UNIVERSAL BANKING

UNIVERSITY OF MUMBAI

A REPORT ON
UNIVERSAL BANKING

SUBMITTED BY:
PRIYADARSHNI ACHARY

T.Y.B.COM (BANKING AND INSURANCE)

SEMESTER V

ACADEMIC YEAR 2016-17

PROJECT GUIDE:
PROF. SHEFALI RAI

VIVEK EDUCATION OF SOCIETY

VIVEK COLLEGE OF COMMERCE
SIDDHARTH NAGAR,GOREGAON (W)
MUMBAI400104.

UNIVERSAL BANKING

DECLARATION

I PRIYADARSHNI ACHARY, a student of third year bachelor of

commerce banking and insurance, vivek college of commerce, hereby that
I have completed project on UNIVERSAL BANKING in semester V
of academic year 2016-17.

This information submitted is true and original to best of my knowledge.

SIGNATURE OF STUDENT DATE:

PRIYADARSHNI ACHARY

UNIVERSAL BANKING

CERTIFICATE

This is to certify that, PRIYADARSHNI ACHARY of third year

bachelor of commerce, vivek college of commerce, has completed project
on UNIVERSAL BANKING in semester V of the academic year
2016-17.

Internal examiner
External examiner

Co-ordinator
Principal
Prof. Suvarna Raikar
Dr. Nandita Roy

College stamp

UNIVERSAL BANKING

ACKNOWLEDGEMENT

To list who all helped me is difficult because they are so numerous and the
depth is so enormous.
I would like to acknowledge the following as being idealistic channel and
fresh dimension in the Completion this project.
I take this opportunity to think the university of Mumbai for giving me
chance to do this project.
I would like to thank my project Dr. Nandita Roy, for providing the
necessary facilities required for completion of this project.
I like this opportunity to thank our co-ordinator Prof. Suvarna Raikar, for
her moral support and guidece .
I would also like to express my sincere gratitude towards my project guide
Prof. Shefali Rai whose guidance and care made the project successful.
I would also like to thank my b college library, for providing various
reference books and magazines related to my project.
Lastly, I would like to thank each and every who directly or indirectly
helped me to complete project, especially my parents and my peers who
supported me throughout my project.

PRIYADARSHNI ACHARY

UNIVERSAL BANKING

INDEX

UNIVERSAL BANKING

UNIVERSAL BANKING

INTRODUCTION

What is 'Universal Banking'

Universal banking is a banking system in which banks provide a wide
variety of financial services, including commercial and investment
services. Universal banking is common in some European countries,
including Switzerland. In the United States, however, banks are required
to separate their commercial and investment banking services. Proponents
of universal banking argue that it helps banks better diversify risk.
Detractors think dividing up banks' operations is a less risky strategy.
Universal Banking is a multi-purpose and multi-functional financial
supermarket (a company offering a wide range of financial services e.g.
stock, insurance and real-estate brokerage) providing both banking and
financial services through a single window.
Definition of Universal Banking: As per the World Bank, "In Universal
Banking, large banks operate extensive network of branches, provide
many different services, hold several claims on firms(including equity
and debt) and participate directly in the Corporate Governance of firms
that rely on the banks for funding or as insurance underwriters".
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UNIVERSAL BANKING

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
while 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. This is most common in European countries.
For example, in Germany commercial banks accept time deposits, lend
money, underwrite corporate stocks, and act as investment advisors to
large corporations. In Germany, there has never been any separation
between commercial banks and investment banks, as there is in the
United States.
THE CONCEPT OF UNIVERSAL BANKING
The entry of banks into the realm of financial services was followed very
soon after the introduction of liberalization in the economy. Since the
early 1990s structural changes of profound magnitude have been
witnessed

in

global

banking

systems.

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 in-house 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
7

UNIVERSAL BANKING

the sale of insurance products. At present, only an 'arm's length

relationship between a bank and an insurance entity has been allowed by
the regulatory authority, i.e. IRDA (Insurance Regulatory and
Development Authority).
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.

COMMERCIAL BANKS IN INDIA

Commercial banks form a significant part of the countrys Financial Institution

System. Commercial Banks are those profit seeking institutions which accept
deposits from general public and advance money to individuals like household,
entrepreneurs, businessmen etc. with the prime objective of earning profit in the
form of interest, commission etc. The operations of all these banks are regulated
by the Reserve Bank of India, which is the central bank and supreme financial
authority in India. The main source of income of a commercial bank is the
difference between these two rates which they charge to borrowers and pay to
8

UNIVERSAL BANKING

depositers. Examples of commercial banks ICICI Bank, State Bank of India,

Axis Bank, and HDFC Bank.
Classification of commercial banks :
1.

Scheduled banks :- Banks which have been included in the Second

Schedule of RBI Act 1934. They are categorized as follows:
Public Sector Banks :- are those banks in which majority of stake

is held by the government. Eg. SBI, PNB, Syndicate Bank, Union Bank of
India etc.
o

Private Sector Banks :- are those banks in which majority of stake

is held by private indivisuals. Eg. ICICI Bank, IDBI Bank, HDFC Bank,
AXIS Bank etc.

