Universal Banking




A system of banking where banks are allowed to provide a variety of services to their customers(world wide), it is a combination of commercial banking and investment banking. In universal banking, banks are not limited to just loans, checking and savings accounts, and other similar activities, but are allowed to offer investment services as well which helps to grow protocol between the nations. It is a super market for both wholesale and retail financial 2 services

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Automatically. etc.By diversifying the activities. So. it entails less cost in performing all the functions by one entity instead of separate bodies.A bank possesses the information on the risk characteristics of the clients. diversifiable and non diversifiable risk analysis. is useful for other clients and information seekers. which can be used to pursue other activities with the same clients. A data collection about the market trends. higher output and better products. the bank can use its existing expertise in one type of financial service in providing other types. Ø Profitable Diversions:. a bank will get the benefit of being involved in the researching Ø 3 . Many Committees and reports by Reserve Bank of India are in favour of Universal banking as it enables banks to explit economies of scale and scope. Ø Resource Utilization:. risk and returns associated with portfolios of Mutual Funds.Advantages Ø Economies of Scale:.The main advantage of Universal Banking is that it results in greater economic efficiency in the form of lower cost.

a bank can reach the client even in the remotest area without having to take resource to an agent.Cont… Ø Easy Marketing on the Foundation of a Brand Name:.Another manifestation of Universal Banking is bank holding stakes in a form : a bank's equity holding in a borrower firm. Mutual Funds without spending much efforts on marketing. In this way. Ø Investor Friendly Activities :. Ø One-stop shopping:. as the branch will act here as a parent company or source. It is beneficial for the bank as well as its customers.A bank's existing branches can act as shops of selling for selling financial products like Insurance. acts as a signal for other investor on to the health of the firm since the lending bank is in a better position to monitor the firm's activities.The idea of 'one-stop shopping' saves a lot of transaction costs and increases the speed of economic activities. Ø 4 .

Ø Merger with DFI {Biggest Challenge} :. For the dissatisfied current day bank customers. burden of mounting NPAs and differences in regulatory prescriptions applicable to FIs and banks such as CRR and SLR requirements and priority sector lending.g.g. the time limit is 8-8.: NPAs of ICICI and IDBI were transferred to ICICI Bank and IDBI Bank respectively after their merger.  E.The establishment of new private sector banks and foreign banks have rapidly changed the competitive landscape in the Indian consumer banking industry and placed greater demands on banks to gear themselves up to meet the increasing needs of customers.  E.Development Financial Institutions (DFIs) opting for conversion into Universal Banks by merger/reverse merger routes may also face certain difficult situations on account of Asset Liability Mismatches. they are given no or less number of bank holidays.: Today there is a lot of burden on staff members. time and convenience. Ø 5 . which also includes a very high level of non-performing assets.Disadvantage Ø To meet with the increasing demands of customers:. it is not only relevant to offer a wide menu of services but also provide these in an increasingly efficient manner in terms of cost. The asset profile of DFIs in India is predominately of long-term nature.

. Improving risk management systems :.: Today most banks have stopped personal loans because there is no guarantee. monitored and controlled by Universal Banks. efficient risk management systems have become essential.g.Cost of deposits is high as the only source of funds is Fixed Deposits having higher Rate Of Interest. as the Rate Of Interest is low. CASA has low cost. For enhancing the risk management system in banks.e. Ø   6 . would adversely affect the profitability of Universal Banks. Costs of funds for Fixed Deposit are higher than CASA {Current account Savings account}.Cont……. Universal Banks will be required to develop comprehensive system of each product/service and each kind of risk. measured. which would need to be identified. The nature of risks and mitigating techniques for different financial product/services will be different and therefore. Risk Management is one of the major challenges. Reserve Bank has issued guidelines on asset liability management and risk management systems in banks in 1999 and Guidelines Notes on Credit Risk Management and Market Risk Management in October 2002 and the Guidance Note on Operational risk management in 2005. which earn lower returns. Further. may also create difficult situations for such bank. i.With the increasing degree of deregulation and exposure of banks to various types of risks. holiday loans too are stopped. which may earn lower returns. where in the financial activity carries with it various risks. Compliance of priority sector lending norms. E. the cost at which DFIs have been raising resources in the past has generally remained high as compared to banks and maintenance of CRR/SLR of such liabilities. no loans are granted for travel and tourism. Ø High cost of funds for DFI:.

