition, and impart transparent and equitable

regulation.

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Lets discuss the impact of universal banking on the performance of State bank of India.

State bank of India transform it into an universal bank in 2004.Following are the some

performance indicator of State bank of India

ADVANTAGES OF UNIVERSAL BANKING

 Economies of scale from lower operational costs, i.e., larger scale can avoid the

wasteful duplication of marketing, research and development and information

gathering efforts.

 By offering a broader set of financial products than what a specialized bank

provides, a universal bank is able to establish long-term relationship with the

customers and provide them with a package of financial services through a single-

window.

 Flexibility in adapting to the fast changing environment.

 Better and innovative products.

 Reduction of risk by diversification.

 Access to international financial markets.

 Higher output due to specialization.

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LIMITATIONS OF UNIVERSAL BANKING

 The failure of a larger institution could have serious ramifications for the entire

system in that if one universal bank were to collapse, it could lead to a systemic

financial crisis. Thus, Universal Banking could subject the economy to the

increased systemic risk.

 Universal bankers may be tempted to take excessive risks. In such cases, the

government would be forced to step in to save the bank.

 Vulnerable to high risks due to investment banking activities coupled with focus

on commercial banking activities.

 By virtue of their sheer size, universal banks may gain monopoly power in the

market, which can have significant undesirable consequences for economic

efficiency.

 Universal banks may tend to work primarily with large established customers and

ignore or discourage smaller and newly established businesses.

 Universal banks could use such practices as limit pricing or predatory pricing to

prevent smaller specialized banks from serving the market. This argument mainly

stems from the economies of scale and scope.

 Combining commercial and investment banking gives rise to conflict of interests,

as universal banks may not objectively advise their clients on optimal means of

financing or they may have an interest in securities because of underwriting

activities.

 There may be conflict between the investment banker's promotional role and the

commercial banker's obligation to provide disinterested advice .

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 Banks may deploy their own assets in securities with consequent risk to

commercial and savings deposits.

 Unsound loans may be made in order to shore up the price of securities or the

financial position of companies in which a bank had invested its own assets.

 A commercial bank's financial interest in the ownership, price, or distribution of

securities inevitably may tempt bank officials to press their banking customers

into investing in securities which the bank itself was under pressure to sell

because of its own pecuniary stake in the transaction.

AREA OF RESEARCH

The banking industry in India has undergone a sea of change ever since the

economic form process was initiated. There is no doubt that the banking

industry continues to play a cardinal role in spread heading the economic

activity of the country. From an industry almost monopolized by the

nationalized bank till the 90's it has now emerged as a conglomerate of

nationalized, private and foreign banks setting new trends in the way

banking is carried out. Banking Industry which is basically my concern

industry around which my project has to be revolved is really a very

complex industry. And to work for this was really a complex and hectic task.

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The area of this research is finance.

SCOPE OF RESEARCH

The findings of this study is helpful for banks in understanding of impact of

universal banking and taking decision regarding the universal banking

RESEARCH OBJECTIVE

 Find out the steps undertaken by banks for adopting universal

banking.

 To come out with valuable suggestions for improvement

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CHAPTER: 3

WHAT IS UNIVERSAL BANKING

The term ‘UNIVERSAL BANKS’ in general refers to the combination of commercial

banking and investment banking, i.e., issuing, underwriting, investing and trading in
securities. In a very broad sense, however, the term ‘UNIVERSAL BANKS’ refers to
those banks that offer a wide range of financial services, beyond commercial banking and
investment banking, such as, insurance. However, UNIVERSAL BANKING does not
mean that every institution conducts every type of business with every type of customer.
UNIVERSAL BANKING is an option; a pronounced business emphasis in terms of
products, customer groups and regional activity can, in fact, be observed in most cases. In
the spectrum of banking, specialised banking is on the one end and the UNIVERSAL
BANKING on the other.

UNIVERSAL BANKS are financial institutions that may offer the entire range of
financial services. They may sell insurance, underwrite securities, and carry out securities
transactions on behalf of others. They may own equity interest in firms, including
nonfinancial firms.