Foreign Banks :- are the banks with Head office outside the
country in which they are located. Eg. Citi Bank, Standard Chartered Bank,
Bank of Tokyo Ltd. etc.

2.

Non scheduled commercial banks :- Banks which are not included in

the Second Schedule of RBI Act 1934.
Primary Functions of Commercial Banks:
Deposit Acceptance: Being a short term credit dealer, the commercial banks
accept the savings of public in the form of following deposits:

Fixed term deposits

Current A/c deposits

Recurring deposits

Sving A/c deposits

Tax saving deposits

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UNIVERSAL BANKING

Deposits for NRIs

Lending Money: a second major function is to give loans and advances and
thereby earn interest on it. This function is the main source of income for the
bank. Overdraft facility: Permission to a current A/c holder of withdrawal more
than to what he has deposited.

Loans & advances: A kind of secured and unsecured loans against some kind
of security. Discounting of bill of exchange: in case a person wants money
immediately, he/she can present the B/E to the respective commercial bank and
can get it discounted.

Cash credit : Facility to withdraw a certain amount of money on a given

security.
Secondary Functions of Commercial Banks:
Agency functions: Bank pays on behalf of its customers as an agent and gets
paid fee for agency functions such as:

Payment of taxes, bills

Collection of funds through bills, cheques etc.

Transfer of funds

Sale-purchaseof shares and debentures

Collection/Payment of dividend or interest

Acts as trustee & executor of properties

Forex Transactions

General Utility Services: locker facility

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UNIVERSAL BANKING

Credit Creation: It is one of the most outstanding function of commercial

banks. A bank creates credit on the basis of its primary deposits. It further lends
the money which people has depositted with the bank also charge interest on
this money, which is much higher than what it actually pays to depositer. Thus
bank generates money for itself.
INVESTMENT BANKING
What is an 'Investment Bank - IB'
An investment bank (IB) is a financial intermediary that performs a variety of
services. Investment banks specialize in large and complex financial
transactions such as underwriting, acting as an intermediary between a
securities issuer and the investing public, facilitating mergers and other
corporate reorganizations, and acting as a broker and/or financial adviser for
institutional clients. Major investment banks include Barclays, BofA Merrill
Lynch, Warburgs, Goldman Sachs, Deutsche Bank, JP Morgan, Morgan
Stanley, Salomon Brothers, UBS, Credit Suisse, Citibank and Lazard. Some
investment banks specialize in particular industry sectors. Many investment
banks also have retail operations that serve small, individual customers.The
advisory divisions of investment banks are paid a fee for their services, while
the trading divisions experience profit or loss based on their market
performance. Professionals who work for investment banks may have careers as
financial advisers, traders or salespeople. An investment banker career can be
very lucrative, but it typically comes with long hours and significant stress.
Because investment banks have external clients but also trade their own
accounts, a conflict of interest can occur if the advisory and trading divisions
dont maintain their independence (called the Chinese Wall). Investment
banks clients include corporations, pension funds, other financial institutions,
11

UNIVERSAL BANKING

governments and hedge funds. Size is an asset for investment banks. The more
connections the bank has within the market, the more likely it is to profit by
matching buyers and sellers, especially for unique transactions. The largest
investment banks have clients around the globe.
Investment banks help corporations issue new shares of stock in an initial public
offering or follow-on offering. They also help corporations obtain debt
financing by finding investors for corporate bonds. The investment bank's role
begins with pre-underwriting counseling and continues after the distribution of
securities in the form of advice. The investment bank will also examine the
companys financial statements for accuracy and publish a prospectus that
explains the offering to investors before the securities are made available for
purchase.

HISTORY IN UNIVERSAL BANK IN INDIA

Universal banking involves a mix of commercial deposit and loan businesses

and investment banking. Universal banking took off in the 19th century, and
conditions became more difficult in the 2oth century. This is because there
have been exogenous political shocks and macro-economic instability during
the 20th century. The wider institutional context is important for universal
banking, and this includes central bank support. The context has been less
favorable in the 20th century. Globalization has also had an impact on the
banking industry.
1. In India Development financial institutions (DFIs) and refinancing
institutions (RFIs) were meeting specific sectoral needs and also providing
long-term resources at concessional terms, while the commercial banks in
general, by and large, confined themselves to the core banking functions of
12

UNIVERSAL BANKING

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.
2. 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.
3. 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. So, saddled with obligations to fund long gestation projects, the
DFIs have been burdened with serious mismatches between their assets and
liabilities of the balance sheet. In this context, the Narsimham Committee
II had suggested DFIs should convert into banks or Non-Banking Finance
Companies. Converting of these DFIs into Universal Banks will grant them
ready access to cheap retail deposits and increase the coverage of the
advances to include short term working capital loans to corporate with
13

UNIVERSAL BANKING

greater operational flexibility. At that time DFIs were in the need to acquire
a lot of mass in their volume of operations to solve the problem of total
asset base and net worth. So, the emergence of Universal Banking was the
solution for the problem of banking sector.
4. Now banks like ICICI bank have expressed their desire to change into a
universal bank. That's why they want to merge ICICI with ICICI bank. The
Narsimham Committee II suggested that DFIs should convert ultimately
into either commercial banks or non-bank finance companies. The Khan
Working Group held the view that DFIs should be allowed to become
banks at the earliest. The RBI released a 'Discussion Paper' (DP) in January
1999 for wider public debate. The feedback indicated that while the
universal banking is desirable from the point of view of efficiency of
resource use, there is need for caution in moving towards such a system.
Major areas requiring attention are the status of financial sector reforms,
the state of preparedness of the concerned institutions, the evolution of the
regulatory regime and above all a viable transition path for institutions
which are desirous of moving in the direction of universal banking.

