Ms. Farhat Najam



This is to certify that Ms.Farhat Najam has undertaken project on UNIVERSAL BANKING AND THEIR OPERATIONS and this Project report is the result of a bonafide work done by the candidate submitted in partial fulfillment of the requirements for the Strategic Management for Assumption University. Narayan K Prabhu Project Guide Dean Global Institute for Management Science Kingdom of Bahrain Mr. Girish Chandran Centre Coordinator Assumption University Off- Campus Academic Centre Global Institute For Management Science Kingdom of Bahrain



Decision making is a fundamental part of the research process. Decisions regarding that what you want to do, how you want to do, what tools and techniques must be used for the successful completion of the project. In fact it is the researcher’s efficiency as a decision maker that makes project fruitful for those who concern to the area of study. Basically when we are playing with computer in every part of life, I used it in my project not for the ease of my but for the ease of result explanation to those who will read this project. The project presents the role of financial system in life of persons.


co-operative banks. The concept of universal banking is spreading fast among various types of banks. It is beneficial for the bank as well as customers the most serious problem of DFIs have had to encounter is bad loans or Non Performing 99 . foreign banks. the players can be broadly classified into the following groups: public sector banks.Executive Summary Banking Industry which is basically my concern industry around which my project has to be revolved is really a very complex industry. The topic of this project is “Impact of Universal Banking on the Operation of Banks “Because of the following reasons. Findings from the study show that the admission of foreign investors in Indian banking sector.India financial institutions and non-banks. the competition and the service value also started to increase The idea of 'one stop shopping' saves a lot of transaction costs and increases the speed of economic activities. I prefer this project work Banking is an essential industry. all. private sector banks. Banking is one of the most regulated businesses in the world. In the financial system. It is where we often wind up when we are seeking a problem in financial crisis and money related query. The term 'Universal Banking' in general refers to the combination of commercial banking and investment banking.

99 . For the DFIs and Universal Banking or installation of cutting-edgetechnology in operations are unlikely to improve the situation concerning NPAs India's financial system is currently undergoing a period of revolutionary changes so much so that. its face may be totally unrecognizable.Assets (NPA). in the very initial phase of the next millennium.

Introduction Universal Banking Research Methodology Problems and Limitations of the Research Major findings Suggestions and Recommendations Conclusion Bibliography 99 . 2. 8. 5. 6. 7. 4.TABLE OF CONTENTS 1. 3.

99 .

it is in the robustness and soundness of our banking system.INTRODUCTION The banking scenario in India has been changing at fast pace from being just the borrowers and lenders traditionally. In the fierce battle for market share and mind share. 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. from planned economy to market. well recognized and trusted brand name." Indian banks have been rated higher than Chinese banks by international rating agency Standard & Poor's. the most potent weapon is a strong. Brands attract and convince people that they will get what is promised. borrowing and lending). Banking today has transformed into a technology intensive and customer friendly model with a focus on convenience. the focus has shifted to more differentiated and customized product/service provider from regulation to liberalization in the year 1991. brand building and IT enabled solutions. They have realized the importance of a customer centric approach. 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.e. 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. The companies have redoubled their efforts to woo the customers and 99 .

it is expected. Even in terms of quality of assets and capital adequacy. It has also changed the way banking is done in India. banking in India is considered as fairly mature in terms of supply. are in the process of consolidating their position by capitalizing on the strength of their huge networks and customer bases. 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. The use of technology has placed Indian banks at par with their global peers. strong and transparent balance sheets-as compared to other banks in comparable economies in its region. The introduction of Basel II norms from 2009 and the fair level playing field that will be available to foreign 99 . the public sector banks. On the one hand. The Indian banking industry is currently in a transition phase. product range and reach-even though reach in rural India still remains a challenge for the private sector and foreign banks. Reforms are continuing as part of the overall structural reforms aimed at improving the productivity and efficiency of the economy. On the other.establish themselves firmly in the market. which are the mainstay of the Indian banking system. Indian banks are considered to have clean. The financial sector now operates in a more competitive environment than before and intermediates relatively large volume of international financial flows. ‘Anywhere banking’ and ‘Anytime banking’ have become a reality. It is no longer an option for a company to provide good customer service. the private sector banks are venturing into a whole new game of mergers and acquisitions to expand their bases.

Large scale mergers. The entry of banks into the realm of financial services was followed very soon after the introduction of liberalization in the economy.banks from 2010 will further enhance the solidarity of the Indian banking sector and open new avenues. emerged new financial conglomerates that could maximize economies of scale and scope by building the production of financial services organization called Universal Banking HISTORY OF BANKING IN INDIA 99 . Since the early 1990s structural changes of profound magnitude have been witnessed in global banking systems. Thus. amalgamations and acquisitions between the banks and financial institutions resulted in the growth in size and competitive strengths of the merged entities.

In fact. From 1786 till today. Today. he has a choice. For the past three decades India's banking system has several outstanding achievements to its credit. It is no longer confined to only metropolitans or cosmopolitans in India. Indian banking system has reached even to the remote corners of the country. 1) Pre-Nationalization Era: 99 . an account holder had to wait for hours at the bank counters for getting a draft or for withdrawing his own money. 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.Not long ago. The most striking is its extensive reach. the journey of Indian Banking System can be segregated into three distinct phases. The first bank in India. Money has become the order of the day. Nationalization Stage. Post Liberalization Era. This is one of the main reasons of India's growth process. Now it is simple as instant messaging or dial a pizza. Gone are days when the most efficient bank transferred money from one branch to other in two days. though conservative.Without a sound and effective banking system in India it cannot have a healthy economy. They are as mentioned below: 1) 2) 3) Pre-Nationalization Era. The government's regular policy for Indian bank since 1969 has paid rich dividends with the nationalization of 14 major private banks of India. was established in 1786.

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 18th 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 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 16th 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 semiurban areas and to diverse other public purposes.” In 1959, the SBI (Subsidiary Bank) act was proposed and the following eight stateassociated banks were taken over by the SBI as its subsidiaries.

Name of the Bank 1. State Bank of Hyderabad 2. State Bank of Bikaner

Subsidiary with effect from 1st October 1959 1st January 1960


3. State Bank of Jaipur 4. State Bank of Saurashtra 5. State Bank of Patiala 6. State Bank of Mysore 7. State Bank of Indore 8. State Bank of Travancore

1st January 1960 1st May 1960 1st April 1960 1st March 1960 1st January 1968 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. 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 15th April 1980, viz.

i) ii) iii)

Andhra Bank. Corporation Bank. New Bank if India.


Consequences of Nationalization:  The quality of credit assets fell because of liberal credit extension policy. the deposit mobilization. In 1969. 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. it was however. achieved at the coast of profitability of the banks.  Political interference has been as additional malady. Vijaya Bank. Nationalization of banks paved way for retail banking and as a result there has been an alt round growth in the branch network. Later in 1975.iv) v) vi) Oriental Bank of Commerce. Punjab and Sind Bank. The overall growth in the deposits and the advances indicates the improvement that has taken place in the banking habits of 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. 99 . the Lead Bank Scheme was introduced to extend banking facilities to every corner of the country. 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.

there should be an efficient financial sector to support the structural reforms taking place in the real economy. Revamping this structure of the banking industry was of extreme importance. the reforms have enhanced the opportunities and challenges for the real sector making them operate in a borderless global market place. 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. as the health of the financial sector in particular and the economy was a whole would be reflected by its performance.  The rapid branch expansion has been the squeeze on profitability of banks emanating primarily due to the increase in the fixed costs. The need for restructuring the banking industry was felt greater with the initiation of the real sector reform process in 1992. Poor appraisal involved during the loan meals conducted for credit disbursals. to harness the benefits of globalization. the banking sector reformation was also addressed. 3) Post-Liberalization Era---Thrust on Quality and Profitability: By the beginning of 1990. 99 .  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. However. Consequently they remained undercapitalized. along with the reforms of the real sector.  There was downward trend in the quality of services and efficiency of the banks. Hence.

the recommendations made by a high level committee on financial sector. These reforms tried to enhance the viability and efficiency of the banking sector. flexibility in operations.  Regulated interest rate structure. The emphasis shifted to efficient and prudential banking linked to better customer care and customer services. by addressing the factors for its dismal performance. 99 . formed the elements of the banking sector reforms. only aimed at liberalizing the regulatory framework. chaired by M.  Lack of transparency in the bank’s balance sheet.  Lack of competition. The committee further advocated introduction of prudential forms.  Excessive regulation on organization structure and managerial resource. the financial sector reforms were initiated to bring about a paradigm shift in the banking industry. The Narasimham Committee suggested that there should be functional autonomy.The route causes for the lackluster performance of banks.  Lack of focus on profitability. reduction in reserve requirements and adequate financial infrastructure in terms of supervision. dilution of banking strangulations. but also to keep them in time with international standards. transparency in operations and improvement in productivity.  Excessive support from government. Narasimham. Some of the factors that led to the dismal performance of banks were. audit and technology. In this context. Against this background. laid the foundation for the banking sector reforms.

