DECLARATION

I Bhagyalaxmi A. Dakuwa , a student of Joshi Bedekar

College of Arts And Commerce Of Third year Bachelor of
Commerce with Banking and Insurance (vth sem) hereby declare
that , I Completed this Project on UNIVERSAL BANKING in the
academic year , 2010-11 .

The Information submitted by me is true and original to best of

my knowledge .

Place – Mumbai Signature of student

Bhagyalaxmi Dakuwa

T.Y BBI

-I-
 Executive
Summary

• The latest mantra is Universal Banking, which is combination

of Commercial & Investment Banking.
• The concept of U.B. is mainly popular in Germany, USA &
UK, Barclays Bank, Chase Manhattan and Citicorp are some of
the examples of it.
• Universal banking is the solution to FIs problems.
• The merger of ICICI and ICICI bank is probably the largest
merger seen in corporate India Industry, which has redefine
banking in the highly competitive era of globalization and
liberalization.
• Post merger, the new entity- ICICI Bank is the first Universal
Bank in India and the second largest commercial bank in the
country after SBI.
• Financial Institutions & Insurance Companies are now merging
ahead to capture new business areas and leading towards
Universal Banking.

-II-
 INDEX
SR DESCRIPTION REMARK PG
NO. NO.
1. INDIAN BANK; CHANGING PARADIGMS

2. UVIVERSAL BANKING – TASK AS HEAD

3. FUTURE AND CHALLENGES OF

UNIVERSAL BANKING

4. ICICI AS UNIVERSAL BANKING

5. CONCLUSION AND FINDINGS

6. BIBLIOGRAPHY

7. ANNEXURE

-III-
 CHAPTER - 1

INDIAN BANK ; CHANGING

PARADIGMS
INDIAN BANKS; CHANGING PARADIGMS

INTRODUCTION:

Banking as a major part of the financial sector, is a life blood for the whole
industry, necessary to survive. It plays a decisive role in accelerating the rate
of economic growth in each economy. In the wake of contemporary changes
in the world economy and other domestic crises like adverse balance of
payment problem, increasing fiscal deficits etc. our country too embarked
upon economic reforms, they are necessary for faster economic growth to
meet the emerging challenges. To improve the adverse situation in banking,
banking sector reforms were introduced in 1991 and 1998 by the committee
constituted under the chairmanship of Mr. M. Narasimham.

Rationale of banking sector reforms:

Banking sector reforms were introduced to remove the deficiencies in the

banking sector. Following were the problems the Indian banking sector was
facing prior to the reforms:

• Highly regulated by the RBI eroded productivity and efficiency of

public sector banks.

• Continuous losses suffered by public sector banks year after years.

• Increasing NPAs.

• Deteriorating portfolio quality.

• Poor customer service.

• Obsolete work technology.

• Inability to face the competitive environment.

Hence, need of hour was to introduce some policies to remove the above
said deficiencies. So, in the light of above distortions, Narasimham
committee was appointed in 1991 and it submitted its report by November
1991, with the detailed measures to improve the adverse situation of the
banking industry. The main motive of the reforms was to improve the
operational efficiency of the banks to further enhance the productivity and
profitability.

First phase of banking sector reforms:

The first phase basically contained:

1. Reduction in SLR and CRR,

2. Deregulation of interest rates,

3. Transparent guidelines or norms for the entry and exit of private

sector banks,

4. Public sector banks allowed for direct access to capital markets,

5. Branch licensing policy liberalized,

6. Setting up of debt recovery tribunals,

7. Asset classification and provisioning,

8. Income recognition,

9. Asset reconstruction fund (ARF), and

10. At least 40 piece of the total advances for the priority sector.
The first phase of the banking sector reforms, termed as “curative”
measures, came up with the main objective to improve the operational
efficiency of the banks. Although first phase of the banking sector reforms
witnessed revealed improvement in the performance of the banks, yet
competition also increased with liberalization, privatization, and
globalization. With the better use of technology, new entrants were able spur
competition, but public sector banks suffered as they were not using the
technology to a large extent mainly due to apposition from trade unions and
high initial costs of installation.

SECOND PHASE OF BANKING FIRMS

In spite of the optimistic views about the growth of banking industry in

terms of branch expansion, deposit mobilization etc. several distortions have
still crept into the systems which are enumerated as follows:

• Increasing competition

• Increasing NPAs, and

• Obsolete Technology

Hence, while observing above distortions the government of India appointed

the second Narasimham in 1998 to review the first phase of banking reforms
and chart out a programme for further reforms necessary to strengthen to
India’s financial system so as to make it internationally competitive. This
situation arose mainly due to the global changes occurring in the world
economy, which has made each industry more competitive. The committee
reviewed the performance of the banks in light of first phase of reforms and
submitted its report with some repaired and some new recommendations.
There are no new recommendations except the following:

• Merger of strong units of banks, and

• Adaptations of the ‘Narrow Banking’ concept to rehabilitate weak
banks .
As the process of second banking sector reforms is going on since 1999, it
has proved improvement in the performance of banks and on the other side,
may changes have come occurred due to the entry of our banks into the
global market.

Since a decade of banking sector reforms has been completed, it is essential

to review the various has been completed, it is essential to review the
various issues of banking sector reforms, especially its post reforms’ impact
on NPAs, interest income, non-interest income, capital adequacy, priority
sector advances and SLR/CRR. This study is mainly concerned with the
efficacy of banking sector reforms, major weak areas need to be further
considered and some possible reforms need to be added in third reforms.

• SLR and CRR

It represents the required percentage of the banks’ time and demand

liabilities that need to be reserved or deposited with RBI on daily
basis. Before the banking sector reforms, it was much more and
have blocked the banks capital resulting in a ban to invest these
funds in other better opportunities that might increase their
profitability. After that, it was reduced as recommended by tha
Narasimham committee, which improved the banks’ financial and
liquidity position. During the banking sector reforms, CRR and
SLR is continuously falling and due to this the banks have more
funds for credit to various sectors and they have more funds for
investment.

• INTEREST INCOME AND EXPENDITURE

Interest is a cost and income of the banks. Due to the deregulation,

interest rates are decreasing continuously to meet the competition.
It adversely affects the interest income earned from advances and
investment. Banks have initiated to pitch into the fee-based
activities market, income from these sources is going to increase
which is further helping the banks to set off their losses due to
reduction in interest margins.
 • CAPITAL ADEQUACY

Capital adequacy ratio reflects the overall financial condition of

the banks and also their ability to meet the need for additional
capital. An adequate capital base is essential for banks to absorb
credit risk but in the pre-reform years, a large number of banks
were under capitalized, as they were unable to add to their capital
base by increasing reserves due to declining profits. Since 1991, it
was much below the internationally accepted CRAR of 8 pc. But
after the reforms were introduced, a target of 10 pc CRAR

• MAJOR ISSUES

The foregoing analysis shows that reforms have paved the way for
building our banking system capable to meet the requirements of an
open and competitive economy. But in one other side, some
deficiencies have persisted despite these reforms like:

 Low level of priority sector advances ,

 Decreasing interest income

 High share of NPAs , and

 Growing influence of foreign banks witnessed by their

tremendously increasing non-interest income, decreasing
NPAs and good CAR.

RESULTS AND DISCUSSIONS

The improvement in the financial health of the banking system is reflected in

declining share of NPAs in the total advances of all the bank groups. The
reforms measures have also resulted in an improvement in the in an
improvement in the profitability of banks

AGENDA FOR THIRD PHASE REFORMS

Rethinking for financial sector reforms have to be accorded the highest
priority, with restructuring of the public sector banks in particular, to
strengthen the Indian financial system and make it sound to meet the
challenges of globalization. The on going reforms process and the agenda
for third phase of reforms will focus mainly on making the banking sector
reforms viable and efficient so that it could contribute to enhance the
competitiveness of the real economy and face the challenges of an
increasingly integrated global financial architecture.

MANAGEMENT OF NPAs

The level of NPAs in the Indian banking industry is of a greater concern and
thus urgent cleaning up of banks balance sheet has became a crucial issue.
Although the ratio of net NPAs to net advances has reduced to some extent,
yet it is high in absolute terms. So, NPAs would have to be reduced
drastically and for the same purpose, following measures are suggested:
• Reducing the existing NPAs and curbing their further build up

• Do not consider projects with old technology for finance

• Do not consider financing term loans for maturities over 5 years

except in case of agriculture, infrastructure and SSI.

• Increasing the number of Debt Recovery Tribunals

• Collect interest from clients on monthly basis instead of quarterly

collection.
• Train the staff to closely monitor creditworthiness of borrowers and
end use of bank loans to major post-defaults

• Regional manager should visit the branches periodically for

monitoring preventive actions taken by the branches

• Eliminate political interference in disbursing loans.

The above said set of reforms should be considered to arrest the trend of
ever increasing level of NPAs.
PRIORITY SECTOR ADVANCES
The tendency to of declining share of priority sector advances in the total
advances, need to be checked if the banking system is to be geared up to
meet the specific requirements of Indian economy. On the basis of above
analysis, the following recommendations should be considered for third
reforms:

• Reduction of present 40 pc target limit to 35 pc, besides motivating

banks to finance in this sector more then their target and reward those
banks with some extra benefits like tax exemption to possible extent,
increase in their credit limits etc.

• Simplify the procedure for loan application form, agreements and

other documents.

• Delegating power to branch managers.

• Order the banks to make their loan policy transparent and stop mutual
adjustments of various aspects of priority sector advances.

• Initiate self- evaluation programmes to evaluate borrower accounts

and security values by internal professionals and by external experts to
prevent default in accounts.

• Eliminate political interference and provide loans only to confident

parties and for productive purposes only.

• Promote more advances for agriculture and SSI by enhancing the

credit limits for them.

These recommendations should be considered in third reforms to manage the

priority sector advances in the right directions.