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UNIVERSAL BANKING

UNIVERSAL BANKING PROS AND CONS

The solution of Universal Banking was having many factors to deal with,
which can be further analyzed by the pros and cons.
Advantages of Universal Bank :
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 use
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.
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UNIVERSAL BANKING

One-stop shopping The idea of 'one-stop shopping' saves a lot of

transaction costs and increases the speed of economic activities. It is
beneficial for the bank as well as its customers.
Disadvantages of Universal Banking :
Grey Area of Universal Bank The path of universal banking for DFIs is
strewn with obstacles. The biggest one is overcoming the differences in
regulatory requirement for a bank and DFI. Unlike banks, DFIs are not
required to keep a portion of their deposits as cash reserves.
No Expertise in Long term lending In the case of traditional project
finance, an area where DFIs tread carefully, becoming a bank may not
make a big difference to a DFI. Project finance and Infrastructure finance
are generally long- gestation projects and would require DFIs to borrow
long- term. Therefore, the transformation into a bank may not be of great
assistance in lending long-term.
NPA Problem Remained Intact The most serious problem that the DFIs
have had to encounter is bad loans or Non-Performing Assets (NPAs). For
the DFIs and Universal Banking or installation of cutting-edge-technology
in operations are unlikely to improve the situation concerning NPAs.

UNIVERSAL BANKING IN INDIA

In India Development financial institutions (DFIs) and refinancing
institutions (RFIs) were meeting specific sect oral needs and also
providing long-term resources at concessional terms, while the
commercial banks in general, by and large, confined themselves to the
core banking functions of accepting deposits and providing working
capital finance to industry, trade and agriculture. Consequent to the
16

UNIVERSAL BANKING

liberalisation 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.

UNIVERSAL BANKING THE INDIAN PERSPECTIVE

Universal Banking, means the financial entities the commercial banks, DFIs,
NBFCs, - undertake multiple financial activities under one roof, thereby
creating a financial supermarket.

17

UNIVERSAL BANKING

The entities focus on leveraging their large branch network and offer wide range
of services under single brand name.
Universal banking generally takes one of the three forms: a. In-house Universal banking. Eg. Germany
b. Through separately capitalized subsidiaries. Eg. England.
c. Operations carried through a holding company. Eg. USA. (Nair, 1998)
Universal Banking includes not only services related to savings and loans but
also investments. However in practice the term 'universal banks' refers to those
banks that offer a wide range of financial services, beyond commercial banking
and investment banking, insurance etc. It is a combination of commercial
banking, investment banking and various other activities including insurance. If
specialised banking is the one end universal banking is the other. This is most
common in European countries.
A narrow view of Universal banking could be activities pertaining to lending
plus investments in bonds and debentures. A broader view could include a
basket of all the financial activities including insurance.
Indian Scenario
1. Commercial banks
In early 90's the financial sector in India was crying out for reforms. Ever since
the process of liberalization hit the Indian shores, the banking sector saw the
emergence of new-generation private sector banks. Public sector banks which
played a useful role earlier on are now facing deterioration in their performance.
For very long, the banks in India were not allowed to have access to stock
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UNIVERSAL BANKING

markets. So their dealing in other securities were minimal. But the financial
sector reforms changed it all, Indian banks started to deal on the stock market
but their bitter experience with scams, they became averse to deal in equities
and debentures. Off late, commercial banks in India have been permitted to
undertake a range of in-house financial services. Some banks have even setup
their own subsidiaries for their investment activities. Subsidiaries include in the
area of merchant banking, factoring, credit cards, housing finance etc.
2. Financial Institutions
DFIs were traditionally engaged in long term financing, as their main objective
was to take care of the investment needs of industries and to contribute to a
better industrial climate. They had, over the time, built up expertise in merchant
banking, project evaluation and also started giving working capital finance.
Recently, they were allowed to accept medium-term deposits within the
specified limits. Lots of changes have taken place in DFIs in the recent past.
Most of DFIs have floated banks, institutions and mutual fund subsidiaries.
Ownership changes took place, several institutions went public, organization
structure itself got transformed.
Some argue that the approach is very slow, while some call for steady approach.
The debate of universal banking is very much on. Should India have universal
banking and if so when? Much has been written about it domestically, however
the following are the issues which are key in Indian context.
i. Regulatory burden
ii. Regulatory requirements
iii. Distinction between maturity and duration
iv. Optimum Transition path
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UNIVERSAL BANKING