This means that it acts as a vehicle for moving finance from those who have surplus money to (however temporarily) those who have deficit. Taking deposits generates funds for lending and money transfer services are necessary for the attention of deposits. Banking industry has always revolved around the traditional function of taking deposits. The Bank have developed their roles to such an extent that a direct contact between the depositors and borrowers in now known as disintermediation. the objective being to lend money. The Bank have introduced progressively more sophisticated 99 . Banks fulfills the role of a financial intermediary. This is what has lead to the very foundation of financial institution like banks. money transfer and making advances. Banks play a pivotal role in enhancing each and every sector. which is the profitable activity of the three. Those three are closely related to each other. Before few decades there existed some influential people who used to land money. This can and does happen of course. In everyday branch terms the banks channel funds from depositors whose accounts are in credit to borrowers who are in debit.BANKING STRUCTURE IN INDIA: In today’s dynamic world banks are inevitable for the development of a country. 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. Without the intermediary of the banks both their depositors and their borrowers would have to contact each other directly. They have helped bring a draw of development on the world’s horizon and developing country like India is no exception.

State Bank of India and its Subsidiaries Other Nationalized Banks Regional Rural Banks Broad Classification of Banks in India: 99 . Societies Commercial Banks Indian Foreign Public Sector Banks Private Sector Banks HDFC.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 State co-op Banks Commercial Banks Central co-op Banks and Primary Cr. ICICI etc.

1) The RBI: The RBI is the supreme monetary and banking authority in the country and has the responsibility to control the banking system in the country. It keeps the reserves of all scheduled banks and hence is known as the “Reserve Bank”. 2) Public Sector Banks: • • • State Bank of India and its Associates (8) Nationalized Banks (19) Regional Rural Banks Sponsored by Public Sector Banks (196) (3) Private Sector Banks: • Old Generation Private Banks (22) • Foreign New Generation Private Banks (8) • Banks in India (40) (4) Co-operative Sector Banks: • • • • • State Co-operative Banks Central Co-operative Banks Primary Agricultural Credit Societies Land Development Banks State Land Development Banks (5) Development Banks: Development Banks mostly provide long term finance for setting up industries. They also provide short-term finance (for export and import activities) 99 .

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. In a way. Banks have been playing a catalytic role in area development. semi-urban and rural areas and have introduced a number of attractive schemes to foster economic development. The banking sector has shown a remarkable responsiveness to the needs of planned economy. industry. international trade in a significant manner. commercial banks have emerged as key financial agencies for rapid economic development. As recourse to this. extended assistance to rural development all along helping agriculture. the commercial banks opened branches in urban. The activities of commercial banking have growth in multi-directional ways as well as multi-dimensional manner.• • • • • • 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. backward area development. 99 . Indian Banking has aided the economic development during the last fifty years in an effective way.

By pooling the savings together. 99 . By contributing to government securities. in the matter of inter-mediation and beyond. The shortterm credit facilities are granted for working capital requirements. And banks have to place considerable reliance on the mobilization of deposits from the public to finance development programmes. banks are at a great advantage. with different regions at different stages of development. bonds and debentures of term-lending institutions in the fields of agriculture. to that extent relieving them of the responsibility of directly approaching the saver. A country like India. Further. This intermediation role of banks is particularly important in the early stages of economic development and financial specification. deposit mobalization by banks in India acquired greater significance in their new role in economic development. These loans are generally granted for periods ranging from five to seven years. Mobilization of resources forms an integral part of the development process in India. 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. chiefly because of their network of branches in the country. Commercial banks provide short-term and medium-term financial assistance. banks can make available funds to specialized institutions which finance different sectors of the economy. In this process of mobilization. industries and now housing. construction of factory premises and purchase of machinery and equipment. banks are also providing these institutions with an access to the common pool of savings mobilized by them. needing capital for various purposes. risks and durations. Certain transaction. The medium-term loans are for the acquisition of land. presents an interesting spectrum of the evolving role of banks.

Since its inception. supply of raw materials for processing. 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. The Reserve Bank of India was set up on the recommendations of the Hilton Young Commission. 99 . implements and monitors the monetary policy. RBI is governed by a central board (headed by a Governor) appointed by the Central Government. The commission submitted its report in the year 1926. 1934. Commercial banks issue such guarantees also. RBI has 22 regional offices across India. 1935 in accordance with the provisions of the Reserve Bank of India Act. full payment of bills on the assurance of the performance etc. may require guarantees being issued in lieu of security earnest money deposits for release of advance money. though the bank was not set up for nine years Main Objective: Monetary Authority • Formulates. RBI has been fully owned by the Government of India since nationalization in 1949. it has been headquartered in Mumbai.particularly those in contracts of sale of Government Departments. Though originally privately owned.

• Objective: maintaining price stability and ensuring adequate flow of credit to productive sectors. 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. Issuer of currency • • Issues and exchanges or destroys currency and coins not fit for circulation. Objective: to facilitate external trade and payment and promote orderly development and maintenance of foreign exchange market in India. 99 . • Objective: maintain public confidence in the system. Regulator and supervisor of the financial system • Prescribes broad parameters of banking operations within which the country’s banking and financial system functions. Developmental role • Performs a wide range of promotional functions to support national objectives. Objective: to give the public adequate quantity of supplies of currency notes and coins and in good quality. 1999. protect depositors’ interest and provide cost-effective banking services to the public.

• • Banker to banks: maintains banking accounts of all scheduled banks. branch expansion. 1949 have given the RBI wide powers of supervision and control over commercial and cooperative banks. reconstruction and liquidation. There is now an international consensus about the need to focus the tasks of a central bank upon central banking. 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. management and methods of working. liquidity of their assets.Related Functions • Banker to the Government: performs merchant banking function for the central and the state governments. the Reserve bank has certain nonmonetary functions of the nature of supervision of banks and promotion of sound banking in India. The Reserve Bank Act. owing to the sprawling mandate described above. 1934. and the Banking Regulation Act. Owner and operator of the depository (SGL) and exchange (NDS) for government bonds. The supervisory 99 . also acts as their banker. relating to licensing and establishments. The RBI is authorized to carry out periodical inspections of the banks and to call for returns and necessary information from them. amalgamation. RBI is far out of touch with such a principle. Supervisory Functions: In addition to its traditional central functions.

The Reserve Bank was asked to promote banking habit. Accordingly. at one time. Co-operative Banks: 99 . extend banking facilities to rural and semi-urban areas. The Bank has developed the co-operative credit movement to encourage saving. the range of the Reserve Bank’s functions have steadily widened. But only since 1951 the Bank’s role in this field has become extremely important. Promotional Functions: With economic growth assuming a new urgency since Independence. and establish and promote new specialized financing agencies. which. and to provide industrial finance as well as agricultural finance. 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 were set up directly or indirectly by the Reserve Bank to promote saving habit and to mobilize savings.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. The RBI has set up the Agricultural Refinance and Development Corporation to provide long-term finance to farmers. As far back as 1935. to eliminate money-lenders from the villages and to route its short term credit to agriculture. were regarded as outside the normal scope of central banking. The Bank now performs a variety of developmental and promotional functions. the RBI set up the Agricultural Credit Department to provide agricultural credit.

cattle. but the importance that such banks have assumed in India is rarely paralleled anywhere else in the world. This exponential growth of Co-operative Banks is attributed mainly to their much better local reach. the co-operative banks in urban areas mainly finance various categories of people for self-employment. 99 . personal finance. The Co-operative banks are an important constituent of the Indian Financial System. judging by the role assigned to them. The co-operative movement originated in the West. Their role in rural financing continues to be important even today. along with some small scale industries and self-employment driven activities. Some of the cooperative banks are quite forward looking and have developed sufficient core competencies to challenge state and private sector banks. 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. consumer finance. They are governed by the Banking Regulations Act 1949 and Banking Laws (Co-operative Societies) Act. industries. their number.The Co-operative bank has a history of almost 100 years. 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. 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. home finance. While the co-operative banks in rural areas mainly finance agricultural based activities including farming. and the number of offices they operate. the expectations they are supposed to fulfill. etc. personal interaction with customers. milk. their ability to catch the nerve of the local clientele. 1965. small scale units. hatchery. personal finance etc.

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, selfhelp, 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 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 UCBs can provide advances against shares and debentures also. Co-operative bank do banking business mainly in the agriculture and rural sector. However, UCBs, SCBs, and CCBs operate in semi urban, urban, and metropolitan areas also. 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 capital, refinance. Co-operative Banks belong to the money market as well as to the capital market. Primary agricultural credit societies provide short term and medium term loans. Land Development Banks (LDBs) provide long-term loans. SCBs and CCBs also provide both short term and term loans. Co-operative banks are financial intermediaries only partially. The sources of their funds (resources) are (a) central and state government, (b) the Reserve Bank of India and NABARD, (c) other co-operative institutions, (d) ownership funds and, (e) deposits or debenture issues. It is interesting to note that intra-sectoral flows of funds are much greater in co-operative banking than in commercial banking. Inter-bank deposits, borrowings, and credit from a significant part of assets and liabilities


of co-operative banks. This means that intra-sectoral competition is absent and intrasectoral integration is high for co-operative bank. 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. 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


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. 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. With successive years of patronage and constantly setting new standards in banking. 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. which envisaged a larger role for Private Sector Banks. particularly during the last decade (1990-2000). 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. 99 .ING Vaysya. to set up a bank in the private sector banks in India as part of the RBI's liberalization of the Indian Banking Industry. yet another Private Bank of India was incorporated in the year 1930. ING Vaysya Bank has many credits to its account. Bangalore has a pride of place for having the first branch inception in the year 1934. 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. Having achieved the objectives of Nationalization. 1956.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.

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  Indusland bank  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 99 .

99 . 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. semi-urban and rural areas and have introduced a number of attractive schemes to foster economic development. the commercial banks opened branches in urban.FOREIGN BANKS  Standard charted bank  City bank  American express bank  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. The banking sector has shown a remarkable responsiveness to the needs of planned economy. Indian Banking has aided the economic development during the last fifty years in an effective way. As recourse to this.