They are multi-product firms in the financial services sector whose complexity is difficult
to manage. In their historical development, organisational structure, and strategic
direction, UNIVERSAL BANKS constitute multi-product firms, within the financial
services sector. This stylized profile of UNIVERSAL BANKS presents shareholders
with an anagram of more or less distinct businesses that are linked together in a complex
network which draws on as set of centralised financial, information, human and
organisational resources - a profile that tends to be extraordinarily difficult to manage in a
way that achieves optimum use of invested capital.

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3.1 Economics of Universal Banking:

From a production -function perspective, the structural form of UNIVERSAL

BANKING appears to depend on the ease with which operating efficiencies and scale
and scope economies can be exploited - determined in large part by product and process
technologies - as well as the comparative organizational effectiveness in optimally
satisfying client requirements and bringing to bear market power.

3.2 Economies of Scale:

Bankers regularly argue that 'Bigger is better' from a shareholder perspective, and usually
point to economies of scale as a major reason

Individually economies (diseconomies) of scale in UNIVERSAL BANKS will either be

captured as increased profit margins or passed along to clients in the forms of lower
(higher) prices resulting in a gain (loss) of market share. They are directly observable in
cost functions of financial service suppliers and in aggregate performance measures.

3.3 Economies of Scope:

Economies of scope arise in multi-product firms because costs of offering various

activities by different units are greater than the costs when they are offered together. On
the supply side, scope economies relate to cost-savings through sharing of overheads and
improving technology through sharing of overheads and improving technology through
joint production of generically similar groups of services.

On the demand side, economies of scope arise when the all-in cost to the buyer of
multiple financial services from a single supplier - including the price of the service, plus
information, search, monitoring, contracting and other transaction costs - is less than the
cost of purchasing them from separate suppliers.

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X-efficiency:

Besides economies of scale and scope, it seems likely that UNIVERSAL BANKS of
roughly the same size and providing roughly the same range of services may have very
different cost levels per unit of output. The reasons may involve efficiency-differences in
the use of labour and capital, effectiveness in the sourcing and application of available
technology, and perhaps effectiveness in the acquisition of productive inputs,
organizational design, compensation and incentive systems - and just plain better
management.

Absolute Size and Market Power:

UNIVERSAL BANKS are able to extract economic rents from the market by application
of market power. Indeed, in many national markets for financial services suppliers have
shown a tendency towards oligopoly but may be prevented by regulation or international
competition from fully exploiting monopoly positions..

Value of Income -stream Diversification:

There are potential risk-reduction gains from diversification in UNIVERSAL financial

service organisations, and that these gains increase with the number of activities
undertaken. The main risk-reduction gains appear to arise from combining commercial
banking with insurance activities, rather than with securities activities.

Access to Bailouts:

In such a case, failure of one of the major institutions is likely to cause unacceptable
systemic problems. If this turns out to be the case, then too-big-to-fail organizations
create a potentially important public subsidy for UNIVERSAL BANKING
organizations and therefore implicitly benefit the institutions' shareholders.

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Conflicts of Interest:

The potential for conflicts of interest is endemic in UNIVERSAL BANKING, and runs
across the various types of activities in which the bank is engaged:

Salesman's Stake: it has been argued that when banks have the power to sell affiliates'
products, managers will no longer dispense 'dispassionate' advice to clients. Instead, they
will have a salesman's stake in pushing 'house' products, possibly to the disadvantage of
the customer.

Bankruptcy - risk transfer: a bank with a loan outstanding to a firm whose bankruptcy
risk has increased, to the private knowledge of the banker, may have an incentive to
induce the firm to issue bonds or equities - underwritten by its securities unit - to an
unsuspecting public. The proceeds of such an issue could then be used to pay-down the
bank loan. In this case the bank has transferred debt-related risk from itself to outside
investors, while it simultaneously earns a fee and/or spread on the underwriting.

Third party loans: To ensure that an underwriting goes well, a bank may make below-
market loans to third party investors on condition that this finance is used to purchase
securities underwritten by its securities unit.
Tie-ins: A bank may use its lending power activities to coerce or tie-in a customer or its
rivals that can be used in setting prices or helping in the distribution of securities unit.
This type of information flow could work in the other direction as well.