i. Regulatory burden:
One of the major problems associated with universal banking is the issue of
regulation. DFIs in India are governed by separate Acts and banks are regulated
by RBI and Banking Regulation Act. DFIs in India have commercial banks as
their subsidiaries, but due to the separation of regulation, the DFIs cannot have
direct access to the resource base of its subsidiary bank. Without any doubt, the
net regulatory burden for all participants in the entire financial system should be
equalized in order to ensure that no participant might end up having a
disadvantage relative to any other. The importance of this point can be
highlighted by citing the example of USA, Japan, West Germany and Britain
where there was a tremendous decline in the share of banks in composition of
household financial assets and its movement to mutual funds and insurance. The
study reveled that the decline has been due to very high net regulatory burden
being imposed upon the entire banking system relative to that on the mutual
funds and insurance companies. In India there is an urgent need to reduce the
regulatory burden, particularly for banks vis--vis mutual funds and insurance
companies, if the banks are expected to compete in free market place. (Mor,
1999)
ii. Regulatory requirements
The reference of regulatory requirements here are on the following issues
a. Cash Reserve Ratio (CRR): From early 90's the monitory policy in India has
been focusing on review of CRR. Off late RBI is concentrating more so on
indirect instruments like Bank Rate and Open Market Operations, and felt that
the CRR must be brought down to its minimum level of 3 percent at the earliest.
It is also argued by some experts that instead of the complete Net Demand and
Time Liabilities (NDTL) of banks, its application if restricted only to cash and
20

UNIVERSAL BANKING

cash like instruments, it would be more effective as an instrument of monetary

policy and by applying the ratio, for the senior bonds that may be issued by
banks to industry, is not in the interests of Monetary policy and this would
further increase the cost of funds to the industry by almost at 1 percent.
b. Statutory Liquid Ratio (SLR): Though, the SLR has already reached its
statutory minimum of 25 percent, some experts feel there is need to re-examine
the present minimum limit, which is very high as per the international practices
and could be brought down further by amending the Banking Regulation Act.
Few banking experts extended to specific infrastructure projects as a part of
SLR, since these facilities have directly replaced similar financing by
Government of India.

c. Priority Sector: The whole issue of priority sector needs a closer look. The
S.H Khan panel called for modifications in defining the priority sector by
excluding all infrastructure loans from the net bank credit for the priority sector.

Even the international experience of banks in Asia-Pacific region had a 'must

serve' obligation towards priority sector and the result was discriminatory and
inefficient performance without the support of commercial mindset.
iii. Distinction between Maturity and Duration
This is the another issue of debate between long term and short term. Somehow
DFIs are the suppliers of term finance, where the maturity is clearly specified
which could be between 3 years to 7 years, where as banks are providers of
21

UNIVERSAL BANKING

short-term finance where in reality bank finance in a way amounts to financing

in perpetuity since there are in general no definite maturity dates. Usually the
deposit base of the banks have are short duration but with a variably high
interest rates but its not the case with DFIs. Their funds have a longer duration
with less interest rates. (Mor, 1999)
The interim report of S H Khan committee has argued that the distinction
between commercial and investment banking have become increasingly blurred
with banks providing both working capital and term loans to corporates but
DFIs can provide only term loans as they cannot accept short term deposits. The
committee further argued that DFIs should be given banking licenses eventually
and until then they should be allowed to establish 100 percent banking
subsidiaries while they continue to play their present role.

iv. Optimal Transition path

Viable transition path is one of the major areas of concern for institutions which
are desirous of moving in the direction of universal banking. The transition path
contains several operational and regulatory issues for information and guidance
of DFIs. The S H Khan working group and the discussion paper on the subject
prepared by RBI eventually felt that DFIs should transform themselves into
commercial banks but in a phased manner. The committee also recommended
that DFIs can have 100 percent owned banking subsidiaries which would be
extremely beneficial to them. If this happens, then it would allow DFIs to gain
expertise in the area of commercial banking which would in turn help the DFIs
if they are seriously looking at the prospect of converting into a commercial
bank. Also the 100 percent subsidarisation allows banks to have a full access to
22

UNIVERSAL BANKING

capital base of DFIs and gain substantial knowledge in the area of project
financing.
The 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.

23

UNIVERSAL BANKING

UNIVERSAL BANKING IN UNITED STATES

Due to strict regulation, the universal bank is was a common occurrence within
the United States. This is due to the Glass-Steagall Act of 1933. Recent
developments have removed a number of the barriers to the creation of a
universal bank, though they are still not as prevalent as they are across many
European countries. Further, the United States has banks that focus purely on
investments, which is highly uncommon in the rest of the world.

International Scenario
Federal Republic of Germany, Switzerland are generally known to be the home
of universal banking. Factors like technological up gradation, wide spread of
24

UNIVERSAL BANKING

applications, increasing competition in financial sector etc., are the driving

forces in these nations. In few other European countries, almost all other
banking and non-banking services are carried out by financial institutions. For
instances, in Germany, commercial and investment banking activities are
performed by a single entity, but separate subsidiaries are required for other
activities. In UK a separate subsidiaries of commercial banks involve in
providing wide range of activities.
What the USA follows is an extreme model, where the commercial banks are
prevented legally from combining their normal lending functions with
investment operations, where they are separated by several legislative acts,
including the Glass-Steagall Act of 1933 and the bank Holding company Act of
1956. However, at present USA is having a re-look at the position. Much of the
international debate on universal banking has been centered around the
restriction on diversification of the type.