RATIONALISATION OF INTEREST RATES

Interest income is declining continuously due to deregulation of interest
rates, entry of NBFCs with easy financing options and intense competition.
On the other side, non-interest income is increasing which is good indicator
of increasing profitability. To manage the interest rates, following
suggestion can be considered:

• Evolve a reserve bank reference rate of interest, which will be the

basis for determining the entire gamut of interest rates.

• Adopt cautions step by step approach rather a rapid deregulation of

interest rates.

• Adopt more and more fee-based activities like merchant banking;

advisory services etc. public sector banks should be further motivated
to initiate fee-based activities.

• The government should reduce the rate of interest on housing

loans and also on loans for infrastructure development activities.

NEW CREDIT ASSESSMENT SKILLS

So far the focus of attention in the banking industry has largely been
extending finance to agriculture and manufacturing sectors covering small,
medium, and large industries. However, banks should now capture service
class also. Through, IT, banks therefore, have to sharpen their credit
assessment skills and lay more emphasis in providing finance to the wide
range of activities in the services sector

CURRENT ISSUES IN INDIAN BANKING

Despite substantial improvement in the banking sector, some issues have to
be addressed over time as the reform process is entrenched further. The
discussion on banking developments revolves around on a wide range of
issues like:

• Overall redrawing of boundaries between the state ownership of

financial entities and private sector ones.

• Public sector character of the banking sector and efficiency.

• Dilution of the government stake and its impact on the performance

of the banking sector.

• Corporate governance in banks and other segments of the financial

system.

• Relevance of development finance institution

Financial sector reforms, introduced in the early 1990s in a gradual and

sequenced manner, were directed at his removal of various deficiencies from
which the system was suffering. The basic objective of reforms was to make
the system more stable and efficient so that it could contribute in
accelerating the growth process.

UNIVERSAL BANKING – TASK AS A HEAD

INTRODUCTION

Economic historians have long emphasized the importance of financial

institution in industrialization. More, recently economists have begun more
intensive investigation of the links between financial system structure and
real economic outcomes. In theory, the organization of financial institution
partly determines the extent of competition among financial intermediaries,
the quantity of financial capital drawn in to the financial system, and the
distribution of that capital to ultimate uses. The choice between universal
and specialized banking may affect interest rates, underwriting costs, and the
efficiency of secondary markets in securities.

Furthermore, the presence or absence of formal bank relationship may affect

the quality of investments undertaken, strategic decision-making, and even
the competitiveness of industry. Particularly since World War II, many
economists and historians have argued that German-style universal bank
offer advantages for industrial development and economic growth. Universal
banking efficiency combined with close relationship between banks and
industrial firms, they hypothesize, spurred Germany’s rapid development at
the end of the nineteenth century and again in the post- World War II
reconstruction. A corollary to this view holds that countries that fold to
adopt the universal relationship system suffered as a consequence.
Adherents suggest the British industry has declined over the past hundred
years or more, and that the American economy has failed to reach its full
potential due to short- comings of the financial system that lesd to relatively
high cost of capital .

INDIAN BANKING SCENARIO

There has been a paradigm shift in mindsets both at the government level
and at the policy framing in the banking industry over the years
nationalization of banks in 1969, particularly during the last decade. Having
achieved the primary objectives of nationalization as envisaged by the
government policy framers at the time viz. a marked shift from class to mass
banking, increasing the reach of the banking industry graphically through
massive branch expansion. Credit to the agriculture and rural sector and to
function as an active arm of the government for poverty alleviation, the most
important issue before the industry at present is survival and growth in the
vortex of strong cross currents that the economic liberalization has
generated. The wide spread branch expansion programme resulted in a
massive recruitment drive over then years for manning the operational unit
opened at the governments directive. As a result the nationalized banking
industry at present it characterized by a massive branch-network and bloated
and highly unionized work force with combined with a low level of
technology, has impaired the maneuverability of these organizations
vis-à-vis the lean, compact, techno savvy, market driven and nimble footed
new generation private bank which have come into market over the last 9/10
years. These new entrants in the markets are consistently chipping away at
the market share of the nationalized banks especially in metro and urban
centers thereby exposing the bottom line of the nationalized banks to severe
strain .

It is now well understood that a healthy banking sector is the bedrock of a

stable financial system. The renewed focus on the banking sector has been
driven by two ,major considerations. Firstly, the growing universalization
and internationalization of banking operation have altered the face of banks
from one of mere intermediator to one of provider of quick, efficient and
consumer centric services. Secondly the widespread banking problems that
have plagued large areas of the globe have raised a clutch of questions
relating to linkages between banking reforms and reforms of other segments
of the financial sector, exposure to sensitive sectors etc.

It is therefore imperative especially in a developing economy like India

where asset of the banking sector constitute a substantial proportion of
financial sector assets, to promote robust financial practices and policies in
respect of banks. In the wake of the recent financial crisis in different parts
of the globe, there has been a renewed focus world wide on containing risks.
The banking industry in India, in the new millennium, is also moving
towards the international best practices in banking supervision for achieving
and maintaining stability and also to combat competition from global players
effectively .

The government, in recognition of the fact that the nationalized banking

industry needs to augment their capital base to cope up with the changing
operational environment, has permitted the banks to access the capital
market both at home and abroad and also permitted a reduction in the
minimum government shareholdings in nationalized banks to 33 %. This
landmark decision has wide ranging implication since the financial health of
these banks would now be subjected to intense scrutiny of both the domestic
and international agencies when the banks access the capital market for
raising fresh funds to shore up their capital base.

Further, given the increasing internationalization of banking operation,

commercial bank are often subject to significant mismatch between asset
and liabilities with implication of several type of risk in view of which Asset
Liability Management (ALM) Committees headed by top management
functionaries have been set up. Moreover the increased complexity in
banking operations and the need to prevent financial crisis of the type
witnessed in south east recently have necessitated up gradation of various
risk management procedures and practices in the banking industry. A risk
management system has therefore been put place in the banks to enable them
to take care of credit risk, interest rate risk ,market risk and operational risk.

MAJOR REFOMS IN THE BANKING SECTOR

• Interest rate deregulations. Interest rates on deposits and lending have
been deregulated with banks enjoying greater freedom to determine
their rates .

• Adoption of prudential norms in terms of capital adequacy, asset .

• Classification, income recognition, provisioning, exposure limits,

investment fluctuation reserve, etc.

• Reduction in Pre-emption- lowering of reserve requirements

( SLR and CRR), thus releasing more lendable resources which banks
can deploy profitably .

• Government equity in banks has been reduced and strong banks have
been allowed to access the capital market for raising additional capital

• Banks now enjoy greater operational freedom in terms of opening and

swapping of branches, and banks with a good track record of
profitability have greater flexibility in recruitment .

• New private sector bank has been set up and foreign banks permitted
to expand their operation in India including through subsidiaries.
Banks have also been allowed to set up.

• Offshore banking units in Special Economic Zones .

• New areas have been opened up for bank financing : Insurance, credit
cards, infrastructure financing, leasing, gold banking, besides of
course investment banking, asset management, factoring etc .

• New instruments have been introduced for greater flexibility and

better risk management : e.g. interest rate swaps, forward rate
agreements, cross currency forward contracts, forward cover to hedge
inflows under foreign direct investment, liquidity adjustment facility
for meeting day-to-day liquidity mismatch.
• Several new institution have been set up including the National
Securities Depositories Ltd, central depositories services ltd, clearing
corporation of India ltd, credit information bureau India ltd .

• Limits for investment in overseas markets by banks, mutual funds and

corporates have been liberalized. The overseas investment limits for
corporate has been raised to 100 % of net worth and the ceiling of
$100 million on prepayment of external commercial borrowings has
been removed. MFs and coporates can now undertakes FRAs with
banks. Indians allowed maintaining resident foreign currency
accounts. Full convertibility for deposit schemes of NRIs introduced .

• Technology infrastructure for the payment and settlement system in

the country has been strengthened with electronic fund transfer,
centralized funds management system, structured financial messaging
solution, negotiated dealing system and move towards Real Time
Gross Settlement .

• Adoption of global standards. Prudential norms for capital adequacy,

asset classification, income recognition and provisioning are now
close to global standards. RBI has introduced risk based supervision
of banks (against the traditional transaction based approach ). Best
international practices in accounting system, corporate governance,
payment and settlement system, etc. are being adopted .
• Credit delivery mechanism has been reinforced to increase the flow of
credit to priority sector through focus on micro credit and self help
groups. The definition of priority sector has been widened to include
food processing and cold storage, software up to Rs. 1 Crore, housing
above Rs. 10 lakh, selected lending through NBFC’S etc.

• RBI guidelines have been issued for putting in place risk management
system in banks. Risk management systems in banks. Risk
management committees in banks address credit risk, market risk, and
 operational risk. Banks have specialized committees to measure and
monitor various risk and have been upgrading their risk management
skills and systems .

• The limit for foreign direct investment in private banks has been
increased from 49 % to 74 % and the 10 % cap on voting rights has
been removed. In addition, the limit for foreign institutional
investment in private banks is 49 % .

• Wide ranging reforms have been carried out in the area of capital
markets. Fresh investment in CP’s , CD’s are allowed only in
dematerialized form. SEBI has reduced the settlement cycle from
T+3 to T+2 from April 1, 2003 i.e. settlement of stock deals will be
completed in two trading days after the trade is executed, taking the
Indian stock trading system ahead of some of the developed equity
markets. Stock exchanges will set up trade guarantee funds. Retail
trading in government trading has been introduced on NSE and BSE
from January 16, 2003. A serious frauds office is proposed to be set
up. Fungibility of ADRs and GDRs allowed.

