Chapter INTERNET Banking Universal Banking : Introduction Definition of Universal Banking Advantages of Universal Banking Disadvantages of Universal Banking Disadvantages of Universal Banking Narrow Banking : Introduction Off Shore Banking : Introduction @ao0ga0o00a WVERSAL BANKING : INTRODUCTION ffering both banking tional supermarket o! yystem in which b tment services. Uni payment processing, anks provide a wide iversal banks may securities Univ ea Banking is a multi-purpose and multi-funct services through a single window. It is a banking } tty of fi financial services + , Ye inancal services including both commercial and inves! taggar' Dans, deposits, asset management, investment advisory, tions, wr underwriting and financial analysis. Univ, ese ‘ ny carvices il ‘aya, 2! banking refers to those banks that provid ge of financial services like ance, auto loans, a] le a wide ran} is most emey go; etchant banking, factoring, credit Pers, retail Joans, housing fin on in Enkin: insurance along with commercial bank functions: ‘Thus banking system i ink ‘Uropean countries. Scanned with OKEN ScannerON universal Banking and Afi aakiy 17.2 ¢ jal products under one roof, It Hence, A Universal Banking is a superstore for a P dere only services related to savings and loans but also investmen’s: DEFINITION OF UNIVERSAL BANKING “In Universal Banking, large banks operate extensive et ae branches, prvi “a different services, hold several claims on firms (including equity en 7 as famines ad Airectly in the Corporate Govemnance of firms that rely on the banks for funding 0 lerwriters" ~As per the World Bang ADVANTAGES OF UNIVERSAL BANKING 1. Economies of Scale. Universal banking results in greater economic lower cost, higher output and better products. It enables the banks to exploit economies of large scale jomic efficiency in the form of and wider scope. '2. Profitable Diversions. The banks can utilize its existing skill in single type of financial Services inoffering other kinds by diversifying the activities. Therefore, it involves lower cost in performing all types of financial functions by one unit instead of other institution. 3. Resource Utilisation. A bank possesses all types of information about the existing customers which can be utilised to perform other financial activities with the same customer. 4. Easy Marketing of Services. A bank with established brand name can easily use its existing branches and staff to sell the other financial products like insurance policies, mutual fund plans without spending much efforts on marketing. 5. One-stop Shopping. One-stop shopping is beneficial for the bank and its customers as it saves lot of transaction costs by increasing the speed of economic activities. DISADVANTAGES OF UNIVERSAL BANKING 1. No Expertise in Long Term Lending. These are different types of long term loans like project finance and infrastructure finance, having long gestation projects can not properly handle by the single bank. 2. Non-performing Assets problem. One of the most serious problem faced by universal banking is Non-performing Assets. OPERATIONAL AND REGULATORY ISSUES OF RBI FOR CONVERSION OF FINANCIAL INSTITUTIONS INTO A UNIVERSAL BANK 1. Requirements of Reserve. It would become mandatory for a financial institution to compliance with the cash reserve ratio and statutory liquidity ratio requirements under (Section 42 of RBI, Act: 1934 and Section 24 of the Banking Regulation Act, 1949 respectively) after its conversion into @ universal bank. 2. Permissible Activities. Any activity of financial institution which is not permissible for a bank = Scanned with OKEN Scannery aig at ftsore banking Gti of Banking Regulation Act, 1949 may have tobe stopped afer its conversion tion 17.3 intoa je nk. bat ‘ ; al 41 of non-banking Assets. Under Section 9 of the Banking Regulation Act, 1949 7 5 DPE erty purchased acquired by a financial institution would be. required dispose of f rO} “ setet, of one fax period of 7 years from the date of acquisition after its conversion into a vit bank i ' Sel osition of the Board. Compliance with the provisions of Section 10(A) of the Bankin 4.comPornirgas, it may become necessary for some financial : : institutions to change the est Op the Board of Directors after their conversion into a universal bank, : ition bition of floating charges of assets. Under Section 14(A) of the B Prot 5 : janking Regulation Act, Reserve Bank of India may ratify the floating. charge (if any created the yf by financial institution) , ver its asset " . 7 wr icensing. A banking licence would be required to obtain from RBI under Section 22 of the iE Regulation Act, 1949 to carry on banking business in India after complying with the able conditions after the conversion of financial institution into universal bank. 7 Branch network. A financial institution will be needed to follow with extant branch , of RBI under which the new banks are needed to open at least 25% of their number of Coan and rural areas after its conversion into a universal bank. ia licensing branches 4, Assels in India. As required for a bank under Section 25 of the Banking Regulation Act, a foancal institution will have to be ensured that its total assets held in India are not less than 75% of istoal demand and times liabilities in India at the close of business on the last Friday of every cuir after the conversion of financial institution into a universal bank. 9.Format of Annual Reports. A financial institution will be required