Practice of Universal Banking Abroad:

Full integration

25

U N I V E R BS A NL K

UNIVERSAL BANKING

Bank Activities
Securities Activities
Insurance Activities &
others

Full integration is divided into three parts, 1- Bank Activities, 2- Securities

Activities, 3- Insurance Activities & others. These are associated under
Universal banking in Full integrated.

German variant

26

UNIVERSAL BANKING

Banking
Activities
Universal
banking
Securities
Activities

Others
(Subsidiary)
Insurance
Activities
(Subsidiary)
Mortgage
Banking
(Subsidiary)

German variant is divided by 1- Banking Activities, 2- Securities Activities.

These two are further sub-divided by 1- others, 2- Insurance activities, 3Mortgage banking , they are the Subsidiaries of Universal banks.
They all are include in German varaints.

United Kingdom variant

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UNIVERSAL BANKING

Holding
company

Bank
Activities

Securites
Activities

Others

Insurance
Activities

United Kingdom has a Holding Company, unlike others as Universal bank.

This Holding Company undertakes the initiative on behalf of Universal bank
which indicates the holding power of UK.
They are divided by 1- Bank activities, 2- Securities activities, 3- Insurance
activities, 4- Others.

RBI GUIDELINES ON UNIVERSAL BANKING

28

UNIVERSAL BANKING

Some of the guidelines are as follows:

Once the FI becomes a universal Bank, it would be compliant with the
CRR and SLR requirements of the RBI.
The activity which is permissible for the FI but NOT permissible for
Bank would have to be stopped.
Any immovable property acquired by the FI would have to be disposed of
in 7 years time.
The composition of the Board of Directors would be required to be
changed so that it is compliant with the Section 10 (A) of the Banking
Regulation Actwhich requires at least 51% of the total number of
directors to have special knowledge and experience.
If there is any floating charge on any of its assets, it would have to be
ratified by the RBI since a banking company is not allowed to create a
floating charge on the undertaking or any property of the company
unless duly certified by RBI as required under the Section 14 (A) of B R
Act.
If there is any subsidiary that is engaged in an activity which is not
permissible under the B R Act, then the subsidiary will have to be
delinked.
Banks cannot hold shares in the companies in excess of 30% of the paid
up share capital of that company or 30 per cent of its own paid-up share

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UNIVERSAL BANKING

capital and reserves as per the B R act, so , the FI after becomes a

Universal Bank shall divert the excess of the equity.
Section 20 of the B. R. Act prohibits grant of loans and advances by a
bank on security of its own shares or grant of loans or advances on
behalf of any of its directors or to any firm in which its director/manager
or employee or guarantor is interested. The compliance with these
provisions would be mandatory after conversion of an FI to a universal
bank.
The FI would require obtaining a license from RBI to carry business of
banking in India and has to comply with the applicable conditions.
The FI would need to comply with the existing branch licensing policy of
RBI which requires allotting at least 25 per cent of their total number of
branches in semi-urban and rural areas.
At the close of business on the last Friday of every quarter, the FI after
becomes a Universal Bank, would make sure that its total assets held in
India are not less than 75 per cent of its total demand and time liabilities
in India, as required of a bank under Section 25 of the B R Act.
Publishing annual Financial reports as per requirements of the B R Act

30

UNIVERSAL BANKING

OPERATIONAL AND REGULATORY IN FIs IN UNIVERSAL BANK

a) Reserve requirements
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) would be mandatory for an FI after its conversion into
a universal bank.
b) Permissible activities
Any activity of an FI currently undertaken but not permissible for a bank under
Section 6(1) of the B. R. Act, 1949, may have to be stopped or divested after its
conversion into a universal bank.
c) Disposal of non-banking assets Any immovable property, howsoever acquired by an FI, would, after its
conversion into a universal bank, be required to be disposed of within the
maximum period of 7 years from the date of acquisition, in terms of Section 9
of the Banking Regulation Act.
d) Composition of the Board
Changing the composition of the Board of Directors might become necessary
for some of the FIs after their conversion into a universal bank, to ensure
compliance with the provisions of Section 10(A) of the B. R. Act, which
requires at least 51% of the total number of directors to have special knowledge
and experience.
31

UNIVERSAL BANKING

e) Prohibition on floating charge of assets

The floating charge, if created by an FI, over its assets, would require, after its
conversion into a universal bank, ratification by the Reserve Bank of India
under Section 14(A) of the Banking Regulation Act, since a banking company is
not allowed to create a floating charge on the undertaking or any property of the
company unless duly certified by RBI as required under the Section.
f) Nature of subsidiaries
If any of the existing subsidiaries of an FI is engaged in an activity not
permitted under Section 6(1) of the B R Act, then on conversion of the FI into a
universal bank, delinking of such subsidiary / activity from the operations of the
universal bank would become necessary since Section 19 of the Act permits a
bank to have subsidiaries only for one or more of the activities permitted under
Section 6(1) of Banking Regulation Act.
g) Restriction on investments
An FI with equity investment in companies in excess of 30 per cent of the paid
up share capital of that company or 30 per cent of its own paid-up share capital
and reserves, whichever is less, on its conversion into a universal bank, would
need to divest such excess holdings to secure compliance with the provisions of
Section 19(2) of the Banking Regulation Act, which prohibits a bank from
holding shares in a company in excess of these limits.