• Universal banking has been introduced. With banks permitted to

diversify into long-term finance and DFI’s into working capital,
guidelines have been put in place for the evolution of universal banks
in an orderly fashion .
UNIVERSAL BANKING DEFINED

The universal bank emerged in Germany as a fruit of economic liberalism

around the mid-19th century. It is defined as, “ A bank, usually a large one,
which can offer a variety of services to its customers under one and the same
roof.”
(Perry, F.E. Dictionary of Banking, 1979 )

Universal banking in general refers to the combination of commercial

banking and investment banking. In a broader sense it encompasses financial
services beyond commercial banking and investment banking, such as,
insurance, leasing, investment advisory etc. However, universal banking
does not mean that every institution conducts every type of business with
every type of customer. In the spectrum of banking, specialized banking is
on the one end and universal banking on the other .

Earlier financial institution used to cater to term loan requirement while

commercial banks did working capital financing. Now. We have reached a
stage where ‘Harmonisation’ has taken place in the financial institution and
commercial banks, where they do working capital finance also and we do
term loan also. In an limited sense that is universal banking. Further, it has
evolved into a situation where we need to take care of the life cycle of the
customers. Then, we have to have every product that he requires for his
different needs. So, when you have reached that stage when the bank is able
to offer term loan, fixed asset loan, working capital finance, retail loans, etc.,
that makes a universe .

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.
 • Universal banking is a combination of commercial banking,
investment banking and various other activities including insurance. If
specialized banking is the one end universal banking is the other. This
is most common in European countries.

• It result in greater economic efficiency in the form of lower cost,

higher output and better products. However larger the banks, the
greater the effects of their failure of the system. Also there is a fear of
that such institution, by virtue of their sheer size, would again
monopoly power in the market, which can have significant
undesirable consequences for economy efficiency. Also combining
commercial and investments banking can gives rise to conflict of
interest.

UNIVERSAL BANKING IN INDIA

THE EMERGENCE

The Narasimham committee II suggested that Development Financial

Institution (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 on the discussion paper 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 by banks and DFIs. 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. It is proposed to
adopt the following broad approach for considering proposals in this area:

The principle of "Universal Banking" is a desirable goal and some progress

has already been made by permitting banks to diversify into investments and
long-term financing and the DFIs to lend for working capital, etc. However,
banks have certain special characteristics and as such any dilution of RBI's
prudential and supervisory norms for conduct of banking business would be
inadvisable. Further, any conglomerate, in which a bank is present, should
be subject to a consolidated approach to supervision and regulation.

Though the DFIs would continue to have a special role in the Indian
financial System, until the debt market demonstrates substantial
improvements in terms of liquidity and depth, any DFI, which wishes to do
so, should have the option to transform into bank (which it can exercise),
provided the prudential norms as applicable to banks are fully satisfied. To
this end, a DFI would need to prepare a transition path in order to fully
comply with the regulatory requirement of a bank. The DFI concerned may
consult RBI for such transition arrangements. Reserve Bank will consider
such request on a case by case basis .

Regulatory issues for conversion into universal banks.

  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

 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.

 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 B. R. Act.
 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

 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 B. R. 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.

 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 B. R. Act.
 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 B. R. Act, which prohibits a bank from
holding shares in a company in excess of these limits.

 Connected lending

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.

 Licensing
An FI converting into a universal bank would be required to obtain a
banking license from RBI under Section 22 of the B. R. Act, for carrying on
banking business in India, after complying with the applicable conditions.
 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.

 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 B R Act.

 Format of annual reports

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 B. R. Act.
  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 B. R. 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.

 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.

 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.

 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 .

 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.
PROS AND CONS OF UNIVERSAL BANKING

• Multiple Utility of Activities

By diversifying, the bank can use its existing expertise in one type of
financial service in providing the other types. So, it entails less cost in
performing all the functions by one entity instead of separate
specialized bodies. A bank possesses information on the risk
characteristics of its clients, which it can use to pursue other activities
with the same clients. This again saves cost compared to the case of
different entities catering to the different needs of the same clients. A
bank has an existing network of branches, which can act as shops for
selling products like insurance. This way a big bank can reach the
remotest client without having to take recourse to an agent. Many
financial services are inter-linked activities, e.g. insurance and lending.
A bank can use its instruments in one activity to exploit the other, e.g.
in the case of the same firm which has purchased insurance from the
bank.

(1) Savings in transaction costs

Now, let us turn to the benefits accruing to the customers. The idea of
‘one-step-shopping’ saves a lot of transaction costs and increases the
speed of economic activity. Another manifestation of universal banking
is a bank holding stakes in a firm. A bank’s equity holding in a
borrower firm acts as a signal for other investors on the health of the
 firm, since the lending bank is in a better position to monitor the firm’s
activities. This is useful from the investor’s point of view.

(2) Loss in Economies of Specialization

Then there is the problem of the bank indulging in too many risky
activities. to account for this, appropriate regulation can be devised,
which will ultimately benefit all the participants in the market,
including the banks themselves. In spite of the associated problems,
there seems to be a lot of interest expressed by banks and financial
institutions in universal banking. In India, too, a lot of opportunities are
there to be exploited. Banks, especially the financial institutions, are
aware of it. And most of the groups have plans to diversify in a big way
even though there might not be profits forthcoming in the short run due
to the switching costs incurred in moving to a new business.

(3) Lack of Expertise in Converting into commercial Banks

Hitherto the business of the financial institutions has been confined to

only ‘credit’ with attendant forex business (with limitations). Apart
from the proportion of existing NPAs in their balance sheets the FIs
have to reckon with other important variables while moving towards
commercial banking. Looking at the existing size of the financial
institutions as compared to the bank with which merger is intended, the
relatively short gestation period available to the bank to establish itself
amidst the turbulent market/competition, the scenario is quite
challenging. One might well ask what is the input from a financial
institution in a merger to a relatively less asset-based bank. FIs have
had a crucial role in the years following Independence: in the then
prevalent conditions, financial institutions built up infrastructure
 contributed to a better industrial climate. The expertise in these fields
may be sub served or enlarged appropriately. However is such expertise
relevant for say small, retail loans-which are promising avenues for the
banks of today?

(4) Mismatch between Long and Short Term Business

Looked from another perspective, the financial institutions till

yesterday are only for ‘long term’ both on the assets and liabilities sides
while commercial banks cater to ‘short term’ businesses. There was a
marked demarcation, though not a ‘Chinese wall’ between these two.
With the advent of market economy, the gap is getting closed through
‘universal banking’. The subject is in the air for sometime but currently,
rising NPAs and dearth of avenues for resources for the financial
institutions in the wake of falling market sentiments in the recent period
have accelerated the process. For a few of the FIs, survival itself might
be at stake. On the risk parameters, the long term liabilities (at higher
rates of interest, in the context of declining trends) will remain as they.
A re-look on the assets side strongly suggests that after netting the
NPAs, the existing ‘mismatch’ might well go up. Barring one or two of
the new generation banks and foreign banks of course, the concept of
ALM (asset-liability management) remains an academic subject. As far
as the ICICI Bank is concerned, having only recently completed the
takeover of Bank of Madura, it probably needs some more time to
prepare for another drastic organizational upheaval.

(5) Staff Incompatibility

It is pertinent to mention that amalgamation between banks in the past,

from a personnel angle has not been at all compatible – the striking
example of the New Bank of India with the Punjab National Bank is a
case in point. But here, larger strength of non-bankers needs to be
groomed and accepted for banking counters! Dealings in financial
 institutions are structured in an easier convenient “one to one basis”
unlike in commercial banks where the personnel are rotated among
practices. For instance, in the FIs loan disbursals are structures over a
period as compared to running accounts of borrowers in banks where
they need to respond on the spot to the situations.

(6) Compliances with BASEL II Norms

In the context of RBI’s dictates, in conformity with Basle Committee

prescriptions at the international level, to banks on ‘risk management’,
apparent risks in all spheres may call for special dispensations to the
merged entity and thus one more class of banks (apart from public
sector, old/new private sector, foreign banks) will emerge for the
central bank to deal with. Lest unhealthy precedents are permitted, the
central bank may have to envision a long term strategy to respond to
emerging situations. In fact, RBI’s policy to have permitted private
banks to be established in the early Nineties has already been reviewed
and yet another phase is now seen in regard to few banks which were
then established. In fact, ever since RBI talked of ‘risk management’
since 1998, except for some sporadic responses, it is yet to percolate at
the top levels of management.

So far it has been yet another jugglery with figures. One has to see the
kind of disclosures in annual report of banks abroad on the risk
parameters. The time is not far off for such compulsions from the
international arenas (as the attraction for GAAP registration increases)
to take hold. Failure or inaccuracies in disclosures may do greater harm
at the national levels. For example, recently the regulatory authorities in
the US demanded policy documents on certain aspects of banking
business: here, practices exist sans any documents, notwithstanding the
infamous securities scam of the 1990’s; such permissiveness needs to
be contained. The RBI has on its record, such prescriptions but this
need to be enforced with rigor to match the US practices.
Imperatives for Universal Banking

1. Improving Profitability

The most direct result of the above changes is increasing competition

and narrowing of spreads and its impact on the profitability of banks.
The challenge for banks is how to manage with thinning margins while
at the same time working to improve productivity which remains low in
relation to global standards. This is particularly important because with
dilution in banks equity, analyst and shareholders now closely track
their performance. Thus, with falling spreads, rising provision for NPAs
and falling interest rates, greater attention will need to be paid to
reducing transaction costs. This will require tremendous efforts in the
area of technology and for banks to build capabilities to handle much
bigger volumes.