to publish its annual balance set and profit and loss account in the forms prescribed in the Third Schedule of the Banking Regulation Act, as prescribed for a banking company under Section 29 and Section 30 of the Banking Regulation Act 1949 after its conversion into a universal bank. 10. Connected Lending. There is a prohibition to grant loans and advances on bank on security its own shares or grant loans on behalf of any of its directors or to any firm in which its tecor/manager or employee or guarantor is interested under Section 20 of the Banking Regulation {* 19. tis mandatory to comply with these provisions after conversion of financial institution ‘Noa universal bank, ve, Managerial Remuneration of the Chief Executive Officers. The appointment and Tag tion of the existing Chief Executive officers may have to be reviewed with the approval of tnt SO the provisions of Section 35 B of the Banking Regulation Act after the conversion of 'sstitution into a universal bank. 2. rion i i tor upto a prescribed r ty Sector Lending, The obligation for lending to priority sector upto a pr me of their net bank a would also become applicable to financial institution after “on into a universal bank. i i " a a be full ied yjental Norms, The prudential norms of RBI applicable to banks will equie tobe fully i Conversion of a financial institution into a universal bank. | i | Scanned with OKEN Scanner1 NARROW BANKING : INTRODUCTION : tem of banking under which a bank places it A ‘Narrow Bank’ can be defined a the 5) a anaes ha vskfree asets with maturity peiod maciG Te emains intact without leading bey relating to asset liability mismatch. The quality of asse Mee of sub-standard assets. Narrow bank approach can ensur' banks are expected to remove the prob! loss to deposits with such pattern of deployment of funds. narrow banking is practically being imp! : B Syst bale tee Papee the epocits mobilised ie more than 46% by ban oe deploy, edi, government securities against a prescribed limit of 25% in the form of Statutory liquidity Ratoaes offers a safe avenue of investment but at a very low return. It Keeps the level of NPA low ang requirement of capital adequacy ratio also low as the risk weight allotted to such securities ig = 2.5% compared to 100% in loan assets. Under the concept of Narrow Banking, a bank may be concentrating only on collection of deposits and lend or invest the money within a particular region or certain selected activities like investing ig funds only in Government Securities. This type of restricted minimum banking activities is refeneg to narrow banking. So the regular deployment of funds in Ow tisk liquid asa, Jems of bank failures and the consequent systemic ig ang jemented by the Indian bankin KEY FEATURES OF NARROW BANKS - No lending of deposits. It reduces risk significantly at the cost of low return on investment for depositors and shareholders. 2. Investment in extremely high liquidity typically in short-term assets e.g. government bonds, 3. Extremely high asset security. 4, Lower interest rates are paid to depositors as a result of no lending to borrowers. 5 ' Possibly specific regulatory framework with higher level of scrutiny and operational or investing restrictions. 6. No offbalance sheet assets, 7. No derivatives are there in narrow banking, 8: High degree of institutional transparency e.g. regular real time disclosure of finandil records. OFF SHORE BANKING : INTRODUCTION Off Shore bank may be defined as a depositor. Typically, off share banks are loc benefits. bE - | Scanned with OKEN Scanner bank situated outside the country of residence va ated in a low tax jurisdiction that offer financial andNO ee Jude poets 7 Li yor pvaCY? 199 taxation: ‘gh coess 0 deposits; yet a . rnostoffshore banks arelocated in island nations e 7 - ys panking uni . a branch of a foreign bank | its from other foreign banks and make Ew financial dePJoans to the residents ofthe country in w Tocutrency loans, but may not aceon ae! sein ct legitimate activites, and are fee foci jon against local political or financial instability, ity. a /hich it is located, Offshore banks are otherwise rm is from the monetary control ls of the county of sor petition -qhe broad definition of an offshare bank is that of a bank that is located in a jurisdic thatis different from the jurisdiction or country that the depositor or investors ciel | “ Wr resides.” jpVANTAGES OF OFFSHORE BANKING |. Offshore banks can offer access to politically and economically stable jurisdictions for the residents in areas who fears their assets may be frozen, seized or disappear. than the legal rate in the home country due to lower overheads and a lack of government Offshore banks may function with a lower cost base and can provide higher interest rates | intervention. | | | . Offshore banks generally pay interest without tax being deducted. Some offshore banks provide banking services that may not be available fom domestic banks. | | USADVANTAGES OF OFFSHORE BANKING | |. Offshore bank accounts are less financially secure- jerground economy and organised crime Offshore banking has been associated with the unde through money laundering: cn, phys acesan’e | sit. He I Offshore jurisdictions are often remote and costly visit difficult. A | those on higher incomes: | andarenotmeant | | Offshore private banking usually more accessible 1° . A Costs of establishing and main' an ordinary person. ccount are very high taining offshore 2 Scanned with OKEN Scanner