32

UNIVERSAL BANKING

h) Connected lending
Section 20 of the Banking Regulation Act prohibits grant of loans and advances
by a bank on security of its own shares or grant of loans or advances on behalf
of any of its directors or to any firm in which its director/manager or employee
or guarantor is interested. The compliance with these provisions would be
mandatory after conversion of an FI to a universal bank.
i) Licensing
An FI converting into a universal bank would be required to obtain a banking
license from RBI under Section 22 of the Banking Regulation Act, for carrying
on banking business in India, after complying with the applicable conditions.
j) Branch network
An FI, after its conversion into a bank, would also be required to comply with
extant branch licensing policy of RBI under which the new banks are required
to allot at east 25 per cent of their total number of branches in semi-urban and
rural areas.
k) Assets in India
An FI after its conversion into a universal bank, will be required to ensure that
at the close of business on the last Friday of every quarter, its total assets held in
India are not less than 75 per cent of its total demand and time liabilities in
India, as required of a bank under Section 25 of the Banking Regulation Act.
l) Format of annual reports
33

UNIVERSAL BANKING

After converting into a universal bank, an FI will be required to publish its

annual balance sheet and profit and loss account in the in the forms set out in
the Third Schedule to the B R Act, as prescribed for a banking company under
Section 29 and Section 30 of the Banking Regulation Act.
m) Managerial remuneration of the Chief Executive Officers
On conversion into a universal bank, the appointment and remuneration of the
existing Chief Executive Officers may have to be reviewed with the approval of
RBI in terms of the provisions of Section 35 B of the Banking Regulation Act.
The Section stipulates fixation of remuneration of the Chairman and Managing
Director of a bank by Reserve Bank of India taking into account the
profitability, net NPAs and other financial parameters. Under the Section, prior
approval of RBI would also be required for appointment of Chairman and
Managing Director.
n) Deposit insurance
An FI, on conversion into a universal bank, would also be required to comply
with the requirement of compulsory deposit insurance from DICGC up to a
maximum of Rs.1 lakh per account, as applicable to the banks.
o) Authorized Dealer's License
Some of the FIs at present hold restricted AD license from RBI, Exchange
Control Department to enable them to undertake transactions necessary for or
incidental to their prescribed functions. On conversion into a universal bank,
the new bank would normally be eligible for full-fledged authorized dealer
license and would also attract the full rigour of the Exchange Control
Regulations applicable to the banks at present, including prohibition on raising
resources through external commercial borrowings.
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UNIVERSAL BANKING

p) Priority sector lending

On conversion of an FI to a universal bank, the obligation for lending to
"priority sector" up to a prescribed percentage of their 'net bank credit' would
also become applicable to it.
q) Prudential norms
After conversion of an FI in to a bank, the extant prudential norms of RBI for
the all-India financial institutions would no longer be applicable but the norms
as applicable to banks would be attracted and will need to be fully complied
with.
Ever since the financial sector reforms were introduced in early 90's the
banking sector saw the emergence of new generation of 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. 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, its
Emergence, merits and related issues. The present paper focuses on
understanding the concept of universal banking in India and attempts to
explain the regulatory role, regulatory requirements, key duration and maturity
distinction and lastly the optimal transition path. The paper also gives an
overview of the international experience and argues in favor of developing a
strong domestic financial system in order to compete in the global market.

35

UNIVERSAL BANKING

BREAKING DOWN 'Universal Banking'

Universal banks may offer credit, loans, deposits, asset management, investment
advisory, payment processing, securities transactions, underwriting and
financial analysis. While a universal banking system allows banks to offer a
multitude of services, it does not require them to do so. Banks in a universal
system may still choose to specialize in a subset of banking services.
Universal banking combines the services of a commercial bank and an
investment bank, providing all services from within one entity. The services can
include deposit accounts, a variety of investment services and may even provide
insurance services. Deposit accounts within a universal bank may include
savings and checking.
Under this system, a bank can choose to participate in any or all of the permitted
activities. They are expected to comply with all guidelines that govern or direct
proper management of assets and transactions. Since not all institutions
participate in the same activities, the regulations in play may vary from one
institution to another.
It is important not to confuse the term "universal bank" with any financial
institutions with similar names.
Impact of the 2008 Financial Crisis
The 2008 financial crisis led to a number of failures within the investment
banking system in the United States. This led to the acquisition or bankruptcy of
a variety of institutions. Some notable examples include Lehman Brothers and
Merrill Lynch.
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UNIVERSAL BANKING