99 . risks and durations. In a way. Banks have been playing a catalytic role in area development. international trade in a significant manner. in the matter of inter-mediation and beyond. chiefly because of their network of branches in the country. with different regions at different stages of development. And banks have to place considerable reliance on the mobilization of deposits from the public to finance development programmes. A country like India. By contributing to government securities. backward area development. extended assistance to rural development all along helping agriculture. to that extent relieving them of the responsibility of directly approaching the saver. industries and now housing. commercial banks have emerged as key financial agencies for rapid economic development by pooling the savings together. banks are at a great advantage. In this process of mobilization.The activities of commercial banking have growth in multi-directional ways as well as multi-dimensional manner. industry. presents an interesting spectrum of the evolving role of banks. banks are also providing these institutions with an access to the common pool of savings mobilized by them. Further. bonds and debentures of term-lending institutions in the fields of agriculture. needing capital for various purposes. Mobilization of resources forms an integral part of the development process in India. deposit mobilization by banks in India acquired greater significance in their new role in economic development. banks can make available funds to specialized institutions which finance different sectors of the economy. This intermediation role of banks is particularly important in the early stages of economic development and financial specification.

strong and transparent balance sheets-as compared to other banks in comparable economies in its region.Commercial banks provide short-term and medium-term financial assistance. The Reserve Bank of India is an autonomous body. supply of raw materials for processing. with minimal pressure from the government. may require guarantees being issued in lieu of security earnest money deposits for release of advance money. banking in India is considered as fairly mature in terms of supply. Even in terms of quality of assets and capital adequacy. With the growth in the Indian economy expected to be strong for quite some time-especially in its services sector. full payment of bills on the assurance of the performance etc. The stated policy of the Bank on the Indian Rupee is to manage volatility-without any stated exchange rate-and this has mostly been true. construction of factory premises and purchase of machinery and equipment. particularly those in contracts of sale of Government Departments. mortgages and investment services are 99 . 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. Commercial banks issue such guarantees also. The medium-term loans are for the acquisition of land. the demand for banking services-especially retail banking. product range and reach-even though reach in rural India still remains a challenge for the private sector and foreign banks. Current scenario Currently overall. Certain transaction. The shortterm credit facilities are granted for working capital requirements. Indian banks are considered to have clean. These loans are generally granted for periods ranging from five to seven years.

takeovers. continuous mergers in the banking. They have a combined network of over 53. This is the first time an investor has been allowed to hold more than 5% in a private sector bank since the RBI announced norms in 2005 that any stake exceeding 5% in the private sector banks would need to be vetted by them.28 public sector banks (that is with the Government of India holding a stake). they may be publicly listed and traded on stock exchanges) and 31 foreign banks. 99 . M&As. Currently. India has 88 scheduled commercial banks (SCBs) . the near monopoly of public sector banks faced the competition by the more customer-focused private sector entrants. By the mid-1990. increasing adoption of technology. modernizing backroom operation in the banks and competition pave the path of growth of Indian banking. According to a report by ICRA Limited.000 ATMs. This competition forced older and nationalized banks to revitalize their operations.expected to be strong.5% respective CHALLENGES IN BANKING SECTOR After the nationalization of Banks.2% and 6. 29 private banks (these do not have government stake. a rating agency.In March 2006. with the private and foreign banks holding 18. asset sales and much more action (as it is unraveling in China) will happen on this front in India .000 branches and 17. the public sector banks hold over 75 percent of total assets of the banking industry. the Reserve Bank of India allowed Warburg Pincus to increase its stake in Kotak Mahindra Bank (a private sector bank) to 10%.

Foreign Banks are focusing on corporate and on the middle class consumer and providing them better service.7 percent of the total net profit of commercial banking sector in India. Large proportion of household saving moved into the banking system. The member of foreign banks operating in India has increased significantly and their share of total assets has also increased. A number of recommendations of two Narasimham committees have been implemented. which recorded an annual growth of 20 percent in deposit. there are several challenges confronting the banking sector. Nationalized Banks are also attempting to get on the path of automation.performing assets). In the year 2001 estimated foreign bank account for 14. overall credit recovery system still exist. Strong Banks will acquire the weaker banks.Year 1992 was the golden period of Indian Banking system due to the scam-tainted stock market. The main challenges facing the banking sector is the deployment of funds in quality assets and the management of revenues and costs. The Reserve Bank of India’s recently released report on Trend and Progress of Banking (2003-04) once again highlights the major issues in Indian banking in the light of increasing global competition. Since the banks have been exposed to competition at home and also at global level. To achieve this. There is a continuous reforms and modernization is in process. a number of suggestions have been put forward from time to time. 99 . The financial sector reforms have to go hand in hand with the overall economic reform process. But along with the continuous growth and modernization. The problem of NPA (non.

Indian banks are not major banks of world class stature. Due to new practices. Under the circumstances it should not be difficult for banks to adopt the Basel II norms as it provides opportunity to Indian banks to raise their standard of banking practices as per international standards. The Basel Accord is something that has to be adopted if Indian Banks are interested in becoming global players.Indian banks are taking steps under the overall regulatory and supervisory framework of the RBI. The operations of the Indian banks are mostly in the domestic sector. No doubt. But now the RBI has taken a view that the standards will apply to all the banks. the Indian financial system is now moving closer to global standards. Accordingly. greater accountability and market discipline among the participants. an elaborate roadmap has been drawn to move the Indian banks closer to Basel II norms. There is also huge cost involved for putting in place proper automation system needed to switch over to the Basel II model. Some of them have a few foreign branches but they are not exposed to significant lending or investments in the overseas market. Initially RBI had taken a view that the standards will apply only to a few select banks depending on the strength of the institutions. Indian banks have smaller asset bases and volume of operations in comparison with international standards. Public sector banks in the past have adapted themselves to international practices such as computerization. a taskforce has been formed to examine the related issues. Accordingly. The report has pointed out that as much as two-thirds of the recent growth in credit has been 99 . asset liability management and Basel I norms. No bank is big enough to rank among the top 100 banks of the world. there are some problems in this respect.

They have to strategically alter their business models in terms of marketing and dealing with customers at the lowest cost. growing use of technology. Cooperative banks need restructuring if they are to survive in the competitive environment. These banks have to use technology for value addition and cost reduction. They are facing a deep crisis with the rising NPA’s and the financial position of one third of these banks is not satisfactory.on account of retail loans. Some cooperative banks are facing challenges created by a few badly managed banks. The Changing Landscape of Banking Sector Under Universal Banking. Finally. for maintaining orderly growth. increased competition and product innovation has all put the banking sector on a high growth trajectory. The new private and foreign banks have thrown open many challenges for the Urban Cooperative Banks (UCBs). Another important aspect of the report is its analysis of the cooperative banks. The ongoing reforms process. They have to turn to modern technologies for better performance. 99 . That means corporate borrowing is yet to pick up significantly in spite of rise in investment demand. The major challenge before the cooperative banks is technology. for easing the work of the bank staff and to attract customers. banks would handle (a) Working Capital (b) Long term Capital (Term Loans) meant for industrial development. UCBs have to be more professional in their approach in order to face new realities. They should not be slow in providing round the clock service to the customers. However significant challenge lie ahead for the banks in the country as they gear unto embrace international standards and best practices in line with BASEL II norms.

dilution of government equity holding in Public Sector Banks (PSBs). and secrecy as third party contractors are used to support e-banking services. Basel committee addresses the need for better risk management practices. liquidity adjustment facility. France. audit. The banking sector in India has undergone remarkable changes since the economic reforms were initiated in 1991-92. The committee does not have enforcement powers. transparency. among others. which provided the much-needed impetus for the growth of the sector as a whole. lowering of reserve requirements in terms of Statutory Liquidity Ratio (SLR) and Cash reserve ratio (CRR). Some of the major initiatives during this period deregulation of interest rates. and the introduction of Real Time Gross Settlement (RTGS). permission to foreign banks to expand their operations through subsidiaries. asset classification and provisioning. Canada.A Word about Basel Committee Founded in 1974.. but has also increased banks’ exposure to financial and legal risks. instead.K. adoption of prudential norms in terms of capital adequacy. Italy. These measures along with Reserve Bank of India (RBI) efforts to adopt international Banking standards and best practices as prescribed in the Basel Accords have no doubt helped the domestic banking industry 99 . opening of the sector to private participation.S. cross country forward contracts. guidelines and best practices that central bank in member nations can use the foundation for their own policies or statutes. it recommends broad standards. Japan and the U. liberalization of FDI norms in banks. greater emphasis on risk management by allowing banks to participate in instruments such as interest rate swaps. Germany. The period has been marked by a slew of reforms in the sector. the Basel Committee is made up of central banking officials from leading industrial nations including the U. introduction of ‘Universal Banking’.

enter a new era. Also. It is helping new generation banks overcome the disadvantage of late entry by allowing them to achieve greater market penetration without having a ‘brick-and-mortar’ structure. Internet banking. As a result of the deregulation of the sector. On the positive side. which is time consuming and expensive. and is now an integral component of any bank strategy. etc. A majority of these banks are now widening and running their operations almost branchless. Increased competitive pressure is forcing public sector banks to wake up from their deep slumber and adapt to the changing business environment so as to remain competitive. The entry of new generation private sector and foreign banks is rewriting the rules of banking in the country. Further it has pushed banks to put greater emphasis on risk management and corporate governance areas that were until now ignored. a host of new generation private banks have entered the scene. technology is helping banks in bringing down their 99 . The proliferation of ATMs of both private and foreign banks in the towns and cities of India prove that. dominated so far by the hitherto slow and lethargic public sector banks. which is the key to success. Technology has emerged as a key enabler to achieve this objective. there is a greater emphasis on customer convenience. Growing Competition The opening of the banking sector to private as well as foreign banks has been a major milestone in the history of the industry in the country. PSBs have begun responding to the challenge well. using technology platforms like ATMs. This along with the permission to foreign banks to expand their operations in the country through subsidiaries has galvanized the domestic banking sector. Today. although many of them are yet to gear up to meet the challenges of the deregulatory era.