SEBI. the Universal Banking Institution and the financial system of the country. Authority etc. The regulators will have to frame sound mechanism to protect the interest of all concerned including the customer. This would mean that all liabilities issued by the DFIs in the past would also be subject to reserve requirements and since the assets structure of DFIs are largely of long term nature it would be very difficult for them to maintain the required level of SLR/CRR.Cont…… Ø Statutory Liquid Ratio {SLR} and Cash Reserve Ratio {CRR} requirements of DFI:. Insurance Regulatory. The regulatory framework would need to be strengthened so as to cover all aspects of Universal Banking either under control of one regulator or a co-coordinating mechanism would have to be developed among different regulators like the Reserve Bank of India. Ø Supervisory and regulatory infrastructure:.Another aspect is related to building up of supervisory infrastructure. CRR and SLR burden that wasn't there for DFI will be applied after its merger with any bank. Ø 7 .In case DFIs are converted into banks they would also be subject to the reserve requirement like banks.

using IT. treasury. the twin pillars of the banking sector i. Ø 8 ..Cont……. the demand for specialized banking functions. Special skills in retail banking. etc. will need to be carefully nurtured and built. development banking. Ø Sharpening skills:.e. foreign exchange. To meet increased competition and manage risk. as a competitive tool has to go up. Thus the need of the day is a combination of improved technology and quality human resources.The far-reaching changes in the banking and financial sector entail a fundamental shift in the set of skills required in banking. human resource and IT will have to be strengthened. risk management. Thus.

. Ø Government interferences:. Ø Conflict of interest between commercial and investment banking:.Cont….Interferences by government in public sector banks through RBI are hampering progress of universal banks. Ø  9 . the greater will be the effects of the failure on the system. Further combining commercial and investment banking can give rise to conflict of interest.Monopolistic competition among universal banks will decrease their profit margin.Larger the banks. which can have undesirable consequences for economic efficiency. by virtue of their sheer size would gain monopoly power in the market. Also there is the fear that such institutions.  Ø Competition:.

effectiveness in the sourcing and application of available technology. Ø Supervisory of financial conglomerates:. consolidated prudential reports intended or supervisory assessment of risk and application of certain prudential regulations on group basis. Ø 10 Ø . organization designs. The components of consolidated supervision include. consolidated financial statements intended for public disclosure.. In due course. and perhaps effectiveness in the acquisition of productive inputs. consolidated supervision as introduced above would evolve to cover.In view of increased focus on empowering supervisors to undertake consolidated supervision of bank groups and since the Core Principle for Banking Supervisory issued by the BASEL committee on Banking Supervision have underscored consolidated supervision as an independent principle. Ø Technology improvement and compensation and incentive systems for employees:. as an initial step. the Reserve Bank of India had introduced.Cont….It is likely that Universal Banks of roughly the same size and providing roughly the same range of services may have very different cost levels per unit of output on account of efficiency differences in the use of labour and capital. compensation and incentive system-and just plain better management. consolidated accounting and other quantitative methods to facilitate consolidated supervision.

Product In Universal Banking Accounts Loans Cards Insurance Investment Wealth management Online banking  11 .

Accounts  Current account  Fixed account  Saving account  Recurring account  DEMAT account  12 .

Loans Home loans  Personal loans  Loan against securities  Car loan  13 .

Cards Credit cards  Debit cards  Pre paid cards  Commercial cards 14 .

Insurance GENERAL INSURANCE Health insurance Motor insurance Overseas insurance Home insurance  LIFE INSURANCE  15 .

Investment Bonds  Mutual funds  For-ex services  IPO  Gold bonds  16 .

Wealth Management Online trading and Mutual funds  Customized products  Life and general insurance  Fixed deposit   17 .

Online Banking Fund transfer  Bill payment  Receive funds  Mobile recharge  Ticket booking  18 .

which it can use to pursue other activities with the same client.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. it entails less cost in performing all the functions by one entity instead of separate bodies. is that it enables banks to exploit economies of scale and scope. Profitable Diversions:. Various Reserve Banks Committees and reports in favour of Universal Banking. diversifiable and non diversifiable risk analysis. Resource Utilization: .By diversifying the activities.SWOT  Strengths: Economies Of Scale:.A bank possesses the information on the risk characteristics of the clients. a bank will get the benefit of being involved in Research. etc are useful for other clients and information seekers. Automatically. risk and returns associated with portfolios of Mutual Funds. the bank can use its existing expertise in one type of financial service in providing other types. higher output and better products. A data collection about the market trends. 19 . So.