THE FALL OF UNIVERSAL BANK

Before the great crash of 2008, the universal banks swaggered around London,
Hong Kong and New York. Barclays, Citigroup, Credit Suisse, Deutsche and
UBS imagined they could be all things to investors in (almost) all corners of the
globe. Five years on, in 2013, such ambitions will seem quaint as the American
and European banks find themselves either shrinking further or increasingly
marginalised.
Far from competing in every category from asset management to equity
derivatives and fixed income, the universal banks will abandon businesses and
locations, through forced disposals or severe cost-cutting. From the ruins, a new
order will emerge: one with different capital structures, new credit channels and
a continued shift in power towards Asian institutions, some of which will be
either partly or wholly government-owned.
The decline of the universal bank will pass unlamented. The promise of the
cross-selling financial supermarket has long been eclipsed by the destruction of
shareholder value after the crash. Sandy Weill, universal bankings evangelistin-chief when at the helm of Citigroup, recanted publicly in 2012. In 2013,
combining stolid utility banking and bonus-hungry investment banking under
one roof will look even more questionable. As one City of London veteran says:
Its like putting Tesco together with Harrodsit doesnt work.
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UNIVERSAL BANKING

The new banking order in 2013 will not be fashioned by a son-of-Glass

Steagall, the Depression-era act which separated commercial lending and
investment banking. There will be little appetite for a giant legislative overhaul,
coming on top of Americas Dodd-Frank act and Britains Vickers commission.
Instead, the power of universal banks will be eroded by market forces driven by
the new Basel 3 rules on capital ratios as well as a more intangible but vital
factor: culture.
In 2012 universal bankers and, more importantly, their clients at last realised
that financial capitalism had moved too far towards transaction banking at the
expense of relationship banking. Politicians and regulators won the argument.
Bankers came to understand that in a world of lower leverageusing money
borrowed on the wholesale markets to investthe old turbo-charged transaction
model no longer worked. The libor rate-fixing scandal was the final straw.
The power of universal banks will be eroded by market forces
In 2013 the rock-star banking CEO typified by Bob Diamond at Barclays will
be consigned temporarily to the Hall of Infamy. Power will either be shared (at
Deutsche, Anshu Jain, a high-flying Indian investment banker, serves as coCEO alongside Jrgen Fitschen, an older German) or invested in a low-profile
CEO like Antony Jenkins, a sober retail banker who has succeeded the abrasive
Mr Diamond at Barclays, or like Michael Corbat, who has succeeded
VikramPandit at Citigroup. Expect further moves at the universal banks, with
Brady Dougan at Credit Suisse among the vulnerable.
Naturally, some masters of the universe will insist that nothing has changed.
Jamie Dimon of JPMorgan Chase, unbowed despite the London Whale
trading loss of 2012, has invested too much in the universal-banking model to
retreat. But Mr Dimon will remain a quintessentially American banker with
38

UNIVERSAL BANKING

little desire to expand in emerging markets such as Africa, Latin America or the
Middle East. Even HSBC, which touted its global-local footprint from every
airport billboard, is pulling back under its new CEO, Stuart Gulliver, with the
exception being an expansion by the bank in China.
Beginning and endings
In 2013 most universal banks will continue to narrow their focus. UBS will
concentrate on wealth management. Others will follow RBS and UniCredit in
exiting or rebalancing their investment-heavy equities business. Another
casualty will be infrastructure lending, which is toxic under the Basel 3 capital
rules. As a senior Goldman Sachs executive notes: Under Basel 1 (in the
1980s) banks were rewarded for being a diversified financial institution; under
Basel 3, the reverse is true. You actually get penalised.
As the investment banks adopt a capital-lite model and syndicate risk, new
players will grow in size and importance. We will hear a lot more about Asian
infrastructure lenders such as the China Development Bank, Japans Bank for
International Co-operation and South Koreas Eximbank. Their rise will signal a
transfer of power from private-sector actors to state-controlled entities, as well
as a geographic shift. The West-to-East shift in financial power in 2013 may
prove as significant as any geopolitical moves in, say, the South China Sea.
In 2012, thanks to the euro-zone crisis, burning the junior and senior
bondholders went from the unimaginable to the possible to the assumed. In
2013 the sovereign-debt crisis will smoulder on. Banks once assumed to be too
big to fail will remain heavily exposed to troubled euro-zone countries
sovereign debt, whatever the palliative operations of the European Central
Bank. In these circumstances, other players will enter the fray. Watch out for
GSO, the credit arm of Blackstone, a private-equity firm. With over $50 billion
39

UNIVERSAL BANKING

under management it is already the single biggest player in sub-senior debt in

Europe (though the cost of capital will rise for these non-banks, with no access
to cheap deposits).

CONSIDERATIONS OF UNIVERSAL BANKING

Caution must be applied on Universal banking because of the following
considerations:
1. Dis-intermediation (i.e replacement of traditional bank intermediation
between savers and borrowers by a capital market process) is only a decade old
in India and has badly slowed down due to loss of investors' confidence.
2. There is an ample room for financial deepening (by banks & DFIs) since loan
market will continue to grow.
3. DFIs as a folder of equity in most of the projects promoted in the past have
never used the tool advantageously.
4. DFIs are now only moving into working capital finance, an area in which
they need to gain lot of expertise and this involves creation of network of
services (including branches) in all fields like remittances, collections etc.
5. Reforms in the Indian capital market is still in the half way stage. The priority
will be to ensure branch expansions, financial deepening of credit markets, and
creation of an efficient credit delivery mechanism that can compete with the
capital market.

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UNIVERSAL BANKING

UNIVERSAL BANKING IN THE OPEN ECONOMY

Developments

in

Information

Globalisation,

Liberalisation

of

Technology,

New

Financial

Sectors

Economic

Policies,

Competitions

and

Opportunities for rapid economic growth in the emerging markets altered the
basic paradigms of banks.