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CHAPTER: 4

HOW BANKING TO UNIVERSAL BANKING

Universal bank is a bank where every need of a customer is solved under one umbrella
that means total solution to a problem. In a universal bank, Investments, loans besides of
savings plays a major important role. Many years back, bank meant a source of deposits
for the people. People had a limited vision for the bank. Now due to globalization, cut
throat competition, banking industry was in dilemma whether to extend its services or
not. The raising standard of people, ever going businesses put a challenge to banking
industry. There developed a concept of universal banking.

Today in this modernized world, when nobody wants to be left behind. The banks have
also started cat-mice race. Every bank today is a universal bank. The major players in
banking industry like ICICI Bank, IDBI Bank, UTI Bank, HDFC Bank etc. have
proved to be emerging universal banks in India. They provide solutions of every
problem under one roof. The have different schemes targeting different people. Every
bank has different products for loans and investment schemes. In a nut shell, we can say
that every bank as a universal bank in this electronic world is proving to be a boon
for a common man and fulfilling his own needs.

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CHAPTER: 5
MAJOR POLICY GUIDELINES

5.1 Electronic Clearing Service (ECS)

The RBI has asked the banks in October 2005, to provide the required details to the
customers in their pass book/account statement regarding the credits effected through
ECS. Following is the RBI notification—

Electronic Clearing service (ECS) is increasingly being used by various users like Govt.
Departments, corporate bodies, etc. for repetitive payments like salary, pension,
dividends, interest, etc.br>

2. While ECS has proved to be of great convenience to both, the users and the beneficiary
customers, there has been a rise in the number of complaints. The main complaint is that
details provided by the banks in the Pass Book / Statement of Accounts for the ECS
entries, are not complete and in the absence of details, reconciliation of transactions by
the customers becomes very difficult.

3. It may be mentioned that in the ECS report (paper as well as electronic), a short
abbreviation of the user name is provided to the banks to facilitate provision of details in
the account statements. This abbreviation may be appropriately captured and utilized.

5.2 Guidelines on One-Time Settlement Scheme for SME Accounts

Following are the guidelines for one-time settlement of dues relating to NPAs of public
sector banks in SME sector, issued by RBI in the September 2005. These guidelines will
provide a simplified, non-discretionary and non-discriminatory mechanism for one-time
settlement of chronic NPAs in the SME sector. All public sector banks are required to
uniformly implement these guidelines. However, these guidelines will not, cover cases of
wilful default, fraud and malfeasance. Banks shall identify cases of wilful default, fraud
and malfeasance and initiate prompt action.

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[I] Coverage
a) The revised guidelines will cover all NPAs in SME sector which have become
doubtful or loss as on March 31, 2004 with outstanding balance of Rs.10 crore and below
on the date on which the account was classified as doubtful.
b) The guidelines will also cover NPAs classified as sub-standard as on 31st March 2004,
which have subsequently become doubtful or loss where the outstanding balance was
Rs.10 crore and below on the date on which the account was classified as doubtful.

[II] Settlement Formula–amount

a) NPAs classified as Doubtful or Loss as on March 31, 2004
The minimum amount that shall be recovered under the revised guidelines in respect of
one-time settlement of NPAs classified as doubtful or loss as on March 31, 2004 will be
100% of the outstanding balance in the account as on the date on which the account was
categorized as doubtful NPAs.
b) NPAs classified as sub-standard as on March 31, 2004 which became doubtful or loss
subsequently
The minimum amount that shall be recovered in respect of NPAs classified as sub-
standard as on March 31, 2004 which became doubtful or loss subsequently would be
100% of the outstanding balance in the account as on the date on which the account was
categorized as doubtful NPAs, plus interest at existing Prime Lending Rate from April 1,
2004 till the date of final payment.

[III] Payment
The amount of settlement arrived at in both the above cases shall preferably be paid in
one lump sum. In cases where the borrowers are unable to pay the entire amount in one
lump sum, at least 25% of the amount of settlement shall be paid upfront and the balance
amount of 75% should be recovered in installments within a period of one year together
with interest at the existing Prime Lending Rate from the date of settlement up to the date
of final payment.