2. Reinforcing Technology

Technology has thus become a strategic and integral part of banking

driving banks to acquire and implement world class systems that enable
them to provide products and services in large volumes in large
volumes at a competitive cost with better risk management practices.
The pressure to undertake extensive computerization is very real as
banks that adopt the latest in technology have an edge over others.
Customers have become very demanding and banks have to deliver
customized products through multiple channels, allowing customers
access to the bank round the clock.
 3. Risk Management

The deregulated environment brings in its wake risks along with

profitable opportunities, and technology plays a crucial role in
managing these risks. In addition to being exposed to credit risk, market
risk and operational risk, the business of banks would be susceptible to
country risk, which will be heightened as controls on the movement of
capital are eased. In this context, banks are upgrading their credit
assessment and risk management skills and retraining staff, developing
a cadre of specialists and introducing technology driven management
information systems.

4. Sharpening Skills

The far-reaching changes in the banking and financial sector entail a

fundamental shift in the set of skills required in banking. To meet
increased competition and manage risks, the demand for specialized
banking functions, using IT as a competitive tool is set to go up. Special
skills in retail banking, treasury, risk management, foreign exchange,
development banking, etc., will need to be carefully nurtured and built.
Thus, the twin pillars of the banking sector i.e. human resources and IT
will have to be strengthened.

5. Greater Customer Orientation

In today’s competitive environment, banks will have to strive to attract

and retain customers by introducing innovative products, enhancing the
quality of customer service and marketing a variety of products through
diverse channels targeted at specific customer groups.

6. Corporate Governance

Besides using their strengths and strategic initiatives for creating

shareholder value, banks have to be conscious of their responsibilities
towards corporate governance. Following financial liberalization, as the
ownership of banks get broad based the importance of institutional and
individual shareholders will increase. In such a scenario, banks will
need to put in place a code for corporate governance for benefiting all
stakeholders of a corporate entity.

7. International Standards

Introducing internationally followed best practices and observing

universally acceptable standards and codes is necessary for
strengthening the domestic financial architecture. This includes best
practices in the area of corporate governance along with full
transparency in disclosures. In today’s globalised world, focusing on
the observance of standards will help smooth integration with world
financial markets.
Universal Banking Implications

Universal banking has a wide spectrum of implications.

1. Portfolio Risk

Permitting banks to acquire more substantial equity holdings than they

can now could diminish the risk taken by banks or increase it.
Economics and regulators have long understood that the riskiness of
returns on common stock exceeds that of debt, other things being equal.
For many years, a principal reason for separating banking from
commerce has been the belief that some activities, including equity and
real estate investment, were too risky. It is now well understood that
risk can be reduced by diversification. Equity and other types of assets
might, in themselves, be relatively risky, but if they have a diversifying
effect on other investment, they can reduce risk in a portfolio of assets
by smoothing revenue streams over time. So, for example, a banking
conglomerate that included an automobile manufacturer might find that,
although interest rate increases during an expansion reduced revenues
from financial services, the reduced revenues were offset by increased
revenues from automobile sales.

Alternatively, in a step recession, with revenues from automobile sales

declining, the offset might come from favorable interest rate spreads on
financial services. According to empirical evidence, diversifying by
combining banking and commerce may reduce risk. The potential,
however, is likely to differ among banks of different size. So, for
example, the potential gain for large banking organizations with
international operations that already permit equity investments is
unlikely to be as great as for smaller regional and local banks whose
current investments opportunities are more limited. Moreover, whether
or not a banking organization actually chooses to diversify will depend
on more factors than the scope of permitted activities.

2. Economies of Scale

Eliminating barriers between banking and commerce could

conceivably yield economies of scale and/or scope. Economies of scale
and manifest in lower average costs when the scale of production of a
specified product increases. Economies of scope lower average costs
when different products within one organization share inputs.
Realization of such economies for a wide range of banking services
would, under competitive conditions, reduce prices paid by bank
customers. Combining banking with commercial firms makes bigger
organizations. Big diversified organizations could increase scale if
some of the products of the combining firms were enough alike to use
the same production process, e.g. a bank’s automobile financing and an
automobile company’s automobile financing. Liberalization of branch
banking restrictions in recent years has facilitated large scale without
the involvement of commercial firms. By acquiring a small, a large
bank can reduce the other’s high average costs.

3. Conflict of Interests: The possibility for multiple conflicts of

interest when a bank is an owner of the company to whom it is
lending, or whose securities it is underwriting, raise issues that have a
long history. Among other things, the creditor-underwriter-owner
combination also raises questions about the availability and use of
insider information. Potential conflicts that have been cited from time
to time include the following:

a) A bank may extend credit to a company in which it has an

ownership interest, independent of the company’s
creditworthiness, to assist the company and increase the value
of its stock. Such an extension would conflict with the interest
of its depositors, its safety and soundness, and the integrity of
the deposit insurance fund. Further, rival companies,
unaffiliated with the banking organization, might be subjected
to unfair credit terms.

b) If bank managers own, in their own right, equity in the same

commercial company that the bank controls, manager would
have an incentive, independent of the interests of the bank’s
stockholders, to increase the value of the company, possibly at
the expense of the bank. The conflict, in this case, is between
the interests of bank management and the bank’s stockholders.

c) Similarly a bank may purchase the debt or equity securities

of a company that it owns and to whom it is creditor to
temporarily increase the value of a company’ stock and, in the
extreme, provide it with funds to repay its bank loans. Such
transactions would also conflict with the interests of depositors,
safety and soundness, and the integrity of the deposit insurance
fund.

d) A bank may come to the rescue of a failing company by

moving bad assets from its subsidiary or affiliate to the bank. It
may or may not be a rational shift aimed at protecting the
banking organization’s reputation and future profitability. The
potential conflict in this case is between the interests of the
bank’s stockholder, on the one hand, and the interests of its
creditors, bank supervisions, the deposit insurance fund, and
taxpayers on the other.

e) A bank may obtain substantial amounts of inside

information that it might act on in its security dealing. If the
information is withheld from its securities customers, the bank
could benefit at their expense. In the extreme, the bank may use
inside information to sell weak securities from its own portfolio
 to its customers, either directly or through a managed
investment fund, and to purchase strong securities in advance of
publicly available information.

The conflict between its own interests and the interests of its securities
customers may be exacerbated by a conflict, under current law, between
the requirement that it not reveal or act on inside information and the
obligation of a dealer to provide all relevant information to its
customers. Conflicts may be exacerbated by the organizational form. In
either an affiliate or subsidiary structure, ownership and creditor
relationships between a bank, its officials, and the subsidiaries or
affiliates are likely to be important. Universal banks, in which all
activities are conducted within the bank itself or in subsidiaries or
affiliates that are owned pro rata by the organization’s stockholders,
carry the least danger of creating incentives that exacerbate potential
conflicts.

4. Global competition and Bank Viability

If narrowing or eliminating the separation between banking and

commerce reduces risk, moderates the asymmetric information
problem, and, for these and other reasons, lowers average costs, foreign
banks with broader powers should have an advantage in competition
with local banks. If nothing more, foreign banks should have an
advantage in maintaining loan customers in whom they have an
ownership interest.

5. Financial Markets

On banking developments in other countries, comparisons suggest that

financial markets are less developed in countries in which banks have
played a larger role on providing equity and long-term credit as well as
short-term credit. It has frequently been suggested that because many
transactions in Germany were executed through banks rather than
through markets, universal banking has been at least partly responsible
for Germany’s weak capital markets. In the mid-1980’s, one study of
capital markets in Germany reported signs of “fragmentation”. The size
of issues was small, turnover was relatively low, the market was
shallow, and the market’s formal operations were limited.

6. Production Sector

Prospective banking/commerce changes may directly affect not only the

financial sector but also the commercial or production sector of the
economy. Potential impacts can be considered in a number of areas,
including economic growth and stability, competition, concentration,
and small business lending. There are, moreover, a variety of other
allocation efficiency considerations that also merit attention.

7. Economic Growth and Stability

The relative contributions of banking-commerce relationships to

economic growth and stability have been a focal point of comparison
between Germany and United States. The costs of capital to commercial
firms, the pace of innovation and technological change, and
susceptibility of the different economies to systemic events all has
potentially differential effects on economic growth and stability.

8. Technological Change and Innovation

Technological improvements and innovation accounts, through

improved productivity, for a substantial share of economic growth
in the economy. It is conceivable that larger and better diversified
banks would contribute to more rapid technological innovation.
Large companies have an advantage in supporting research and
innovation; diversification might contribute because of the “cross
fertilization” of ideas and the cross-selling of new products, among
other things. How important size and diversification are, however,
is unclear, given the possibilities for sluggishness in large,
 complex organization and the seeming willingness of small and
new business to take greater risks. The combination of banking
with commercial firms will result in larger and more diversified
organizations. Improved efficiency and lower costs of capital, if
they materialized, might better support innovation both in banking
and in industry. There has, however, been little or no investigation
into the effects of bank size and diversification on innovation. In
other areas, empirical studies have not provided consistent results.

9. Systemic Risk

Concern about systematic risk transcends the financial and commercial

sectors. To the extent a systemic event develops in any sector, it is
likely to affect the entire economy. The ability of banking organizations
to diversify could provide some protection against distress that might
otherwise lead to systemic problems. Whatever the extent of geographic
and/or product diversification, systemic problems may still occur, for
example, from oil crises, stock market crashes, and real estate busts;
that is, from the kind of risk that cannot be reduced by diversification.
The timing and specific nature of such shocks are not predictable. Less
bank aversion to risk at the end of a long expansion has been identified
as a contributing cause of systematic problems.119 objectively, shocks
become increasingly likely with the lengthening of an economic
expansion in which optimism flourishes.