Universal Banking differs from others form of banks which carry a simple
banking or traditional banking connected with collection of deposits and lending
the same to users and mainly functioning as financial intermediaries between
savers and users.

In the light of above with changing scenario at both National and International
levels, it aims to analysing various issues involved concerning acceptability of
concepts of Universal Banking, the state of preparedness of the institutions for
the same and viable transition path with special emphasis on the issues to be
tackled by the institutions at internal levels.

In a broader sense, the term Universal banking refers to providing a wide range
of financial services even beyond commercial banking and investment banking.

In this context, attempting to examine the emerging issues in Universal Banking

in India .
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UNIVERSAL BANKING

THE FUTURE TREND OF UNIVERSAL BANKING IN DIFFERENT

COUNTRIES
Universal banks have long played a leading role in Germany,
Switzerland, and other Continental European countries. The principal
Financial institutions in these countries typically are universal banks
offering the entire array of banking services. Continental European banks
are engaged in deposit, real estate and other forms of lending, foreign
exchange trading, as well as underwriting, securities trading, and
portfolio management. In the Anglo-Saxon countries and in Japan, by
contrast, commercial and investment banking tend to be separated. In
recent years, though, most of these countries have lowered the barriers
between commercial and investment banking, but they have refrained
from adopting the Continental European system of universal banking. In
the United States, in particular, the resistance to softening the separation
of banking activities, as enshrined in the Glass-Steagall Act, continues to
be stiff.
In Germany and Switzerland the importance of universal banking has
grown since the end of World War II. Will this trend continue so that
universal banks could completely overwhelm the specialized institutions
in the future? Are the specialized banks doomed to disappear? This
question cannot be answered with a simple "yes" or "no". The German
and Swiss experiences suggest that three factors will determine future
growth of universal banking.
First, universal banks no doubt will continue to play an important role.
They possess a number of advantages over specialized institutions. In
particular, they are able to exploit economies of scale and scope in
42

UNIVERSAL BANKING

banking. These economies are especially important for banks operating

on a global scale and catering to customers with a need for highly
sophisticated financial services. As we saw in the preceding section,
universal banks may also suffer from various shortcomings. However, in
an increasingly competitive environment, these defects will likely carry
far less weight than in the past.
Second, although universal banks have expanded their sphere of
influence, the smaller specialized institutions have not disappeared. In
both Germany and Switzerland, they are successfully coexisting and
competing with the big banks. In Switzerland, for example, the
specialized institutions are firmly entrenched in such areas as real estate
lending, securities trading, and portfolio management. The continued
strong performance of many specialized institutions suggests that
universal banks do not enjoy a comparative advantage in all areas of
banking.
Third, universality of banking may be achieved in various ways. No
single type of universal banking system exists. The German and Swiss
universal banking systems differ substantially in this regard. In Germany,
universality has been strengthened without significantly increasing the
market shares of the big banks. Instead, the smaller institutions have
acquired universality through cooperation. It remains to be seen whether
the cooperative approach will survive in an environment of highly
competitive and globalized banking.

UNIVERSAL BANK NEW GROWTH AVENUE

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UNIVERSAL BANKING

Universal Baking refers to cross selling of financial products and enables a bank
to act one-stop financial super markets. It is helping transform the banks in the
countries, which were facing bleak process as their traditional sources of
lending, dried up and became virtually Non-existent. Many banks have begun
to migrate to the universal banking model which has opened up new avenues of
growth for them.
Several banks are foraying into areas such as credit cards, insurance, mortgage
financing, investment banking, mutual funds etc, thereby offering different
services to their customers under one roof.
India has experience in universal banking for quite some time. There are
conglomerate variety, in house variety, the narrow variety, and also the board
variety of universal banking. The form that is more predominant is the
conglomerate one rather than the in house form, both internationally and in
India.
This form of universal banking creates a sharp business focus, generates
expertises, enables companies and organizations to harness human resources
more effectively, attract, train, retain and reward them and help in creating an
enduring client relationships.

CONCLUSIONS

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UNIVERSAL BANKING

The following are the steps suggested:

a. Equalise the net regulatory burden across the financial system (including
banks,

DFIs,

mutual

funds,

NBFCs

and

Insurance

companies).

b. Lower the regulatory burden on the over regulated entities.

c. Promote and encourage strong competition.

d. Do not allow the merger of a weak bank with a viably strong DFI or viceversa.
e. DFIs should be permitted to set up a 100 percent owned banking subsidiaries.
f. Need is felt to re-examine the minimum level of SLR requirement in order to
meet the best of international standards.

Bibliography
There are no sources in the current document.

https://en.wikipedia.org/wiki/Universal_bank
www.investopedia.com/terms/u/universalbanking.asp

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UNIVERSAL BANKING

www.indianmba.com/Faculty_Column/FC55/fc55.html

http://www.investopedia.com/terms/i/investmentbank.asp#ixzz4MKKMyNen

References
There are no sources in the current document.

Universal Banking P.K. BANDGHAR - ARTHI KALYANARAMAN

Universal Banking in India and AbroadO.P. AGGARWAL.

46