This assumption automatically implied that even the government had no business to endanger the solvency. In Structural Reorganization of the Banking System 99 .operational costs. methods and procedures of banks in India. directed credit programmes. poverty eradication. structural of rate of interest. Towards this end.    Ensuring a degree of operational flexibility. etc. which is allowing them to stay competitive even as competition is heating up. Accordingly. structural reorganization of the Indian banking system. Recommendations of Narasimham Committee on Commercial Banking System (1991) The narasimham committee (1991) assumed that the financial resources of the commercial banks from the general public and were by the banks in trust and that the bank funds were to be deployed for maximum benefit of the depositors. narasimham committee recommendations covered such subjects as directed investments. health and efficiency of the nationalized banks under the pretext of using banks funds for social banking. and organization. Greater degree of professionalism in banking operations. the narasimham committee aimed at achieving three major changes in the banking sector in India-. Internal autonomy for the banks in their decision making process.

  Three or four large banks including SBI should become international in character. Eight to ten banks should national bank with wide network of branches through out the country. the system of licensing of branches with the objective of spreading the banking habit should be discontinued.To bring about greater efficiency in banking operations.  RBI should permit the establishment of new banks in the private sector. the broad pattern should consist of-. the narasimham committee (1991) proposed substantial reduction in number of public sector banks through mergers and acquisition.  Since the country had already a network of rural and semi-urban branches. On Organization and Methods and Procedures In Banks 99 . provided they conform to the minimum start-up capital and other requirements.  The rest should remain as local banks with operations be confined to a specific region.  Foreign banks are allowed to open their branches in India either as fully owned or subsidiaries. The government should make declaration that no further banks be nationalized.  Foreign banks and Indian banks are allowed to set-up joint ventures in regard to merchant and investment banking. This would improve efficiency. Banks should have freedom to open branches. According to committee.

 The appointment of chief executive of bank and the board of directors should not be based on political considerations but on professionalism and integrity. so to become competitive internally and to be in step with wide. The narasimham committee was forthright in apportioning the blame to the government of India and the finance ministry of this sad state of affairs.ranging innovations taking place. Several public sector banks had become weak financially and were unable to meet the challenges of the competitive environment.  Over.regulation and over. the narasimham committee (1991) recommended that  Each bank should be free and autonomous.  The quality of control over the banking system between RBI and the banking division of ministry and finance should end forthwith and RBI should be the primary agency for regulation. Every bank should go for a radical change in working technology and culture. The public sector banks has been used and abused by the 99 .administration should be avoided and greater reliance should be placed on internal audit and internal inspection.In order to tone up the working of the banks. several distortions had crept into the banking system over the years. So despite impressive quantitative achievements in resources mobilization and in extending the credit reach.  The various guidelines issued by government or RBI in regard to internal administration should be examined in the context of the independence and autonomy of bank.

Narasimham as chairman of one more committee.  Need For Stronger Banking System. especially in the context of capital account convertibility (CAC) which would involve large amount of inflow and outflow of capital and consequent complications for exchange rate management and domestic liquidity. The narasimham committee on banking sector reforms submitted this report to the government in April 1998. recasting of banks boards etc. The committee was asked to “review the progress of banking sector reforms to the date and chart a programme on financial sector reforms necessary to strengthen India’s financial system and make it internationally competitive”. some important findings are as follows-. bank mergers. The recommendations of narasimham committee(1991) has been revolutionary in many aspects and were opposed by trade unions and even by finance ministry of central government and of course. 99 . the condition of global sized banks. The government however accepted many of the recommendations of the narasimham committee (1991). M. the progressive economist who generally championed the public sector banks. Narasimham Committee on Banking Sector Reforms (1998) The finance ministry of government of India appointed Mr. This report covers the entire issues relating to capital adequacy. the officials and the bank employees and the trade unions.government. this time it was called as the committee on banking sector reforms.The narasimham committee has made out a stronger banking system in country. To handle this India would need a strong resilient banking and financial system.

and in some cases. Accordingly.  Capital Adequacy Ratio.” The committee has suggested the setting up of small local banks which should be confined to states or clusters of districts in order to serve local trade. there will still be a need for a large number of local banks. Experiment with the Concept of Narrow Banking.The narasimham committee has also suggested that the government should consider raising the prescribed capital adequacy ratio to improve the inherent strength of banks and to improve their risk taking ability. the committee has recommended a review of functions of banks boards with a view to make them responsible for enhancing shareholder value through formulation of corporate strategy.  Public Ownership and Real Autonomy. 99 . They suggested the concept of narrow banking to rehabilitate such weak banks. small industry etc. as high as 20% of their total assets.The narasimham committee has argued that “While two or three banks with an international orientation and 8 to 10 of larger banks should take care of their needs of the large and medium corporate sector ad larger of the small enterprises.The narasimham committee is seriously concerned with the rehabilitation of weak public sector banks which have accumulated a high percentage of non-paying assets (NPA).The narasimham committee has argued that government ownership and management of banks does not enhance autonomy and flexibility in working of public sector banks.  Small Local Banks.

as far as all other issues are concerned” 99 . Review and Updating Banking Laws. State Bank of act etc so as to bring them on same line of current banking needs. Really speaking there was no purpose of setting up the second narasimham committee on banking sector reforms even before a decade has elapsed for the full implementation of the recommendations of First committee.The narasimham committee has suggested the urgent need to review and amended the provisions of RBI Act. As one critics has commented: “ barring this is. Banking Regulation Act. a stray recommendation here or there like the categorical rejection of the merger of weak with strong banks and the suggestion to try out narrow banking.

99 .

under one roof. As per the World Bank. Merchant Banking. Credit Cards. investment banking and various other activities including insurance. etc. Auto Loans." In a nutshell. insurance etc. 99 . Corporates can get loans and avail of other handy services. Retail loans.Universal Banking includes not only services related to savings and loans but also investments. This is most common in European countries." In Universal Banking. provide many different services. large banks operate extensive network of branches. while individuals can bank and borrow. 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. Universal banking is a combination of commercial banking. If specialized banking is the one end universal banking is the other. However in practice the term 'universal banks' refers to those banks that offer a wide range of financial services. Housing Finance. It is a multipurpose and multi-functional financial supermarket providing both 'Banking and Financial Services' through a single window. a Universal Banking is a superstore for financial products. beyond commercial banking and investment banking. 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. Factoring. Insurance. It includes not only services related to savings and loans but also investment.

Consequent to the liberalisation and deregulation of financial sector. Now RBI has asked FIs. its proposed policy for universal banking. Reserve Bank of India constituted on December 8. while the commercial banks in general. when ICICI gave a presentation to RBI to discuss the time frame and possible options for transforming itself into an universal bank. FIs need to formulate a road map for the transition path and strategy for 99 . 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. trade and agriculture.H. confined themselves to the core banking functions of accepting deposits and providing working capital finance to industry. The issue of universal banking resurfaced in Year 2000. 1997. by and large. including a case-bycase approach towards allowing domestic financial institutions to become universal banks. Khan to bring about greater clarity in the respective roles of banks and financial institutions for greater harmonisation of facilities and obligations . a Working Group under the Chairmanship of Shri S. which are interested to convert itself into a universal bank. there has been blurring of distinction between the commercial banking and investment banking.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. to submit their plans for transition to a universal bank for consideration and further discussions. Reserve Bank of India also spelt out to Parliamentary Standing Committee on Finance.

They can avail the options to involve in deposit banking and short term lending as well. In this context. the DFIs have been burdened with serious mismatches between their assets and liabilities of the balance sheet. They have build up expertise in Merchant Banking and Project Evaluation. saddled with obligations to fund long gestation projects. the Narsimham Committee II had suggested DFIs should convert into banks or Non-Banking Finance Companies. So. 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. So. The plan should specifically provide for full compliance with prudential norms as applicable to banks over the proposed period. 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. DFIs were set up with the objective of taking care of the investment needs of industries.smooth conversion into an universal bank over a specified time frame. the emergence of Universal Banking was the solution for the problem of banking sector 99 .