10. Risk-sharing and Inter-temporal Smoothing

The existence of systemic risk raises the issue of risk-sharing. It is a

well-established principle of modern financial analysis that well-
functioning financial markets permit portfolio diversification and
reduction or elimination of the risk associated with variability in the
return to individual securities. Further, financial markets permit the
adjustment of portfolio risk in accordance with preferences, as well as
the hedging of risk. Diversification, portfolio adjustment, and hedging
involve the exchange of risk among market participants. They can be
termed “cross-sectional risk-sharing”, since “different individuals are
exchanging risks at a given point at time”. On the other hand, there are
important kinds of risk that, as a practical matter, cannot in general be
diversified or hedged. These include risk that arise out of shocks that
affect the entire economy, such as the oil crisis of the early 1970s and
the sudden and substantial upward movement in interest rates in the
early 1980s. These kinds of risk can be reduced, however, through
institutional mechanisms that stabilize investor’s income streams over
time. Such mechanism also involve risk-sharing that can be termed
“inter-temporal smoothing.”

11. Competition and Concentration

How combining banking and commerce would affect competition and

concentration are longstanding concerns. A traditional criticism of
universal banking in Germany and the close association between
banks and commercial firms in Japan has been that small and new
businesses are discriminated against in obtaining credit. This same
criticism has periodically been made against large banks in the United
States. A fundamental problem in evaluating such criticism is that it is
difficult to differentiate between the effects of business size and credit
risk on differential rates, terms, and commerce, coupled with
continuing mergers, will result in larger banking organization, no
issue need arise as long as adequate source of credit remain for small
businesses.

12. Industrial Policy

Germany and Japan have, in the past, directed equity investment by

banks to meet government objectives for industrialization and military
preparations. Banks have been elements in their industrial policy.
Banks have also been used to meet public objectives. Comparative
experience suggests that universal banking is a useful mechanism for
industrial policy. While economic analysis strongly supports some
government direction of resources, there has been in the United States,
particularly during recessions, debate on whether government should
identify and support key industries to enable them to compete in
world markets. The integration of banking and commerce would not
in itself resolve this debate. But it would create convenient
mechanism for such support.
 13. Corporate Governance

A universal banking system asymmetric information/transaction costs

and competitive imperfections may cause real resources to be allocated
less efficiently. Corporate governance in a universal banking system
can affect resource allocation for good or bad. Characteristic of
universal systems has been that rather than the markets determine
resource allocation. So, for example, if RBI eased monetary policy, it
might confront the complaint that it was doing so for the benefit of
large commercial firms affiliated with large commercial banks. In times
of stress, transfers of credit to commercial company affiliates or
subsidiaries may be difficult to control.

14. Organizational Structure

The principal aim is to protect the bank from the risks involved in
commercial activities and to prevent the transmission of whatever
subsidy might exist for the bank to non-banking activities. Firewalls are
intended to bolster corporate separateness. The assumption is that
firewalls are more effective between separate corporations than within a
corporation (e.g., between a bank and its trust department).

15. Large and Complex Size

As banking organizations grow larger and more complex, financial

markets and bank managers are likely to perceive some as being too big
to fail. Such perceptions create banks incentives to take excessive risk
(moral hazard). Supervisors of banking organizations perceived as too
big to fail are likely to depend heavily on risk-adjust capital
requirements for the bank (if not the banking organizations), risk-adjust
deposit insurance premium, and intensive supervision. Form a
competitive perspective, too big to fail provides advantages to large
banking organizations relative to small ones. Unless market perceptions
are built on a clear understanding that banks, but not there their
subsidiaries and affiliates, are supportable, and that strict enforcement
of firewalls will be maintained, the “corporate veil” would not be
adequate to prevent the transmission of too-big-to fail advantages to
commercial firms through lower organizational costs of capital.

16. Extension of Banking Regulation

Combining banking with commercial activities would at least require

this multitude to work in a more coordinated fashion. Banks would
likely enter businesses that are regulated by other types of agencies.
Banks might own or be owned by the public utilities such as telephone
companies, transportation companies, oil/gas pipelines, and power
companies. Expansion through separate subsidiaries or affiliates may
bring so-called functional regulation the regulatory supervision of a
complex company by many agencies according to their expertise.
Whether or not that happens, the continued existence of firewalls and
any continuation of cross-guarantees call for close cooperation among
the several bank regulators. If combined banking-commercial
organizations measure and manage their risk on a consolidated basis,
another important reason exists for such cooperation. If new banking-
commercial combinations involve new interfaces between banking and
non-banking regulatory agencies, issues regarding the efficacy of the
current regulatory structure, similar to those that have arisen in debates
on bank expansion into securities and insurance, are likely to develop.
 17. Socio-political and Cultural Issues

In considering socio-political and cultural issues, definitions are useful.

Political systems include the relationships between people and their
political leaders, methods of choosing political leaders, and factors
affecting political decisions. Social systems include group structure in
society, relationships among groups, and the duration of such groups.
Both political and social systems may be subsumed under the
amorphous term “culture”. Cultural characteristics include perceptions
of and attitudes toward some of which have been to comparison with
the United States suggests that these issues are not unique to universal
banking. But there is a difference in degree. The prospect exists that the
large banking-commerce conglomerates will have an increased
influence on public policy by virtue of their size and importance.
Perceptive analysis of the past half-century has found a close
relationship between political democracy and a free market system. In
the united states, markets have grown with little government
interference and abundant opportunity for small and new business; the
financial and economic system in the united states has also been
compatible with political democracy. The long-run prospects, however,
are very encouraging. At present, only and an ‘arms-length’ relationship
between a banks at an insurance entity has been allowed by a regulatory
authority, i.e. the insurance regulatory and Development Authority
(IRDA). This means that commercial banks can enter insurance
business either by acting as agents or by setting up joint ventures with
insurance companies. And the RBI allow banks to only marginally
invest in equity (5 per cent of their outstanding credit).
FUTURE AND CHALLENGES OF UNIVERSAL BANKING

Commercial banks have entered the domain of term-financing and have

started providing investment-banking services, besides making their
presence in diverse areas like mutual funds, securities trading and factoring
services. With DFIs, in turn, making inroads into traditional banking
activities of short-term/working capital financing, the operational division
between banks and DFIs has become increasingly blurred. In the light of the
recommendations of the Narasimham Committee as well as the Khan
Working Group for Harmonizing the Role and Operations of DFIs and
Banks (1998), the Reserve Bank prepared a Discussion Paper which
contended that the issue of transformation of a DFI into0 a bank should
ideally be considered with in a reasonable period of time has elapsed; in the
interim, DFIs could tailor their activities to become either a bank, or a
NBFC, depending on institutions specific considerations and their
comparative advantages.

It however needs to be recognized that universal banking is not a panacea:

Rojas Suarez (1997) has documented that the potential systematic effect of a
bank failure could be far greater under universal banking than otherwise.
Several issues would need to be sorted out in the transition towards universal
banking become operational. On the liabilities side of the banks’ balance
sheets, short-term deposits account for a substantial share.

On the other hand, it is long-term resources that dominate the liability side
of a DFI’s balance sheet, with mobilization of short-term / medium-term
resources through term-deposits, certificates of deposits, inter-corporate
deposits and term money borrowings, restricted by the umbrella limit in
terms of their net owned funds. In the absence of cash-like assets and the
existence of relatively illiquid assets, the imposition of CRR and SLR
would, therefore, prompt the universal banks to resort to large-scale
borrowings.

With the CRR and SLR prescriptions currently at 7.5 per cent and 25 per
cent, respectively, the extent of pre-emption would be substantial, thereby
limiting the flow of lendable resources to the productive sectors of the
economy. In addition, several other issues like branch network (new banks
are 33 required to locate at least 25 per-cent of their total branches in the
semi-urban and rural areas), extension of deposit insurance, priority sector
lending etc., will need to be sorted out before the full transition towards
universal banking.
 (a) ADVANTAGES AND LIMITATIONS OF
UNIVERSAL BANKING

 Advantages

1.Greater economic efficiency

The main argument in favour of universal banking is that it results in greater

economic efficiency in the form of lower cost, higher output and better
products. This logic stems from the reason that when sector participants are
free to choose the size and product-mix of their operations, they are likely to
configure their activities in a manner that would optimize the use of their
resources and circumstances.

2. Economies of scale

It means lower average costs, which arise when larger volume of operations
are performed for a given level of overhead on investment. Economies of
scope arise in multi-product firms because costs of offering various activities
by different units are greater than the costs when they are offered together.
Economies of scale and scope have been given as the rationale for
combining the activities. A larger size and range of operations allow better
utilization of resources/inputs.
3. Easy handling of business cycles

Due to various shifts in business cycles, the demand for products also varies
at different points of time. It is generally held that universal banks could
easily handle such situations by shifting the resources within the
organization as compared to specialized banks. Specialized firms are also
subject to substantial risks of failure.
Because their operations are not well diversified. By offering a broader set
of financial products than what a specialized bank provides, it has been
argued that a universal bank is able to establish long-term relationship with
the customers and provide them with a package of financial services through
a single window.

 Limitations

1. Failure Risk System

The larger the banks, the greater the effects of their failure on the system.
The failure of a larger institution could have serious ramifications for the
entire system in that if one universal bank were to collapse, it could lead to a
systemic financial crisis. Thus, universal banking could subject the economy
to the increased systemic risk.

2. Risk of increase in Monopoly power

Historically, an important reason for limiting combinations of activities has

been the fear that such institutions, by virtue of their sheer size, would gain
monopoly power in the market, which can have significant undesirable
consequences for economic efficiency [Borio and Filosa, 1994]. Two kinds
of concentration should be distinguished, viz., the dominance of universal
banks over non-financial companies and concentration in the market for
financial services. The critics of universal banks blame universal banking for
fostering cartels and enhancing the power of large non-banking firms.