.The idea of 'one stop shopping' saves a lot of transaction costs and increases the speed of economic activities. since the lending bank is in a better position to monitor the firm's activities. Investor friendly activities:. Ø Easy marketing on the foundation a of Brand name:.A bank has an existing network of branches. as the branch will act here as a parent company or source. In this way a bank can reach the remotest client without having to take recourse ton an agent. which can act as shops for selling products like Insurance.Another manifestation of Universal Banking is bank holding stakes in a firm. It is beneficial for the bank as well as customers.Cont…. One stop shopping:. Mutual Fund without much efforts on marketing. A bank's equity holding in a borrower firm. acts as a signal for other investors on to the health of the firm. Ø 20 .

becoming a bank may not make a big difference.Weakness  Grey area of Universal Bank:. The biggest one is overcoming the differences in regulatory requirements for a bank and DFI. Unlike banks.The path of Universal Banking for DFIs is strewn with obstacles. Therefore. 21 . No expertise in long term lending:.The most serious problem of DFIs have had to encounter is bad loans or Non Performing Assets (NPA). NPA problem remained intact:. DFIs are not required to keep a portion of their deposits as cash reserves. the transformation into a bank may not be of great assistance in lending long-term.In the case of traditional project finance an area where DFIs tread carefully. Project finance and Infrastructure Finance are generally long gestation projects and would require DFIs to borrow long term. For the DFIs and Universal Banking or installation of cutting-edge-technology in operations are unlikely to improve the situation concerning NPAs.

by their asset base. due to over expansion .Threats  Big Empires:. 22 . Universal Banks will be the largest banks. But there will be big empires which may put the economy in a problem. because of the possibility of turning all the strengths of the Universal Banking into weaknesses.the strength of economies of scale may turn into the degradation of qualities of bank products.Universal Banking is an outcome of the mergers and acquisitions in the banking sector. The Finance Ministry is also empathetic towards it. There is a threat to the overall quality of the products of the bank. . income level and profitability there is a danger of 'Price Distortion'. (e. It might take place by manipulating interests of the bank for the self interest motive instead of social interest.g.

Insurance. personal loans. as the wide range of financial services in addition to the Commercial banking functions like Mutual Funds. 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. which lead to lower cost funds. assets and market value. the focus will be on profits rather than on the size of balance sheet. will help in enhancing overall profitability. Fee based incomes will be more attractive than mobilizing deposits. credit cards. the Indian banks need to acquire a lot of mass in their volume of operations. banks will need to improve their efficiency and productivity.Opportunity  To increase efficiency and productivity:. Now. which will lead to new products and better services.Liberalization offers opportunities to banks. Factoring. profits. Pure routine banking operations alone cannot take the Indian banks into the league of the Top 100 banks in the world. (SBI is the only Indian bank to appear in the top 100 banks list of 'Fortune 500' based on sales. Merchant banking. To face the increased competition.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.  23 . retail. In order to enter at least the top 100 segment in the world. Here is the real need of universal banking. etc. To get more exposure in the global market:.

etc. a Chennai based association. (In the month June a consortium of 20 lenders led by SBI has committed a 14 year project finance term loan for a special purpose company promoted BPCL. for funding the Greenfield and Brownfield projects. Most of the partners are nationalized banks. the lowest strata of the society is still out of the purview of banking services. has found out that. Central Bank of India. there is a large market of General Insurance and Project Financing. to overcome this. laundry services. but because banks do not want to lend these entrepreneurs. 34% of that goes to money lenders for funds. The respondents were businesses engaged in activities such as fruits and vegetables vendors.. provision stores. petty shops and tea stalls. It is a situation of Financial Apartheid in the informal sector. Bank of Maharashtra.A recent study on the informal sector conducted by Scientific Research Association for Economics (SRA).  To eradicate the 'Financial Apartheid' :. they form a consortium of lenders.Cont….Now a day. which is starting a Greenfield project in Madhya Pradesh) The point of consideration here is the consortium partner – Bank of Baroda. The Need of Universal Banking:. As only a bank is not able to fund it properly. Because the small businesses in the city. So. It means with the help of retail and personal banking services Universal Banking can reach this stratum easily.5% goes to pawn brokers. 97% of them do not depend the banking system for funds.To make pace with the present need of corporates. due to insufficient asset base and net worth. Another 6. Indian Overseas Bank.  24 . 'Though having a large number of branch network in rural areas and urban areas. LIC. Not because they do not want credit from banking sources.

Thank You ! 25 .