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[IV] Sanctioning Authority

The decision on the one-time settlement and consequent sanction of waiver or remission
or write-off shall be taken by the competent authority under the delegated powers.

[V] Non-discretionary treatment

Banks shall follow the above guidelines for one-time settlement of all NPAs covered
under the scheme, without discrimination and a monthly report on the progress and
details of settlements should be submitted by the concerned authority to the next higher
authority and their Central Office..

[VI] Reporting to the Board

Banks shall submit a report on the progress in the one-time settlement of chronic NPAs
under the revised guidelines every quarter to the Board of Directors. A copy of the
quarterly progress report may also be sent to RBI.

5.3 Guidelines for External Commercial Borrowings (ECB)

The department of Economic Affairs, Ministry of Finance, and Government of India
monitors and regulates Indian firms' access to global capital markets. From time to time,
they announce guidelines on policies and procedures for ECB and Euro-issues. ECBs
include bank loans, suppliers' and buyers' credits, fixed and floating rate bonds (without
convertibility) and borrowings from private sector windows of multilateral Financial
Institutions such as International Finance Corporation. Euro-issues include Euro-
convertible bonds and GDRs.

The important aspect of ECB policy is to provide flexibility in borrowings by Indian

corporate, at the same time maintaining prudent limits for total external borrowings. The
guiding principles for ECB Policy are to keep maturities long, costs low

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The ECB policy focuses on three aspects:

Eligibility criteria for accessing external markets.

The total volume of borrowings to be raised and their maturity structure.

End use of the funds raised.

Detailed guidelines were announced in July 1999.

5.4 Internet Banking in India–Guidelines

In June 2001 banks were advised to seek prior approval of Reserve Bank of India before
offering transactional services on the Internet. The position has since been reviewed and
RBI has advised on 20th July 2005, that while the offering of Internet Banking services
will continue to be governed by the provisions of the above circular, no prior approval of
the Reserve Bank of India will be required by banks for offering Internet Banking
services.
2. Banks should, however, ensure compliance with the following conditions:
a. The Internet Banking policy has been approved by the Bank's Board.
b. The policy fits into the bank's overall Information Technology and Information
Security policy and ensures confidentiality of records and security systems.
c. The policy takes into account operational risk.
d. The policy clearly lays down the procedure to be followed in respect of "Know Your
Customer" requirements, and
e. The policy broadly meets the parameters laid down in the earlier circular

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5.5 Reserve Bank Guidelines on purchase/ sale of Non Performing Asset

Financial
Scope
1. These guidelines would be applicable to banks, FIs and NBFCs purchasing/ selling non
performing financial assets, from/ to other banks/FIs/NBFCs (excluding securitization
companies/ reconstruction companies).
2. A financial asset, including assets under multiple/consortium banking arrangements,
would be eligible for purchase/sale in terms of these guidelines if it is a non-performing
asset/non performing investment in the books of the selling bank.
3. The reference to 'bank' in the guidelines would include financial institutions and
NBFCs.

Structure
4. The guidelines to be followed by banks purchasing/ selling non-performing financial
assets from / to other banks are given below. The guidelines have been grouped under the
following headings:
i. Procedure for purchase/ sale of non performing financial assets by banks, including
valuation and pricing aspects.
ii. Prudential norms, in the following areas, for banks for purchase/ sale of non
performing financial assets:
A bank which is purchasing/ selling non-performing financial assets should ensure that
the purchase/ sale is conducted in accordance with a policy approved by the Board. The
Board shall lay down policies and guidelines covering, inter alia,
a. Non performing financial assets that may be purchased/ sold;
b. Norms and procedure for purchase/ sale of such financial assets;
c. Valuation procedure to be followed to ensure that the economic value of financial
assets is reasonably estimated based on the estimated cash flows arising out of
repayments and recovery prospects;
d. Delegation of powers of various functionaries for taking decision on the purchase/ sale

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of the financial assets; etc.

e. Accounting policy

ii. While laying down the policy, the Board shall satisfy itself that the bank has adequate
skills to purchase non performing financial assets and deal with them in an efficient
manner which will result in value addition to the bank. The Board should also ensure that
appropriate systems and procedures are in place to effectively address the risks that a
purchasing bank would assume while engaging in this activity.