3. Bureaucratic and inflexible

Some critics have also observed that universal banks tend to be bureaucratic
an inflexible and hence they tend to work primarily with large established
customers and ignore or discourage smaller and newly established
businesses. Universal banks could use such practices as limit pricing or
predatory pricing to prevent smaller specialized banks from serving the
market. This argument mainly stems from the economies of scale and scope.
CORPORATE GOVERNANCE : INDIAN SCENARIO

In India , the question of corporate governance has come up mainly in the

wake of economic liberalization, deregulation of industry and business and
increasing integration of the Indian economy with the rest of the world. With
the opening up of the economy and to be in tune with WTO requirements,
Indian companies can succeed and survive amidst increasing competition
from multi- national companies only through excellence in their working.
The need to confirm to internationally accepted norms and standard of
corporate governance has become essential for Indian industry, as their
stakeholders are no longer confined to this country alone. In the mean time,
structural changes effected in the corporate sector also require special
attention. Many family owned enterprises are being converted into closely
held public limited companies and further into widely held public limited
companies. The recognition of the need for a code of corporate governance
has also moved in line with this trend .

The standing conference of public enterprises(1996), New Delhi, had first

recognized the need to examine the relevant issues of corporate governance
of the public sector undertakings in India. The confederation of Indian
Industries (CII) and the associated chambers of commerce and industry of
India discussed corporate governance in general. In India, the first structural
initiative in this regard was initiated by the confederation of Indian industry
leading to the issue of a code of governance standards in 1997. The CII
issued a code of 17 recommendations titled ‘Desirable corporate governance
– A code,’ to be followed on a self-regulatory basis by Indian industries. It is
considered as the first Indian paper of its kind on the subject. It was
recognized that the codes, which were referred to the Cadbury’s and the
confederation of Indian industry’s at remedies, and the infirmities in the
public enterprises governance, which needed a close look.

SIGNIFICANCE OF CORPORATE GOVERNANCE IN INDIA

Because of varied reason, corporate governance is extremely relevant. Of-

late, the concept has been assuming greater significance, following major
business busts across the world. Corporate governance has thus attained vital
significance to ensure the stability and soundness of the financial system.
Developments in modern business world demands quality, ethics and
excellence in right proportion injected into the organization at the level of
person, process and product to make them viable. It is closely related to the
ISO standards, which guarantees quality practices. To cope with these
changes are competency is to be identified and leveraged by Indian
companies for success and this is possible through corporate governance.

Corporate governance assumes greater significance in Indian context for the

following reason:

• To ensure that promoters of a company remain perennially

accountable and responsible to all stakeholders.

• Stresses the need to have transparency in respect of matters relating to

Board Of Directors, disclosure to shareholder and emphasizes the
need to have a close relationship between the owners and the
managers.

• Expounds the need to adhere to ethical business practices.

• Helps to evolve measures for strategic management and to gain

credibility.
 • Strive to enhance Board performance by emphasizing the contribution
of professionally qualified and experienced no-executive directors and
board committee.

• Trends to monitor and ensure absolute compliance with the laws of

the country.

CHALLENGES IN UNIVERSAL BANKING:

There are certain challenges, which need to be effectively met by the

Universal Banks:

1. 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. For the
discerning current day bank 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, time and convenience.

2. Development Financial Institutions (DFIs) opting for conversion into

Universal Banks by merger/reverse merger routes may also face
certain difficult situations on account on Asset Liability Mismatches,
burden of mounting NPAs and differences in regulatory prescriptions
applicable to FIs and banks such as CRR and SLR requirements and
priority sector lending. The asset profile of DFIs in India is
predominantly of long-term nature, which also includes a very high
level of non-performing assets. Further, the regulation of DFIs in
India has been historically less as compared with the banking system,
partly because DFIs do not form part of the monetary system and
partly because they do not have deposits like liabilities.

3. In case DFIs are converted into banks they would also be subject to
the reserve requirements like banks. This would mean that all
liabilities issued by the DFIs in the past would also be subjected to the
 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.

4. Further, 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 for such liabilities, which may earn lower returns, would
adversely affect the profitability of such Universal Banks. Compliance
of priority sector lending norms, which earn lower returns, may also
create difficult situations for such bank Risk Management is one of
the major challenges, where in the financial activity carries with it
various risks, which would need to be identified, measured, monitored
and controlled by Universal Banks. The nature of risks and mitigation
techniques for different financial products/services will be different
and therefore, Universal Banks will be required to develop
comprehensive system for each product/services and each kind of risk.

5. Improving Risk Management Systems: With the increasing degree of

deregulation and exposure of banks to various types of risks, efficient
risk management systems have become essential. For enhancing the
risk management systems in banks, Reserve Bank has issued
guidelines on asset-liability management and risk management
systems in banks in 1999 and Guidance Notes on Credit Risk
Management and Market Risk Management in October 2002 and the
Guidance Note on Operational risk management in 2005.

6. Another aspect is related to building up of supervisory infrastructure.

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 regulations like the Reserve Bank of India, SEBI,
Insurance Regulatory, Authority etc. The regulators will have to frame
 sound mechanism to protect the interests of all concerned including
the customers, the Universal Banking Institutions and the financial
system of the country.

7. Supervision of financial conglomerates: In view of increased focus

on empowering supervisors to undertake consolidated supervision of
bank groups and since the Core principles for Effective Banking
Supervision issued by the BASEL Committee on Banking Supervision
have underscored consolidated supervision as an independent
principle, the Reserve Bank had introduced, as an initial step,
consolidated accounting and other quantitative methods to facilitate
consolidated supervision. The components of consolidated
supervision include, consolidated financial statements intended for
public disclosure, consolidated prudential reports intended for
supervisory assessment of risks and application of certain prudential
regulations on group basis. In due course, consolidated supervision as
introduced above would evolve to cover.

8. 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, effectiveness in the sourcing and
application of available technology, and perhaps effectiveness in the
acquisition of productive inputs, organizational designs, compensation
and incentive systems-and just plain better management.

9. Larger the banks, the greater will be effects of their failure on the
system. Also there is the fear that such institutions, by virtue of their
sheer size would gain monopoly power in market, which can have
undesirable consequences for economic efficiency. Further combining
 commercial and investment banking can give rise to conflict of
interest.

(10) Sharpening skills: The far-reaching changes in the banking and

financial sector entail a fundamental shift in the set of skills required in
banking. To meet increased competition and manage risks, the demand
for specialized banking functions, using IT as a competitive tool has to
go up. Special skills in retail banking, treasury, risk management, foreign
exchange, development banking, etc., will need to be carefully nurtured
and built. Thus, the twin pillars of the banking sector i.e. human
resources and IT will have to be strengthened.
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 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.
 ICICI BANK AS UNIVERSAL BANKING

The Industrial Credit and Investment Corporation of India limited (ICICI) was
formed in 1955 at the initiative of the World Bank, the government of India and
representatives of Indian industry. The principal objective was to create a
development financial institution for providing medium-term and long-term
project financing to Indian businesses. Until the late 1980s, ICICI primarily
focused its activities on project finance, providing long-term funds to a variety of
industrial projects. ICICI typically obtained funds for these activities through a
variety of government-sponsored and government-assisted programs designed to
facilitate industrial development in India. Today ICICI is one of the largest
financial institutions in India. It provides a wide range of products and services
aimed at fulfilling the banking and financial needs of India's corporate and retail
sectors. ICICI became the first Indian company to get listed on the NYSE on
September 22, 1999. The Company's vision is to transform into a 'Universal
Bank' by offering a wide range of products and services to corporate and retail
customers in India through a number of business operations, subsidiaries and
affiliates.

Tech- savvy
ICICI Bank has always period it self on a highly Automated environment, be into
in terms in branches of Information Technology communication system. All the
branches of the Bank of the online connectivity with the other, ensuring speed
funds transfer for the client, At the same time, the bank branches network and
ATM allow multi-branches access to retail clients.

ICICI BANK USES THE CONCEPT OF UNIVERSAL BANKING.

In universal banking, large banks operate extensively in networks 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. It means the ability to offer i.e. sell and underwrite all the
types of products and services to any set of clients, either through a single or
through a group of companies. The practice of Universal Banking varies
across several countries. India faces a very high regulatory burden although
now a conglomerate structure of the universal banking has already been
permitted .Many international players like ABN-AMRO, Citigroup, HSBC,
Deutsche Bank, JP Morgan Chase, Lehman Brothers have realized the
benefits of Universal Banking. The ICICI Bank has also joined these
international players. The ICICI Bank functions as a universal bank through
itself and its associate companies in the areas of corporate finance,
commercial banking, personal banking, investment banking, asset
management, investor services and insurance. The Universal Banking
provides competitive advantage in the current scenario through large product
suite, diversified resource base, Economies of scale and scope, Optimization
of human and financial capital.

In a span of just four years, the ICICI Bank has emerged as a consumer
banking behemoth. With a retail book of over Rs 56,000 cores (Rs 560
billion) and a market share that is the envy of competition -- it has a share of
over 30 per cent – The ICICI Bank today has reached a commanding
position.

The bank boasts of the widest integrated technology platform in the country
and only a fourth of its business takes place at its branches and subsidiaries.

Its legacy of non-performing assets (NPAs) -- for which it has been rated
below its peers earlier -- is now almost history with net NPLs (non-
performing loans) down to 2 per cent.

Armed with a much stronger balance sheet, the ICICI Bank is aggressively
foraying into overseas markets and also has an eye on the rural India.

Rural India is an opportunity, somewhat premature, but in the next 12-18

months the bank’s strategy will be seen there. Bank is looking at new agri
lending as something that is directed; it's a viable business proposition, but it
has to be driven very carefully. The bank can't have branches there because
that is not workable in terms of costs.
The solution to this problem is to partner with the micro-credit institutions,
corporate providing inputs or buying products from the farmer and self-help
groups.

MERGER OF ICICI & ICICI BANK

The merger is a culmination of a dream, which began five years ago. This
process was initiated in 1996. The time when SCICI merged with ICICI, in
1997-98 ICICI acquired ITC classic and Anagram finance by way of
acquisition, in 2000, ICICI bank gobbled up Bank of Madura. Reverse
merger of ICICI’s MD & CEO K.V. Kamath started articulating on it in
1996. At first, it seemed impossibility latter, it looked imperative.

