UNIVERSAL BANKING

What is UB?
Universal Banking is a multi-purpose and
multi-functional financial supermarket (a company offering a wide range of financial services providing both banking and financial services through a single window

 In a nutshell, a Universal Banking is a

superstore for financial products under one roof. Corporate can get loans and avail of other handy services, and also can deposit and borrow. It includes not only services related to savings and loans but also investments

 However in practice the term 'universal

banking' refers to those banks that offer a wide range of financial services, beyond the commercial banking functions like Mutual Funds, Merchant Banking, Factoring, Credit Cards, Retail loans, Housing Finance, Auto loans, Investment banking, Insurance etc.

THE CONCEPT OF UNIVERSAL BANKING-INDIAN SCENARIO

The entry of banks into the realm of financial
services was followed very soon after the introduction of liberalization in the economy. Large scale mergers, amalgamations and acquisitions between the banks and financial institutions resulted in the growth in size and competitive strengths of the merged entities. Thus, emerged new financial conglomerates that could maximize economies of scale and scope by building the production of financial services organization called Universal Banking.

 By the mid-1990s, all the restrictions on

project financing were removed and banks were allowed to undertake several inhouse activities. Reforms in the insurance sector in the late 1990s, and opening up of this field to private and foreign players also resulted in permitting banks to undertake the sale of insurance products.

 The phenomenon of Universal Banking as

a distinct concept, as different from Narrow Banking came to the forefront in the Indian context with the Narsimham Committee (1998) and later the Khan Committee (1998) reports recommending consolidation of the banking industry through mergers and integration of financial activities.

UNIVERSAL BANKING IN INDIA

In India Development financial institutions (DFIs)
and refinancing institutions (RFIs) were meeting specific sectoral needs and also providing longterm resources at concessional terms, while the commercial banks in general, by and large, confined themselves to the core banking functions of accepting deposits and providing working capital finance to industry, trade and agriculture. Consequent to the liberalization and deregulation of financial sector, there has been blurring of distinction between the commercial banking and investment banking

 Reserve Bank of India constituted on

December 8, 1997, a Working Group under the Chairmanship of Shri S.H. Khan to bring about greater clarity in the respective roles of banks and financial institutions for greater harmonization of facilities and obligations . Also report of the Committee on Banking Sector Reforms or Narasimham Committee (NC) has major bearing on the issues considered by the Khan Working Group.

 The issue of universal banking resurfaced

in Year 2000, when ICICI gave a presentation to RBI to discuss the time frame and possible options for transforming itself into an universal bank. Reserve Bank of India also spelt out to Parliamentary Standing Committee on Finance, its proposed policy for universal banking, including a case-by-case approach towards allowing domestic financial institutions to become universal banks.

 Now RBI has asked FIs, which are

interested to convert itself into a universal bank, to submit their plans for transition to a universal bank for consideration and further discussions. FIs need to formulate a road map for the transition path and strategy for smooth conversion into a universal bank over a specified time frame. The plan should specifically provide for full compliance with prudential norms as applicable to banks over the proposed period.

Recommendations
The following are the recommendations of Khan Working group for harmonizing the role and operation of DFIs

1. A progressive move towards UB and the

development of enabling regulatory framework 2. A full banking licence is eventually granted to DFI. In the interim period the DFIs may be permitted to have a banking subsidiary (A company having more than half of its stock owned by another company ) while the DFIs themselves may continue to play their existing role.

3. The appropriate corporate structure of UB should be integral management/ shareholders decision and not be imposed by regulation 4. Management and shareholders of banks and DFIs should be permitted to explain and enter DFIs merger.

5. Financial support to be give by the RBI and Govt to DFIs

 The committee of banking sector reforms said

with conversion of activities between bank and DFIs, the DFIs should over a period of time convert themselves into banks. There would then only be two forms of intermediaries i.e.; banking companies and non banking finance companies If a DFI does not acquire a banking licences within a stipulated time it would be categorized as a non banking finance company.

Advantages of Universal Banking

Economies of Scale. The main
advantage of Universal Banking is that it results in greater economic efficiency in the form of lower cost, higher output and better products. 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.

 Profitable Diversions. By diversifying the

activities, the bank can use its existing expertise in one type of financial service in providing other types. So, it entails less cost in performing all the functions by one entity instead of separate bodies.

 Resource Utilization. A bank possesses

the information on the risk characteristics of the clients, which can be used to pursue other activities with the same clients. A data collection about the market trends, risk and returns associated with portfolios of Mutual Funds, diversifiable and non diversifiable risk analysis, etc, is useful for other clients and information seekers. Automatically, a bank will get the benefit of being involved in the researching

 Easy Marketing on the Foundation of a

Brand Name. A bank's existing branches can act as shops of selling for selling financial products like Insurance, Mutual Funds without spending much efforts on marketing, as the branch will act here as a parent company or source. In this way, a bank can reach the client even in the remotest area without having to take resource to an agent

 One-stop shopping. The idea of 'onestop shopping' saves a lot of transaction costs and increases the speed of economic activities. It is beneficial for the bank as well as its customers.

 Investor Friendly Activities. Another

manifestation of Universal Banking is bank holding stakes in a form : a bank's equity holding in a borrower firm, 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

Disadvantages
Notes

UB Models
Fully integrated model Partly integrated model Bank subsidiary structure Bank holding company structure

Fully integrated model

One institution offering wide range of

activities

Partly integrated model One which offers range of services but some of them are offered through wholly owned or partially owned subsidiary (like mortgage, leasing, insurance etc,)

Bank subsidiary structure This on carries out the main commercial banking functions while the other services of investment banking like mf, mb pm are carried out through legal separate subsidiaries of the bank. Bank holding company structure One financial holding company owns both banking and non banking subsidiary that are legally separate and individually capitalized in so far as financial services other than banking permitted by law

The concept of ub is based on two financial models namely: Fully integrated universal banks (FIUB) Financial conglomerate( FC) Under FIUB big banks provide wide range of banking services including commercial banks, securities related services, insurance related services etc. under one roof. This FIUB model is being practiced in Germany and hence this model is known as German type financial model.

Under Financial Conglomerate (FC) different financial services are provided through separate subsidiaries. This model is popularly known as British American type model. This model is practiced is US and UK. In India, universal banking is practiced by providing whole range of activities through FC route

For example: SBI has set up the following subsidiaries SBI Fund management SBI Capital Market SBI Home Finance SBI life insurance company SBI Gilts