Trade Finance. Treasury Operations. 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. are at the hand office or a designated branch. Retail Banking and Trade finance operations are conducted at the branch level while the wholesale banking operations.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. 99 . Retail Banking: • • • • • • Deposits Loans. which cover treasury operations.

holding. If the amount is not paid full by the end of the period. They insure. buying. The banks can also act as an agent of the Government or local authority. guarantee. Foreign exchange Acquiring. 99 . etc.• Drawing. bill of lading and other securities Treasury Operations: • • • Buying and selling of bullion. promissory notes. drafts. the bank provides a whole lot of other services like investment counseling for individuals. Apart from the above-mentioned functions of the bank. short-term funds management and portfolio management for individuals and companies. selling. discounting. Purchasing and selling of bonds and securities on behalf of constituents. debentures. It undertakes the inward and outward remittances with reference to foreign exchange and collection of varied types for the Government. underwrite. etc. accepting. participate in managing and carrying out issue of shares. underwriting and dealing in shares. debentures. 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 line-money made available by the card issuer (bank) and gives one a to pay. one credit grace period is charged interest. collecting of bills of exchange.

it dials the acquiring bank system – either Master Card or Visa that validates the PIN and finds out from the issuing bank 99 . To get a debit card along with a Personal Identification Number (PIN). Credit cards are joining popularity for online payments. such as a signature and a small photo. on which he is billed. It authorizes the holder to change goods or services to his account. The bank receives the bills from the merchants and pays on behalf of the card holder. he enters this number on the shop’s PIN pad.A credit card is nothing but a very small card containing a means of identification. India at present has about 3 million credit cards in circulation. by debiting an exact amount of purchase from the card. Credit cards have found wide spread acceptance in the ‘metros’ and big cities. When he makes a purchase. These bills are assembled in the bank and the amount is paid to the bank by the card holder totally or by installments. When the card is swiped through the electronic terminal. Debit Cards quickly debit or subtract money from one’s savings account. 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. The card holder need not have to carry money/cash with him when he travels or goes for purchasing. The major players in the Credit Card market are the foreign banks and some big public sector banks like SBI and Bank of Baroda. The bank charges the customer a small amount for these services. 2) Debit Cards: Debit Card is a “prepaid” or “pay now” card with some stored value. or if one were taking out cash.

a person can’t operate it in case the telephone lines are down. for the debit card to work. Also. Debit Card holder need not carry a bulky checkbook or large sums of cash when he/she goes at for shopping. 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. It provides the customers with the ability to withdraw or deposit funds. There is no grace period for a debit card purchase. So. Some debit cards have monthly or per transaction fees. 3) Automatic Teller Machine: The introduction of ATM’s has given the customers the facility of round the clock banking. 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. check account balances. The ATM’s are used by banks for making the customers dealing easier. The customer never overspread because the amount spent is debited immediately from the customers account. transfer funds and check statement 99 . It provides exchange services. ATM’s are currently becoming popular in India that enables the customer to withdraw their money 24 hours a day and 365 days. so they are often easier than credit cards to obtain.whether to accept or decline the transaction. The major limitation of Debit Card is that currently only some 3000-4000 shops country wide accepts it. 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. one must already have the money in the account to cover the transaction.

Relieves bank employees to focus an more analytical and innovative work. It increases existing business and generates new business. To receive cash. Advantages of ATM’s: To the Customers • • • • • ATM’s provide 24 hrs. Alternative to new branches and to reduce operating expenses. To view account information. 7 days and 365 days a year service.information. To order cash. Service is quick and efficient Privacy in transaction Wider flexibility in place and time of withdrawals. Crowding at bank counters considerably reduced. • • • • To transfer money to and from accounts. 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. It allows the customers. The advantages of ATM’s are many. 99 ..

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”. Railway Stations. for obtaining cash. Over the past year up to 44 banks in Mumbai. Big Business arcades. Grind lays bank and now by many private and public sector banks in India like ICICI Bank. introduced by the Indian Bank 4) E-Cheaques: The e-cheaques consists five primary facts. Electronic version of cheaques are issued. the merchant. The ATM services provided first by the foreign banks like Citibank.• Increased market penetration. The payer issue a digital cheaques to the payee ant the entire transactions are done through internet. They are the consumers. have became a part of “SWADHAN” a system of shared payments networks. etc. SBI. 99 . HDFC Bank. consumer’s bank the merchant’s bank and the e-mint and the clearing process. ATM’s can be installed anywhere like Airports. received and processed. This cheaquring system uses the network services to issue and process payment that emulates real world chaquing. Petrol Pumps. Vashi and Thane. Hence. UTI Bank etc. it gives easy access to the customers. 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 ICICI has launched ATM Services to its customers in all the Metropolitan Cities in India. markets.

The e-chequing is a great boon to big corporate as well as small retailers. In this system the sender and the receiver of funds may be located in different cities and may even bank with different banks. transferring value and managing cash flows. 1996. • • • • The merchant validates the e-cheque with its bank for payment authorisation. The clearing house jointly works with the consumer’s bank clears the cheque and transfers the money to the merchant’s banks. 99 . 5) Electronic Funds Transfer (EFT): Many modern banks have computerised their cheque handling process with computer networks and other electronic equipments. The merchant electronically forwards the e-cheque to its bank. This system facilitates speedier transfer of funds electronically from any branch to any other branch. The scheme has been in operation since February 7. Most major banks accept e-cheques. The merchant’s bank forwards the e-cheque to the clearing house for cashing. These banks are dispensing with the use of paper cheques. The consumer’s bank updates the consumer’s account with the withdrawal information. • • The merchant’s bank updates the merchant’s account. Funds transfer within the same city is also permitted. The system called electronic fund transfer (EFT) automatically transfers money from one account to another. in India. Thus this system offers secure means of collecting payments.• The consumer selects the goods and purchases them by sending an e-cheque to the merchant.

Information with regard to foreign exchange rates. • Facility to stop payment on request. Mobile Banking: A new revolution in the realm of e-banking is the emergence of mobile banking. The payment office directs the computer to credit an employee’s account with the person’s pay. These are the computer centers that handle the bills meant for deposits and the bills meant for payment. And other similar services. 6) Telebanking: Telebanking refers to banking on phone services. • • • • • 7) Information on the current interest rates. One can easily know about the cheque status. Request for a DD or pay order.The other important type of facility in the EFT system is automated clearing houses. giving everybody with a mobile phone access to real-time banking services. D-Mat Account related services. On-line banking is now moving to the mobile world. But there is much more to mobile 99 . 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. • To get a particular work done through the bank.. the users may leave his instructions in the form of message with bank. In big companies pay is not disbursed by issued cheques or issuing cash. regardless of their location. Telebanking is extensively user friendly and effective in nature.

customer can access account details on mobile using the Short Messaging System (SMS) technology6 where select data is pushed to the mobile device. Sky Cell. The potential of mobile banking is limitless and is expected to be a big success. This is a very flexible way of transacting banking business.banking from just on-lie banking. 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. According to this system. any inquiry or transaction is processed online without any reference to the branch (anywhere banking) at any time. to withdraw cash or deposits a cheque or request a statement of accounts. Orange. It provides a new way to pick up information and interact with the banks to carry out the relevant banking business. Already ICICI and HDFC banks have tied up cellular service provides such as Airtel. The wireless application protocol (WAP) technology. As indicated by McKinsey 99 . In internet banking. Booking and paying for travel and even tickets is also expected to be a growth area. etc. With internet banking is now no longer confirmed to the branches where one has to approach the branch in person. which will allow user to surf the net on their mobiles to access anything and everything. 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.

Attract new customers. and other businesses use on automatic payment system with bills paid through direct withdrawal from a bank account. credit cards and coins. more than a dollar per person. including personal loans and mortgages Financial Transaction on the Internet: Electronic Cash: Companies are developing electronic replicas of all existing payment system: cash. since they can conduct many banking transaction 24 hours a day. effort and money. Improve customer access. Easy online application for all accounts. presently traditional banking costs the banks. saving time. Automatic Payments: Utility companies. 99 . • Increase convenience for customers. ATM banking costs 27 cents and internet banking costs below 4 cents approximately. cheque. • • • • Increase customer loyalty. Direct Deposits: Earnings (or Government payments) automatically deposited into bank accounts. loans payments. 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. ICICI bank was the first one to offer Internet Banking in India.Quarterly research.

99 . and apply for loans on the Internet. In short. How to Operate DEMAT ACCOUNT? One needs to open a Demat Account with any of the branches of the bank. to trade on shares it has become compulsory to have a share demat account and all trades take place through demat. Point of Sale transactions: Acceptance of ATM/Cheque at retail stores and restaurants for payment of goods and services. 9) Demat: Demat is short for de-materialisation of shares. transit fares. library fees and school lunches. pay bills.Stored Value Cards: Prepaid cards for telephone service. Cyber Banking: It refers to banking through online services. 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. As on date. laundry service. by filling the demat request form one can handover the securities. After opening an account with any bank. transfer funds. This system has made functioning of the stock Market very smooth and efficient. highway tolls. Banks with web site “Cyber” branches allowed customers to check balances. 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.

he has to inform his broker about his Depository Account Number so that the shares bought by him are credited in to his account. K V Kamath He is seriously exploring merger options with the aim of becoming a Universal Banking group. Any buying or selling of shares is done via electronic transfers. 1) If the investor wants to sell his shares. The DP will debit hi s account with the number of shares sold by him. he has to place an order with his broker and give a “Delivery Instruction” to his DP (Depository Participant). SOME COMMENTS BY EXPERTS According to ICICI CEO Mr. 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. 2) If one wants to buy shares. The discussion paper on harmonizing the role and operations of 99 . RBI is willing to consider the transformation of DFI’s into banks only 5 -year hence. Both the mergers have enabled ICICI to become bigger and better. And he already has two mergers .There is no physical movement of share certification any more. 3) Payment for the electronic shares bought or sold is to be made in the same way as in the case of physical securities. 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.with the Shipping Credit & Investment Corporation of India (SCICI) in early 1997 and ITC Classic in December 1997.

in the developed international markets like the US for instance. In this regard. the rating agencies Moody's and Standard and Poor feel that since the security is not realizable. It is also sometimes debated that non-performing assets were due to the fact that policies had changed. Therefore. in order to give transparency to the banking system. 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. one should forget about Universal Banking since it will take a long time for long-term debt market to fully develop in India. the bank can foreclose the loan without any resort to the legal process. However. The Reserve Bank has proposed that banks be given the power to sell the security in case assets become non-performing. an enabling legislation will have to be passed. financial intermediaries should make an enhanced provision for NPA’s. banks have to go through a long drawn legal process before it can sell a security and recover the money from the defaulting borrower. It has been suggested that in case a loan is rescheduled. By the time a decision comes through the value of the asset has depreciated and not much cash is recovered. for banks and financial institutions to foreclose without resorting to the courts or the debt recovery tribunal. the financial intermediaries opined that time should be given before an asset is classified as NPA’s. The biggest stumbling block to developing such a market is RBI's own s loth in revamping its Public Debt Offices (PDO's) .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. However. 99 . Regarding the realisability of the security. The steel industry is a case in point. Currently. it must be shown separately.