On 25the of October India’s first true-blue universal bank was born, as

ICICI reverse- merged into its sibling ICICI Bank to create a Rs. 95,000
crore asset base monolith, only second after SBI that has the asset base of
3,16,000 crore. HDFC Bank is left at third place with asset size of Rs. 19000
crore. Earlier the reverse merger looked like a bailout strategy for Non
Performing Assets (NPA) ridden ICICI, but later the merger seemed justified
because of possibility of numerous benefits through size and diverse
portfolio of products of two entities. Swap ration for merger is decided to be
two shares of ICICI for one share of ICICI Bank. Merged entity would

become fully operational from 31st March 2002. ICICI requires this five-
month to meet all regulatory requirements.
 The other interesting aspect of reverse merger is its methodology. ICICI
Bank has adopted the “purchase method” of accounting principles (GAAP)
for the merger, unique in India. ICICI’s assets and liabilities will be “fair
valued” for the purpose of incorporation in the accounts of ICICI Bank on
the appointed date. This accounting practice is opportunity for ICICI to
bring down its level of NPA.

PRODUCTS AND SERVICES OFFERED BY ICICI BANK

(A) PERSONAL BANKING

• Commercial banking activities

Commercial banks are institution, which deal with money and credit
primarily for earning profit. These banks occupy a dominant place in the
modern banking structure. They are financial intermediaries, which perform
the dual function of mobilization of deposits and deployment of surplus
funds to the various sectors of the economy. A well developed commercial
banking system is a precondition for the economic development of the
nations. Commercial banks play a vital role in giving a direction to early the
economy’s development over time by financing the requirements of
agriculture, business and industry. The operations of commercial banks
record the monetary pulse of the economy .Commercial banks in India
consist of 28 state owned banks, 28 private banks and 29 foreign banks
totaling of 85 banks. Apart from these, there are 133 regional banks also.
The size, niches and vintages vary from one another.

The banking business in its oldest form originated in Italy where the early
bankers were called Moneychangers. They used to conduct their money
changing business in streets seated on benches. The word bank originated
from the Italian word ‘banca’ banca means bench. The origin of modern
banker can be traced back to the merchant bankers, moneylenders and
London goldsmith.

• Deposits with bank

 (i) Saving Deposits services are for individuals, Hindu
undivided families, partnership etc. in this commercial banks
and postal saving bank mobilize the small savings of public
through this account. This account is useful for salaried
sections of society. Bank cannot possibly offer a high rate of
interest on these accounts.

(ii) Current Account is most useful for businessmen since any

number of cheques can be issued through this account at any
time and overdraft facility is also available. No interest is
allowed on current deposits by bank.

(iii) Fixed deposits are account under which a fixed amount is

deposited in a bank for a specific period. The objective of
this account is to encourage people to deposits surplus fund
and earn high rate of interest.

DEMAT ACCOUNT

Banks undertake to purchase and sell shares and debenture of joint stock
companies on behalf of its customers. Only members of the stock exchange can do
the function of purchase and sale of securities. Internet banking account,
electronically records holding of d-materlized shares in internet banking payments
and shares transfer r handled automatically with out separate paper works. The
investor opens an account called Demat account with the depository participants.
These depositories transact business through electronic media.

DEBIT CARD

The developed countries like USA have moved a step further. Debit card,
electronic products has become more and more popular in these countries. Just like
credit card, the debit card holder can present the card to the merchant, sign slip and
forget about it. The purchase amount is automatically deducted or debited to the
account of card holder electronically and would appear in the monthly statement of
account . Debit card is a prepaid card with some stored value, which optimizes
conveniences for the customers. A customer possessing of a Debit card need not
carry cash. It is like carrying cash from the bank account, without the
inconvenience or risk of carrying liquid cash. In other words, Debit card allows
`anywhere any time accesses` to the customers with their saving or current
account. A personal identification number (PIN) will be issued to the customers for
using the Debit card. Debit card can be used at all outlets that accepts such cards
for payment viz. department stores, petrol pumps, jewelry shops, restaurants,
textile shops, hospital, airlines, railways etc.
CREDIT CARD

Credit card culture is a old hat in western countries, In India, it is relatively a new
concept that is fast catching on. The present trend indicates that the coming year
will witness a burgeoning growth of credit cards which will lead to cashless
society. Credit card is a convenient medium exchange. It is a cute card made of
plastic. It has a method of identifications of users by means of either signature
identification or a stamp size photo of the cardholder. It authorizes the holder to
charge goods or services to his account for which he is billed. Credit card is also
called as Plastic Money’. The most important difference between credit card and
debit card is that Credit card is a ‘Post paid’ one the latter is a ‘Prepaid’. Credit
card are designed to reduce the use either cash or cheque for transactions.

INSURANCE

Insurance is the only industry in India, which is fully nationalized. The insurance
sector in India was organized as General and Life Insurance with the establishment
of the Life Insurance Corporation of India (LIC) and General Insurance
Corporation (GIC). LIC was formed through the take over and nationalization of
the business of 245 Indian and Foreign insurer and provident societies. The LIC of
India was established by an act of parliament, which received the President’s asset
on June 18, 1956. The act came into force on July 1, 1956 and the corporation
became functional on September 1, 1956.

The Indian Mercantile Insurance Ltd, formed in 1907 is considered as the First
Company to transact all types of General Insurance in India
PAYMENT AND SETTLEMENT SYSTEM

Payment and settlement system play a pivotal role in the development of an

economy. Adoption of an efficient, modern and global electronic payment and
settlement system beneficial to everyone. Electronic payment and settlement
systems are cheaper because they have lesser production cost than paper-based
instruments.

ELECTRONIC FUND TRANSFER (EFT)

Electronic Fund Transfer (EFT) is one of the important electronic banking services
offered by commercial banks to attract and retain their customers. Electronic Fund
Transfer system is an easy and speedy mechanism to facilitate the transfer of funds
from one place to another. Compared to all other existing system of funds transfer,
Electronic Fund Transfer is the most convenient system, which facilitates the
instant transfer of funds from end to the other.

SPECIAL ELECTRONIC FUND TRANSFER (SEFT)

To provide for transfer of funds electronically across a large number of bank

branches in the country as a forerunner to the nation-wide funds transfer system
(NEFT), the Special Electronic Fund Transfer (SEFT) system was introduced from
April 1, 2003. SEFT is a system with the settlement being centralized at Mumbai
and providing for same day funds settlement with multiple settlements (three
settlement cycles per day) during the day. SEFT covers 2,312 branches of 29 banks
situated in 127 centers across the country. This scheme facilitated the introduction
of the T+2 settlement system by the capital markets. While inward SEFT is
mandatory for all banks outward, SEFT is optional.

NATIONAL ELECTRONIC FUND TRANSFER SYSTEM (NEFT)

The Reserve Bank of India introduced a payment system called the “RBI National
Electronic Fund Transfer system” which is referred as” NEFT. The
operationalisation of the NEFT in November 2005 was a major step in the
direction of setting up and operating a national level payment system. The NEFT is
a secured network, which uses the structured financial messaging solution (SFMS)
messaging format with public key infrastructure (PKI) enabled digital signatures
retail electronic payment system having a nation-wide network .

ELECTRONIC CLEARING SERVICES

Indian banks are competing with one another to offer new products and services to
their customers. Banking services and products in India witnessed transformation
on a large scale in the last few years. Clearing services is one of the new electronic
banking services. Electronic Clearing Services (ECS) is a non-paper based
movement of funds, which is encouraged by the Reserve Bank of India on a wide
scale. Indian banking sector has made a quantum leap forward in terms of
switching over from paper-based transactions, like use of currency notes, cheques,
drafts or challans, to electronic means, like Real Time Gross Settlement (RTGS),
National Electronic Fund Transfer (NEFT) and other electronic modes.

ELECTRONIC CREDIT CLEARING

Electronic credit clearing service is a reliable device used for bulk and repetitive
credit-push payments such as salary, pension, dividend, commission, IPO refunds,
interest etc. ECS facility is largely utilized by the public and private limited
companies and government departments, which makes bulk and recurring
payments. Electronic Credit Clearing Services brings down administration cost and
ensures more profitability and productivity to the bank.

ELECTRONIC DEBIT CLEARING

Electronic Debit Clearing service was introduced by RBI to facilitate the payment
of credit-pull transactions such as payment of utility bills, insurance premium and
repayment of loans installments. Under ECS debit clearing, customers authorize
their bank to deduct directly from their account the amount of their utility bills
such as telephone, electricity bill etc. and regular payment of insurance premium
and installments of loan amount.

MICR CHEQUE CLEARING FACILITY (MICR)

Magnetic ink character recognition (MICR) technology is payment and

settlements system in India used for automatic listing and sorting of cheques and
arriving at a settlement position of the member banks. Before the introduction of
MICR, technology cheques were cleared manually. MICR cheques were
introduced with a view to automate the labour intensive business of clearing
cheques and to facilitate to strengthen and speed up the payment and settlement
system in the economy.

MAGNETIC MEDIA BASED CLEARING SYSTEM (MMBCS)

RBI introduced magnetic media based clearing system (MMBCS) with the goal of
improving the efficiency and speed of the paper-based system of clearing system
of clearing. Even though the rate of growth in cheque volumes has decelerated
over the last few years, cheque clearing still continues to be the largest mode of
settlement in terms of the volume of processing. Magnetic media based clearing
system is a clearing system in which the member banks present their claims in the
form of an electronic life, which gets processed on the computer. This enables
arriving of settlement figures within a quarter of an hour as compared with three or
four hours under the manual system.

CHEQUE TRUNCATION SYSTEM (CTS)

The reserve bank of India took several measures periodically to develop and
improve the efficiency of the payment and settlement system in the country. The
implementation of cheque truncation system (CTS) is yet another effort from the
side of RBI for improving the efficiency of paper-based clearing system.