iii) The estimated cash flows are normally expected to be realised within a period of three
years and not less than 5% of the estimated cash flows should be realized in each half
year.

iv) A bank may purchase/sell non-performing financial assets from/to other banks only
on 'without recourse' basis, i.e., the entire credit risk associated with the non-performing
financial assets should be transferred to the purchasing bank. Selling bank shall ensure
that the effect of the sale of the financial assets should be such that the asset is taken off
the books of the bank and after the sale there should not be any known liability devolving
on the selling bank.

v) Banks should ensure that subsequent to sale of the non performing financial assets to
other banks, they do not have any involvement with reference to assets sold and do not
assume operational, legal or any other type of risks relating to the financial assets sold.
Consequently, the specific financial asset should not enjoy the support of credit
enhancements / liquidity facilities in any form or manner.

6. Prudential norms for banks for the purchase/ sale transactions

(A) Asset classification norms
(i). The non-performing financial asset purchased, may be classified as 'standard' in the
books of the purchasing bank for a period of 90 days from the date of purchase.

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Thereafter, the asset classification status of the financial asset purchased, shall be
determined by the record of recovery in the books of the purchasing bank with reference
to cash flows estimated while purchasing the asset which should be in compliance with
requirements in Para5 (iii).
(ii). The asset classification status of an existing exposure (other than purchased financial
asset) to the same obligor in the books of the purchasing bank will continue to be
governed by the record of recovery of that exposure and hence may be different.
(B) Provisioning norms
Books of selling bank
i. When a bank sells its non-performing financial assets to other banks, the same will be
removed from its books on transfer.
ii. If the sale is at a price below the net book value (NBV) (i.e., book value less
provisions held), the shortfall should be debited to the profit and loss account of that year.
iii. If the sale is for a value higher than the NBV, the excess provision shall not be
reversed but will be utilized to meet the shortfall/ loss on account of sale of other non
performing financial assets.
Books of purchasing bank

The asset shall attract provisioning requirement appropriate to its asset classification
status in the books of the purchasing bank.

(C) Accounting of recoveries

Any recovery in respect of a non-performing asset purchased from other banks should
first be adjusted against its acquisition cost. Recoveries in excess of the acquisition cost
can be recognized as profit.

(D) Capital Adequacy

For the purpose of capital adequacy, banks should assign 100% risk weights to the non-
performing financial assets purchased from other banks. In case the non-performing asset
purchased is an investment, then it would attract capital charge for market risks also. For
NBFCs the relevant instructions on capital adequacy would be applicable.

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(E)Exposureorms
The purchasing bank will reckon exposure on the obligor of the specific financial asset.
Hence these banks should ensure compliance with the prudential credit exposure ceilings
(both single and group) after reckoning the exposures to the obligors arising on account
of the purchase. For NBFCs the relevant instructions on exposure norms would be
applicable.

7.DisclosureRequirements
Banks which purchases non-performing financial assets from other banks shall be
required to make the following disclosures in the Notes on Accounts to their Balance
sheets:

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CHAPTER: 6

ISSUES OF CONCERN FOR UNIVERSAL BANKING

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

Unhealthy concentration of power:

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

Impartial Investment Advice:

There is a lengthy list of problems, involving potential conflicts between the bank’s
commercial and investment banking roles. For example there may be possible conflict
between the investment banker’s promotional role and commercial banker’s obligation to
provide disinterested advice. Or where a UNIVERSAL BANK’s securities department
advises a bank customer to issue new securities to repay its bank loans. But a specialized
bank that wants an unprofitable loan repaid also can suggest that the customer issues
securities to do so.

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CHAPTER: 7

SUGGESTIONS AND RECOMMENDATIONS

 There is need to review and amended the provisions of RBI Act, Banking

Regulation Act, State Bank of act etc so as to bring them on same line of

current banking needs

 Government should consider raising the prescribed capital adequacy ratio

to improve the inherent strength of banks and to improve their risk taking

ability

 weak public sector banks which have accumulated a high percentage of

non-paying assets (NPA), and in some cases, as high as 20% of their total

assets. They suggested the concept of narrow banking to rehabilitate such

weak banks.

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