DFI’s have to become what is recognized in the west as wholesale banks. they should be NBFCs would be wrong. Narasimham committee recommended merging strong banks together. However. Indeed. Former Governor of RBI In the long run. an allencompassing supervisory should not be created. etc.At present. REI's discussion paper on harmonizing the role and 99 . is increasingly becoming a global trend. there should be a degree of statutory pre-emption to enable DFI’s to access resources at lower rate of interest. The banking system in India has over 67000 branches today. there should be a level playing field between different players in the financial market. and Khan suggests merger between banks and DFI’s. at least to meet the needs of infrastructural finance. and it is questioned whether the development financial institutions will set up a similar network. Karur Vysya Bank (KVB) It is a historical fact that monolithic organizations. rather than strong with weak. "Big may not always be beautiful". like a super-bank. there is no formal forum for interaction between DFI’s and banks despite the emerging overlap in their functional areas. Further. According to Mr. A D Navaneethan. There is also need to ensure access for DFI’s to more resources in the national and international capital markets. MD & CEO. Bu t neither committee provided any details or tackles reducing labour or closing inefficient branches. The issue of Universal Banking-as exists in Germany. S V Venkataramanan. cannot care for the customers. it should be more on functional lines. SEBI. There is continuing need for maintaining separate supervisory organizations for different functions like IRA. But at the same time. According to Mr. all banks must be allowed to grow such that instead of a geographical based tiered system.To assist that. Further.

000 crores. SBI has over 8. universal banks would mean harmonizing the roles of development financial institutions and banks-which means harmonizing long-term and short-term debt. The challenge for banks are to deal with new types of risks-market risk.. there must be a mix of long and short term liabilities and assets.operations of banks and DFI’s should not remain only on paper but should promote a genuine exchange of views. State Bank of India (SBI) and the largest financial institution of India. it means a combination of commercial banks and investment banks. 179. Ideally. The numbers are simply enormous. however. Special Secretary (Banking) It is not prudent for banks and development financial institutions to keep all their eggs in one basket. viz. C M Vasudev. Therefore. 250. Chairman – IDBI Former State Bank of India chairman M S Verma has suggested a merger of the largest bank. they will have to deal with greater risks. which essentially means bringing together debt and equity type of financing. In the global context. In the Indian context.673 crores. According to Mr.900 branches and an asset base of Rs. G P Gupta. By merely adding up the two balance sheets. credits risk. But the more politically connected bankers are of the view that the finance ministry is not in favor of such a deal for the simple reason that it will create an institution "which will be too big". In such a case. the resulting entity will have an asset base of over Rs.either short term or long term. there is a need to adopt a risk-mitigation mechanism. Industrial Development Bank of India (IDBI) thereby making the India's biggest universal bank. viz. According to Mr. 99 . while banks will have an opportunity to increase their profitability. etc.

and so would its lending profile. Chairman . Further. A merger. working capital requirements of a company. Further. In the specific issue of a hypothetical SBI-IDBI merger.IDBI says. The mega entity could also have the advantage of spreading its lending across various time baskets and industry groups.However. it is simply to take advantage of deposit 99 . with a higher equity base. both entities are in customer businesses. without a clear idea of objectives. Mr. G P Gupta. Whereas IDBI has skills in project appraisal. the merged entity would not have to spend any more resources to reequipping itself in learning new skills since SBI has skills in assessing short-term. Second. The new brand may not be as effective as the old brands. then product distribution channels have to be strengthened and revamped. Additionally. if the purpose of the merger is to build a more responsive and market sawy entity. whether the merged entity would be just SBI or IDBI or SBI-IDBI. There may be brand confusion. could lead to customer disorientation and significant loss of business.. Further. But there are flip sides of this issue also. all the staff cuts in mega-bank mergers in the recent past are proof that they are cutting costs not by rationalizing products but by cutting staff strength.e. If some of the DFI’s go for the conversion into commercial banks or setting up banking subsidiaries. the merged entity could have the benefit in the sense that the liability profile would span the entire horizon (short-to-long term). the proposed merged entity will have to return higher net profits if only to maintain its return on capital. which will reduce stress in the system. i.

their NPA’s have mounted. There are few takers in the market today for the NPA’s figures being put out by some of the DFI’s. the banking system has developed a strong fear of the prospect. But after the experience PNB & SBI have had with mergers foisted on them by REI. According to Mr. V H Ramakrishna. Both Narasimham (II) and KWG had viewed mergers of DFI’s with banks Favorably. The problem is so big that mergers with banks are infeasible without recapitalization of DFI’s by the government on a scale that is hard to contemplate in the present fiscal situation. banks can acquire both term funds and expertise by simply merging with the DFI’s. T T Ram Mohan. 99 . The DFI’s were not subject to such a clean up and as a result.Bank of India Since it will not be possible for DFI’s to establish branch networks in the immediate future. According to Mr.One of the best things to have happened to commercial banks post liberalization is the cleaning up of their balance sheets through re-capitalization. they should be allowed to open accounts for clients in existing branches and gradually expand. Faculty of IIM – Ahmadabad Narasimham (II) committee had suggested that weak banks should be recapitalized and then merged with strong banks. In any case. DFI’s should be subject to reserve requirements on an incremental basis. General Manager .resources. Such mergers make sense from the standpoint of the DFI’s too because it's hard to see how they can ever compete with the banks' network of branches by building from scratch. which are available mainly to commercial banks and to a very limited extent to the DFI’s. This will enable first charge on the cash flow of the account holders. Further.

It will become a wholesale bank catering to industry and will offer all products so as to have a better asset-liability match. P V Narasimham. causing substantial duplication. it would be essential to separate the regulatory and central bank functions of REI. IFCI proposes to convert itself into a bank to access low-cost deposits. the Insurance Regulatory Authority of India.Internationally. and the comptroller and auditor-general. That will be IFCI's source of cheap funds. development banks are allowed to open operating accounts of customers and issue letters of credit. Universal Banking coupled with SWOT The solution of Universal Banking was having many factors to deal with which further categorized under Strengths. The Reserve Bank has permitted us to achieve this in 5 years. The single body option enjoys greater preference. IFCI proposes to have branches only in major centers. They have to keep a cash float. the operations of a universal bank would be subject to the regimen of REI. Evidently. it would require all existing regulators to be represented in a super-regulator. Further. go into factoring and even cash management for companies. The debate on establishing an appropriate regulating body essentially revolves around the choice between a multiple body and a single body. It will rely more on the current account balances of companies. Chairman & Managing Director – IFCI Within 3 to 4 years. the SEBI. Weaknesses. IFCI will transform into a new type of entity and not remain only in the development finance mode. IFCI will access trade finance. Under a multiple system. According to Mr. Opportunities and Threats Strengths: 99 .

Automatically. So. diversifiable and non diversifiable risk analysis. a bank will get the benefit of being involved in Research. which it can use to pursue other activities with the same client. it entails less cost in performing all the functions by one entity instead of separate bodies. higher output and better products. Economies Of Scale The main advantage of Universal Banking is that it results in greater economic efficiency in the form of lower cost. It means a bank can reduce average costs and thereby improve spreads if it expands its scale of operations and diversifying activities. In this way a bank can reach the remotest client without having to take recourse ton an agent.  Easy marketing on the foundation a of Brand name A bank has an existing network of branches. risk and returns associated with portfolios of Mutual Funds. A data collection about the market trends.  Profitable Diversions By diversifying the activities.  Resource Utilization A bank possesses the information on the risk characteristics of the clients. Various Reserve Banks Committees and reports in favor of Universal Banking. 99 . etc are useful for other clients and information seekers. 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. the bank can use its existing expertise in one type of financial service in providing other types. is that it enables banks to exploit economies of scale and scope.

 One stop shopping The idea of 'one stop shopping' saves a lot of transaction costs and increases the speed of economic activities. becoming a bank may not make a big difference. Unlike banks. Project finance and Infrastructure Finance are generally long gestation projects and would require DFIs to borrow long term. The biggest one is overcoming the differences in regulatory requirements for a bank and DFI. Weaknesses:  Grey area of Universal Bank The path of Universal Banking for DFIs is strewn with obstacles. 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. since the lending bank is in a better position to monitor the firm's activities. acts as a signal for other investors on to the health of the firm. Therefore.  NPA problem remained intact 99 . A bank's equity holding in a borrower firm. the transformation into a bank may not be of great assistance in lending long-term.  No expertise in long term lending In the case of traditional project finance an area where DFIs tread carefully. DFIs are not required to keep a portion of their deposits as cash reserves.