REAL TIME GROSS SETTLEMENT (RTGS)

RTGS is an electronic based settlement of inter-bank and customer based

transaction, with intra-day collateralized liquidity support from the reserv bank to
the participants of the system. The RTGS system has also enabled banks to opt for
straight through processing of customer transactions without manual intervention.
The RTGS system will be fully integrated with the accounting system of the
Reserv Bank and other settlement services such as Deferred Net Settlement
System, (DNS) the settlement of which will be performed as RTGS transactions
through a facility for Multi Lateral Net Settlement batch processing.

CLEARING CORPORATION OF INDIA LIMITED (CCIL)

Recognizing the greater impetus towards payment and settlement system, a

clearing corporation known as clearing corporation India ltd. (CCIL) was
established in April 2001 for clearing and settlement of government securities and
foreign exchange transaction. It was promoted by SBI (chief promoter) and co-
promoted by Bank of Baroda, HDFC Bank, ICICI, IDBI and LIC in April 2001
with an authorized and paid-up capital of Rs. 50 crore. Clearing corporation of
India which was set up by banks is the central counter party for clearing of
transaction in government securities and foreign exchange. The CCIL operates the
G-sec clearing while the settlement for both the securities and finds take place in
the Reserve bank. CCIL acts as the CCP for all the transaction, guarantees both the
securities, and funds legs of the transaction.

AUTOMATED TELLER MACHINE (ATM)

Automated teller machine (ATM) has become the most popular and convenient
delivery channel used by people in the rural and in urban areas. ATM is the most
accepted and popular user-friendly technology for even the rural customers. An
automated teller machine is one, which a customer can use with card having PIN to
withdrawn cash, information and other services. ATM is a modern device
introduced by the banks to enable the customers to have access to money day in
day with out visiting the bank branches in person. The BANK OF INDIA was the
first nationalized Bank to render ATM facilities to its customers in Mumbai. ATMs
have already become the most popular in India and they enable the customers to
withdraw their money 24 hours a day, 7 days a week and round the year. The
system is known as ‘any time money’ or ‘Any where money’, because it allows the
customers to withdrawn money from the bank from any of its ATMs round the
clock even on Sundays and national holidays. Though this facility, customers of
the bank are not restricted to remain a customer of the branch where the ac count is
maintained.

NET BANKING

Internet banking enables a customer to do banking transactions through the banks

website on the internet. It is a system of accessing accounts and general
information on banks products and services through a computer while sitting in its
office or home. This is also called ‘virtual banking’. It is more or less bringing the
computer. In traditional banking one has to approach the branch in person, to
withdraw cash or deposit a cheque or request a statement of accounts etc. but
internet banking has changed the way of banking. Now one can operate all these
types of transaction on his computer through website of bank. All such transactions
are encrypted; using sophisticated multi-layered security architecture, including
firewalls and filters. One can be rest assured that one’s transactions are secure and
confidential. Cost of banking services through the internet come to only a fraction
of costs incurred in conventional methods. Rough estimates assume cost at 45
paisa, phone banking at 35 paisa, debit cards at 20 paisa, and internet banking at
10m paisa per transactions. The cost-conscious banks in the country have therefore
actively considered and accepted use of the internet as a medium for providing
services.

MOBILE BANKING

Mobile banking is relatively a new form of electronic banking product and it is

gaining ready acceptance from the customers. It has become one of the customer-
friendly facilities, which can have far-reaching implications for the financial sector
as a whole. It takes the bank to the customer’s cell phone. Its communication
facilities are of immense use to even an illiterate user. It is cost effective and
assists the rural customer in reaching the customer and banker instantly. On-line
banking is now moving in to the mobile mode, giving everybody with a mobile
phone access to real time banking services, irrespective of their location. In India
banks with the facility of banking, services at present provide only limited number
of services to their customers. The potential for mobile banking is endless with the
scope for introduction of new services and products on a large scale.

Customer can carry out a number of conventional transactions by remaining in

their office, or home, in fact from anywhere with a mobile phone. The following
services are made available and accessible through mobile phone:

• Account balance – clear balance and total balance.

• Mobile alerts such as debits and credits to the account.

• Registered bill payment.

• Last few transaction statement.

 • Request for cheque book.

• Password change for mobile banking.

• Suspension of mobile banking services.

• Transfer of funds from one account to another etc.

PHONE BANKING

Under Phone Banking, service a customer can talk to a phone banking officer for
transacting a banking business. It is generally provided to customers from Monday
to Saturday (except on national holidays) . The number of days and working time
for transaction banking business through phone banking vary in individual banks
and their branches. Under Phone Banking service, a customer can interact directly
with a telephone-banking officer appointed by bank. Under this scheme, a
customer can obtain information about their accounts and can prefer their
requirements before the telephone-banking officer. Following are the facilities
available in a phone banking service.

• Balance and transactions in customers account.

• Status of cheque issued or deposited by the customer and information

relating to clearing.

• Location at which cheque / cash was deposited in the account.

• Transactions at ATMs or merchant establishments.

• Charges related to customers account.

• Account statement by fax or email or printed statement of account.

• Status of debit card swallowed / captured in ATM and request for sending
it to any branch for collecting it.
 • Requisition for cheque book.

• Requisition for new PIN for debit card or new password for internet
banking.

• Queries regarding non-receipt of cheque book, statement of account, debit

card PIN etc.

MUTUAL FUNDS

Mutual fund collects the savings from small investors, invest them in government
and other corporate securities and earn income through interest and dividends,
besides capital gain. It works on the principle of ‘small drops of water make a big
ocean’. Mutual fund is nothing but a form of collective investment. It is formed by
the coming together of a number of investors who transfer their surplus funds to a
professionally qualified organization to manage it. To get the surplus funds from
investors, the fund adopts a simple technique. Each fund is divided into a small
fraction called “units” of equal value. Each investor is allocated units in proportion
to the size of his investment. Thus, every investor, whether big or small, will have
a stake in the fund and can enjoy the wide portfolio of the investment held by the
fund. Mutual fund cannot be invested for such purposes and the mutual fund is not
at all concerned with the daily ebbs and flows of the market. In short mutual fund
is not the right investment vehicle for speculators.

PORTFOLIO INVESTMENT SCHEMES

Portfolio management means selection of securities and constant shifting of the

portfolio in the light of varying attractiveness of the constituents of the portfolio .

NRI BANKING

With a view to attract the savings and other remittance into India through banking
channels from the person of Indian Nationality / Origin who are residing abroad
and bolster the balance of payment position, the Government of India introduced in
 1970 Non-Resident(External) Account Rules which are governed by the Exchange
Control Regulations.

The funds held in Non-Resident (External) Accounts (NRE Accounts) qualify for
certain benefits like exemptions from taxes in India, free reatriation facitities, etc.

DEPOSIT TYPES

NRI-Banking-

Facilitates the NRI customer to open the following account types .

NRE (Non Resident External Accounts)

In can be in the form of Savings, Current or fixed deposits in Indian rupees. The
funds in this account are fully repatriable.

NRO (Non Resident Ordinary Accounts)

It can be in the form of Savings, Current or Fixed Deposits in Indian Rupees. The
funds in this account are not repatriable (only interest accrued is repatriable).

FCNR (Foreign Currency Non Resident Accounts)

It can be in the form of fixed Deposits only,in the five major currencies ,namely
US Dollars, GBP ,DM, Euro, Japanese Yen. The funds in this account are fully
Repatriable.
 Conclusion

As a student of BBI I had a great opportunity to do a project of “Universal

Banking” which was indeed a wonderful experience and has enhanced my
knowledge in banking sector.

This study on Universal Banking is important not only to an organization,

shareholders, banking sector but also to an Indian economy as a whole. Due
to globalization and liberalization our economy is opening its door for
reforms. The onset of universal banking will undoubtedly accelerate the pace
of structural change within the Indian banking system. The financial
institutions as a segment will essentially convert into banks. This can
potentially impose a better corporate control structure on the firms, they can
be sources of long-term finance, and they can contribute to real sector
restructuring. Universal Banking is totally a new concept in Indian Banking
system and ICICI Bank is the first financial Institution to go ahead with this
concept.

Thus Universal banking, in fact, provides for a cafeteria approach or, if

one were to vary the metaphor, it would take on the role of a one-stop
financial supermarket.

BIBLIOGRAP
HY

BOOKS :

1. INDIAN BANKING IN THE GLOBALISED WORLD

Author : R.K UPPAL

2. E- BANKING IN INDIA

Author : R.K UPPAL

3. COMMERCIAL BANKING IN INDIA

Author : R.K UPPAL

WEBSITES :

1. www.rbi.com
2. www. Icicibank.com

ANNEXURE

1. What are the various product & services that ICICI offers to
compete with financial institution?

ANS:-

2. ICICI is emerging as universal banking offering all financial

services. Is ICICI a wholly owned financial institution or is
acting as a subsidiary?

ANS:-

3. What is the correct intrest rate going on for housing loans

offered by ICICI ? What is the maximum repayment period
offered to the customers?

ANS:-
 4. What is the correct market strategy adopted by ICICI to
attract new customer and to remain them?

ANS:-

5. Are the deposits with the Bank exempt from the wealth tax ACT?

ANS:-

6. Does the customer approaching for housing loan have to

maintain a deposits account with the Bank?

ANS:-

7. How does ICICI link commercial, Investment and insurance

by offering various financial Services? Or are they owned by
its subsidiaries ?

ANS:-

8. What are the various investment schemes offered by ICICI ?

ANS:-

9. What strategies are adopted by the bank to attract the insurance

sector of ICICI?

ANS:-
10. What are the major draw backs of providing various services
under one institution ?

ANS:-

11. Do the Banking customers approach for other services

provided by ICICI?

ANS:-