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. So. the prospect of the business. due to the expansion in activities banks will fail to make thorough study of the actual need of the party concerned. . but the IDBI has got worst hit of NPAs. ICICI suffered the least in this section. the quality of the management. Most of the NPAs came out of loans to commodity sectors. because of the possibility of turning all the strengths of the Universal Banking into weaknesses. a sharp change in operating environment and poor appraisals by DFIs combined to destroy the viability of some projects. its track record.g. The Finance Ministry is also empathetic towards it. income level and profitability there is a danger of 'Price Distortion'. instead of improving the situation Universal Banking may worsen the situation. There is a threat to the overall quality of the products of the bank. 99 . textiles. such as steel. But there will be big empires which may put the economy in a problem.the strength of economies of scale may turn into the degradation of qualities of bank products. For the DFIs and Universal Banking or installation of cuttingedge-technology in operations are unlikely to improve the situation concerning NPAs. chemicals. etc. (e. It might take place by manipulating interests of the bank for the self interest motive instead of social interest. Universal Banks will be the largest banks. by their asset base. the improper use of DFI funds by project promoters.The most serious problem of DFIs have had to encounter is bad loans or Non Performing Assets (NPA). due to over expansion. etc. in which it is engaged.

profits. To increase profits quickly banks may go in for riskier business. the Indian banks need to acquire a lot of mass in their volume of operations. which lead to lower cost funds. as the wide range of financial services in addition to the Commercial banking functions like Mutual 99 .If the banks are not prudent enough. which could lead to a full in asset quality. the focus will be on profits rather than on the size of balance sheet. In order to enter at least the top 100 segment in the world. Pure routine banking operations alone cannot take the Indian banks into the league of the Top 100 banks in the world. Fee based incomes will be more attractive than mobilizing deposits. Opportunities:  To increase efficiency and productivity Liberalization offers opportunities to banks. Disintermediation and securitization could further affect the business of banks. banks will need to improve their efficiency and productivity.  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. Here is the real need of universal banking. deposit rates could shoot up and thus affect profits. Now. It also ranks II in the list of Forbes 2000 among all Indian companies) as the asset base sans capital of most of the top 10 banks in the world are much more than the asset base and capital of the entire Indian banking sector. To face the increased competition. assets and market value. which will lead to new products and better services.

provision stores. but because banks do not want to lend these entrepreneurs. banking systems worldwide have been going through a 99 . personal loans. It means with the help of retail and personal banking services Universal Banking can reach this stratum easily. Because the small businesses in the city. petty shops and tea stalls. IMPACT OF UNIVERSAL BANKING Since the early 1990s. etc. credit cards. a Chennai based association. will help in enhancing overall profitability. 'Though having a large number of branch network in rural areas and urban areas.5% goes to pawn brokers. Merchant banking. Another 6. The respondents were businesses engaged in activities such as fruits and vegetables vendors. 97% of them do not depend the banking system for funds. Not because they do not want credit from banking sources.Funds. has found out that. retail. laundry services. etc.  To eradicate the 'Financial Apartheid' A recent study on the informal sector conducted by Scientific Research Association for Economics (SRA). It is a situation of Financial Apartheid in the informal sector. 34% of that goes to money lenders for funds. the lowest strata of the society is still out of the purview of banking services. Factoring. Insurance.

the focus is on Development Financial Institutions (DFIs). amalgamations and acquisitions have been undertaken on a large scale in order to gain size and to focus more sharply on competitive strengths. hire-purchase activities through separate subsidiaries. factoring. securitization. The Reserve Bank’s 99 . This consolidation has produced financial conglomerates that are expected to maximize economies of scale and scope by ‘bundling’ the production of financial services. In the recent period. By the mid-1990s. The general trend has been towards downstream universal banking where banks have undertaken traditionally non-banking activities such as investment banking. The global experience can be segregated into broadly three models. investment banking. Mergers. In the US type model. and particularly. there is a holding company structure and separately capitalized subsidiaries. certain types of activities are required to be carried out by separate subsidiaries. In India. which have been allowed to set up banking subsidiaries and to enter the insurance business along with banks. There is the Swedish or Hong Kong type model in which the banking corporate engages in in-house activities associated with banking. all restrictions on project financing were removed and banks were allowed to undertake several activities in-house. mortgage financing. In Germany and the UK. the first impulses for a more diversified financial intermediation were witnessed in the 1980s and 1990s when banks were allowed to undertake leasing. and this conversion was endorsed by the Khan Working Group (1998). insurance. are also on the increase. DFIs were also allowed to undertake working capital financing and to raise short-term funds within limits. insurance. Upstream linkages. where non-banks undertake banking business.rapid transformation. It was the Narasimham Committee II Report (1998) which suggested that the DFIs should convert themselves into banks or non-bank financial companies. mutual funds.

Accordingly. but it also emphasized the need to take into account factors such as the status of reforms. preserve the safety of public deposits.Discussion Paper (1999) and the feedback thereon indicated the desirability of universal banking from the point of view of efficiency of resource use. 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. Lets discuss the impact of universal banking on the performance of State bank of India. and a viable transition path while moving in the desired direction. ensure healthy competition. improve efficiency in financial intermediation. the movement towards universal banking should entrench stability of the financial system. and asset liability mismatches.Following are the some performance indicator of State bank of India 99 . non-performing assets. 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. the mid-term review of monetary and credit policy. From the point of view of the regulatory framework. and impart transparent and equitable regulation. the state of preparedness of the institutions. subject to normal prudential norms applicable to banks. The need to proceed with planning and foresight is necessary for several reasons. State bank of India transform it into an universal bank in 2004. 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. etc.

Capital adequacy ratio.it provide cushioning effect to the bank. It improve the risk taking ability of the bank. Following graph shows the capital adequacy ratio of the 5 financial years of the State bank of India GRAPH-1 Interpretation 99 .

37 percent in FY 2008-09(14.it shows the average amount of business which is done by employee of State bank of india GRAPH-2 Interpretation 99 .Capital adequacy ratio of the Sate bank of India is increased by 14.45) Business per employee.24) as compared to FY 2004-05(12.

GRAPH-3 Interpretation 99 .The of business per employee is increased by 23 percent in 2005-06. 22 percent in 2008-09. 19 percent in 2006-07. 27. If compare the 2008-09 to 2004-05 then it is increased by 128.the followingbgraph represent the amount of profit on each employee.73 percent inFY 2008-09 as compared to FY 200405 Profit per employee.73 percent in 2007-08.

Profit per employee is increased by 4. 27. If compare the 2008-09 to 2004-05 then it is increased by 128.32 percent in FY 2008-09 as compared to FY 2004-05 Return on Assets Return on assets shows the ratio of the return on assets.16 percent in 2008-09. 9. 57.46 percent in 2005-06. GRAPH-4 Interpretation 99 .25 percent in 2006-07.32 percent in 2007-08.

97 percent in 2008-09. decreased by 5.10 percent in 2005-06. but in 2007-08 it us increased by 20.ROA is decreased by 10. If compare the 2008-09 to 2004-05 then it is increased by 5.it shows the percentage of NPA to assets GRAPH-5 99 .23 percent it is also increased by 2.61 percent in 2006-07.05 percent in FY 2008-09 as compared to FY 2004-05 Net NPA ratio.

If compare the 2008-09 to 2004-05 then it is decreased by 33.NET NPA ratio is decreased by 29.1.  Reduction of risk by diversification.  Flexibility in adapting to the fast changing environment.  Better and innovative products. decreased by 17.2 LIMITATIONS OF UNIVERSAL BANKING 99 .05 percent in 2005-06. i.  Access to international financial markets. larger scale can avoid the wasteful duplication of marketing.58 percent in FY 2008-09 as compared to FY 2004-05 ADVANTAGES OF UNIVERSAL BANKING  Economies of scale from lower operational costs.  Higher output due to specialization..e.12 percent in 2008-09. 1. research and development and information gathering efforts. but in 2007-08 it is increased by 14.  By offering a broader set of financial products than what a specialized bank provides.02 percent in 2006-07.10 percent it is decreased by 1. 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.

 Universal banks could use such practices as limit pricing or predatory pricing to prevent smaller specialized banks from serving the market. which can have significant undesirable consequences for economic efficiency. Universal Banking could subject the economy to the increased systemic risk. the government would be forced to step in to save the bank.  Combining commercial and investment banking gives rise to conflict of interests. universal banks may gain monopoly power in the market. 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. The failure of a larger institution could have serious ramifications for the entire system in that if one universal bank were to collapse.  There may be conflict between the investment banker's promotional role and the commercial banker's obligation to provide disinterested advice . Thus. In such cases.  Vulnerable to high risks due to investment banking activities coupled with focus on commercial banking activities.  By virtue of their sheer size. 99 .  Universal banks may tend to work primarily with large established customers and ignore or discourage smaller and newly established businesses. This argument mainly stems from the economies of scale and scope. it could lead to a systemic financial crisis.  Universal bankers may be tempted to take excessive risks.

 Banks may deploy their own assets in securities with consequent risk to commercial and savings deposits. AREA OF RESEARCH The banking industry in India has undergone a sea of change ever since the economic form process was initiated. price. The area of this research is finance. There is no doubt that the banking industry continues to play a cardinal role in spread heading the economic activity of the country.  A commercial bank's financial interest in the ownership. SCOPE OF RESEARCH 99 . 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. From an industry almost monopolized by the nationalized bank till the 90's it has now emerged as a conglomerate of nationalized. Banking Industry which is basically my concern industry around which my project has to be revolved is really a very complex industry.  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. And to work for this was really a complex and hectic task. private and foreign banks setting new trends in the way banking is carried out.

• To come out with valuable suggestions for improvement 99 .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.

RESEARCH METHODOLOGY Research design: Exploratory research • Methods of data collection: The most desirable approach with regards to the selection of the research methodology depends on the nature of the particular problem. As for as method of data collection is considered secondary data sources have been used • SECONDRY DATA: 99 . time and resources available along with the desired level of accuracy.

Institutions like ICICI. magazines. If the newer players can do that then why can’t the bigger players like the Financial Institutions (FIs) try their hands on it? Here comes the concept of universal banking. The spinoffs For savvy institutions. insurance and much else (see chart). They are also waking up to the sheer potential for growth: life insurance premium to GDP in India is estimated at less than 2%. the appeal of becoming a universal bank is now Irresistible. merits and related issues. INTRODUCTION TO RESEARCH WORK This report is an attempt to study the Impact of universal banking on the operations of banks. its emergence. and more than 70% of mutual fund collections are only from the major 99 .Secondary data is collected from websites . ICICI. Ever since the financial sector reforms were introduced in early 90’s the banking sector saw the emergence of new generation private sector banks. These banks gained at most popularity as they have technology edge and better business models when compared to public sector banks and the most important thing is they are able to attract more volumes simply because they meet their customers requirements under one roof. and entities like SBI. SBI and HDFC have realised that it helps to spread risks among different segments. Business boom in universal banks. HDFC and Kotak Mahindra have all become one-stop departmental stores for Mutual funds. retail loans are less than 3% of GDP. journals and news paper. loans.

for example. A retail customer would have been quite content with a bank deposit about 20 years ago. mutual funds. This is also fueling the growth of these banks. thereby offering different services to their customers under one roof. A couple of recent mergers clearly send a signal that consolidation is inevitable. changing consumer preferences has clearly been the biggest driver of universal banking in India. mortgage financing. DEMAT services. mutual funds. Nedungadi Bank’s merger with Punjab 99 . equity. The merger between ICICI Bank and Bank of Madura. insurance.metros. Several banks are now foraying into areas such as credit cards. pension products and insurance. As the competition increases. insurance. etc. securitization. investment banking. A bank either has to offer it all to him. The greater cost competitiveness of private banks will also force PSBs with inefficient operations and high costs to either close those branches of merge with other banks to bring down the costs. or lose him. Signs of consolidation have already begun to emerge. Besides. With the highly fragmented nature of the sector. In fact. The high profile merger of Times Bank with HDFC Bank five years ago marked the arrival of Mergers and Acquisitions (M&A) in the banking sector in the country. Today. it will make consolidation in the sector inevitable. many banks have begun to migrate to the universal Banking model. pension products and insurance— leading banks see sense in becoming one-stop shops—so they can capture the consumer completely. with more and more middle class customers wanting to spread their wealth across banking products. . mutual funds. it is not unlikely that many banks especially PSBs will find some of their branches unproductive and unsustainable. which has opened up new avenues of growth for them. Today he spreads his wealth around: equities.

some groups like the HDFC (commercial banking and insurance joint venture with Standard Assurance). have already started diversifying from their traditional activities through setting up subsidiaries and joint ventures. and more recently. Even then. HSBC Bank. the Life Insurance Corporation increased its stakes in Corporation Bank and is planning to sell insurance to the customers of the Bank.National Bank. like IIBI. particularly the PSBs. especially government-owned ones. To acquire these capabilities Indian banks will have to look beyond organic growth.. size and scale to act local and seek new markets. He was recently quoted saying. the merger of the beleaguered Global Trust Bank with the government-owned Oriental Bank of Commerce vindicate the argument. ICICI (commercial banking).” This gives enough indication as to what lies in store for the banks. new classes of borrowers. but have to adhere to the statutory liquidity ratio and cash reserve requirements meant for banks. Corporation Bank itself has been planning to set up an insurance subsidiary since a long time. is now talking of turning into a universal 99 . as far as consolidation is concerned. etc. Even a specialized DFI. and economies of scale and size. In a recent move. “Consolidation alone will give banks the muscle. SBI (investment banking) etc. Further as banks in India look forward to expanding their presence outside the country and have a global reach they will be competing with global behemoths like the Citigroup. and private sector players like ICICI Bank have already made their intentions of going global clear. in terms of strong balance sheet. State-owned banks like State Bank of India and Bank of Baroda. Development financial institutions (DFIs) can turn themselves into banks. The Union Finance Minister has also hinted that he is favourable to mergers between banks. Industry experts opine that there may be many more mergers on the cards.

besides increasing transparency and efficiency in the system. In this backdrop. as the banks have pointed out the Act suffers from certain loopholes and. key structural reforms have improved the asset quality. profitability. the Securitization Act that came into vogue two years ago is helping banks clean their balance sheets. besides the traditions risks like credit risk.bank. as compared to 15% in the previous fiscal. Technology: E-banking and mobile-banking services construct customer confidence in the that will increase the business of banks Risk Management: With increasing pace of globalization and easy flow of money across the globe. Many of the PSU Banks have shown improved Capital Adequacy Ratio (CAR) for the fiscal 2002-03 as against the previous fiscal. profitability and capital adequacy ratio of banks. and provisioning (read: Non Performing Assets). needs fine-tuning. From the above description impact of universal banking on the operation of banks are a follows. According to Standard & Poor’s. the progress made on the NPA front too is encouraging. and operational risk. This is an encouraging sign as the Indian banking industry has for long been suffering the chronic problem of NPAs. prominently country risk. Further. Deregulation has enabled banks in India to improve their financial health in terms of capital adequacy. However. though it needs to be further improved. banks 99 . Improved financial health The ongoing reforms process has seen several major positive changes for the Indian banking sector. For instance. only eight PSBs have shown NPAs of more than 5% for the fiscal 2003. asset quality. However. banks in the country will be exposed to several new kinds of risk. therefore.

International Best Practices: If the banks in the country have to compete with international banks. and improve their corporate governance practices. and. which are seeing a dilution in government ownership. giving emphasis on acquiring and leveraging technology capabilities to deliver services. reporting and disclosure norms. Factors such as cost competitiveness. domestic banks. they will have to gear up to embrace international best practices and standards in terms of operating. perhaps a global presence will hold key to the success of banks in the future. will come under intense pressure to be more transparent in their operations. and improve disclosure and reporting practices. strong balance sheet. better risk management skills. 99 . Increased integration with the global economy and the fast changing banking environment in the country along with the reform process will be an overwhelming challenge for the banking sector.will be required to strengthen their risk management and surveillance systems and improve their credit assessment and risk management skills. Corporate Governance: With growing emphasis on the part of listed companies worldwide on creating shareholder wealth. Hence these banks will have to gear up to meet the stock market demands.

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LIMITATIONS AND PROBLEMS No company can rely on it finding through any bind og study because the customers and the future is uncertain. This research is based on secondary data This is not an exhaustive study some import conclusions might have escaped my observation 99 . Therefore organization has to develop an eagle’s site grab each and every opportunity existing in the market • • • Time is a limiting factor in any research.

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 The idea of 'one stop shopping' saves a lot of transaction costs and increases the speed of economic activities.FINDINGS  By the admission of foreign investors in Indian banking sector. efficient risk management systems have become essential  The most serious problem of DFIs have had to encounter is bad loans or Non Performing Assets (NPA). which can have significant undesirable consequences for economic efficiency. universal banks may gain monopoly power in the market. the competition and the service value also started to increase. 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  By virtue of their sheer size. It is beneficial for the bank as well as customers.  By offering a broader set of financial products than what a specialized bank provides. For the DFIs and Universal Banking or installation of 99 .  With the increasing degree of deregulation and exposure of banks to various types of risks.

cutting-edge-technology in operations are unlikely to improve the situation concerning NPAs. 99 .

They suggested the concept of narrow banking to rehabilitate such weak banks. 99 . 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).SUGGESTIONS AND RECOMMENDATIONS  There is need to review and amended the provisions of RBI Act. and in some cases. as high as 20% of their total assets.

globalisation and automation in the banking industry. universal banking sector as a whole is facing a lot of competition ever since financial sector reforms were started in the country. 99 . This requires product development and differentiation. Walk-in business is a thing of past and banks are now on their toes to capture business. prudent pricing. marketing. There is a need for constant innovation in universal banking. are now competing for increasing their business. Banks therefore. micro-planning.CONCLUSION The banking scenario has changed drastically. The changes which have taken place in the last ten years are more than the changes took place in last fifty years because of the institutionalisation. liberalisation. Universal banking is the fastest growing sector of the banking industry with the key success by attending directly the needs of the end customers is having glorious future in coming years.

effective risk management and asset liability management techniques. home / electronic / mobile banking. in all these customer interest is of chief importance. 99 .customization. technological upgradation. However. Furthermore. The banking sector in India is representing this and I do hope they would continue to succeed in this traded path. the kind of technology used and the efficiency of operations would provide the much needed competitive edge for success in universal banking business.

com/topic/universal-banking: Universal Banking: definition  www.htm: Universal Banking: introduction.org/pubs/journal/cj13n2/cj13n2-8.pdf Universal Banking: Future 99 .R. 2nd edition)  Shekhar K.com/terms/u/universalbanking. Kothari (New Age International Publishers. Banking Theory and Practice.cato.asp Universal Banking: definition  www. Universal Banking in India  www.answers. Vikas Publishing House Magazines’ and journals’  Annual reports of State bank ok India WEBSITES  www.Bibliography BOOKS  Research Methodology – C.banknetindia. RBI rules and regulations.com/banking/ubfeature.C (2005).investopedia.