<br>

A
Book Of

UNIVERSAL
BANKING
M. Com. Part I; Semester -I
Course Code 60122; Credits - 02
-
Advanced Banking and Finance (Major Mandatory)

2023 Pattern as per NEP Syllabus

W.e.f. Academic Year 2023-24

Dr. Rupali Bipin Sheth

Ph.D. (Accountancy) SET, M.Com., PGDEM, ICWA (Inter)
Assistant Professor
Huzurpaga Smt. Durgabai Mukunddas Lohia
Mahila Vanijya Mahavidalaya,
691, Narayan Peth, Pune 411030

Price 80.00

NIRALI
PRAKASHAN
ADVANCEMENT OF KNOWLEDGE

N6917
<br>

Universal Banking ISBN 978-81-19116-95-9

First Edition September 2023
Author

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<br>

Preface ..
Savitribai Phule Pune University has revised syllabus of M.Com First year according to

National Education Policy, from the year 2023-24. It is my immense pleasure to connect with
M. Com students with the subject of Universal Banking which is major elective as per NEP.

Through this book you will get knowledge of Universal Banking in depth.

As per the requirement of Savitribai Phule Pune University, I have developed new content
in this book. This will help the student to acquaint with concept of Universal Banking, to
understand the student's applicability of Universal Banking. This will also help the students in
getting knowledge for Utility / Practical use of the Universal Banking. Students will learn

Evolution of Universal Banking System in India, Meaning, Objective, Characteristics of

Universal Banking, Difference between Commercial Banking and Universal Banking, Functions

of Universal Banks. Practices of Universal Banks, Advantages and Disadvantages of Universal

Banking, Problems faced by the Universal Banks, Recent Trends in Universal Barnking in India

I am extremely thankful to Nirali Publication for giving me this opportunity and for having
entrusted me with responsibility of writing this book. I am extremely thankful and obliged to
Mr. Jignesh Furia, for placing me in the panel of writers of his esteemed publishing house

Nirali Publication. I am also thankful to Mr. Amol Mahabal, Mrs. Yojana Deshpande and Mr.

Umesh Mundada and entire team of Nirali Publication.

Suggestions regarding any matter related to this book are welcome.

Best of Luck

Dr Rupali Sheth
<br>

...
Syllabus

1. Evolution of Universal Banking System in India

Evolution of Universal Banking System in India Meaning, Definition, Objective,

Characteristics of Universal Banking.

Difference between Commercial Banking and Universal Banking Functions of

Universal Banks

2. Practices of Universal Banks

Practices of Universal Banks
Advantages and Disadvantages of Universal Banking
Problems faced by the Universal Banks
Recent Trends in Universal Banking in India
<br>

Contents

-
1. Evolution of Universal Banking System in India 1.1 1.32

2. Practices of Universal Banks 2.1 -2.34

<br>

Chapter 1..
Evolution of Universal Banking
System in India
Contents ..
1.1 Evolution of Universal Banking System in India
1.1.1 Concepi of Bank
1.1.2 Importance of Banking
1.1.3 Structure of Indian Banking System
1.1.4 Evolution of Universal Banking
1.1.5 Development of Banking in India
1.1.6 Types of Banks
1.1.7 Evolution of Universal Banking in India

1.2 Meaning of Universal Banking

1.2.1 Meaning
1.2.2 Types of Universal Banks
1.2.3 Types of Universal Banking Services
1.3 Definition of Universal Banking
1.4 Objective of Universal Banking
1.5 Characteristics of Universal Banking
1.5.1 Components of Universal Banking
1.6 Difference between Commercial Banking and Universal Banking
1.6.1 Meaning of Commercial Banking
1.6.2 Difference between Commercial Banking and Universal Banking
1.6.3 Meaning of Retail Banking
1.6.4 Difference between Retail Banking and Universal Banking
1.7 Functions of Universal Banks
Questions for DiscUssion
References

11
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Universal Banking Evolution of Universal Banking System in India

1.1 Evolution of Universal Banking System in India

1.1.1 Concept of Bank
bank is defined by different eminent persons as follows
:

1. Macleod
"The essential business of a banker is to buy money and debts, by creating
other debts. A banker is therefore, essentially a dealer in debts or credit."
2. Sir John Paget
"No person or body corporate or otherwise can be a banker who does not
take deposit accounts, take current accounts, issue and pay cheques drawn
upon himself and collect cheques, crossed and uncrossed for his
customers".
3. Prof. Sayers
"Banks are institutions whose debts usually referred to as "bank deposits"
are commonly accepted in final settlement of other people's debts."
4. Banking Regulation Act, 1949
"A bank refers to a banking company which transacts the business of
banking [Section 5 (c)]."
5. Dr. H. L. Hart
"A banker is one who, in the ordinary course of his business, honours
cheques drawn upon by him by a person from and for whom he receives
money on current accounts."
1.1.2 Importance of Banking
1. Veins of the Economic System
• Banks are the veins of the economic system. The functioning of economic
system depends on banking and financial institutions. The proper co
ordination of savings and investment is done by banks. Development of
different economic sectors depends on finance provided by banks.
Investment decisions of banks determine the direction of investment in a
country.
2. Sectoral Investment
• Some sectors require investment on a large scale, banks may come forward
for this investment and therefore other individuals and institutions also start
investment. So it can be said that banks contribute to economic
development.
1.2
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Universal Banking Evolution of Universal Banking System in India

3. Creation of Near Money

• Bank convert non liquid assets into liquid assets as they provide loans on
the security of non-liquid assets. Though banks do not create legal money,
they create near money like cheques, drafts that can be used as money for
the purpose of exchange.
4. Development of Trade and Commerce
• Banks encourage
and help development of trade and commerce by
providing short term credit to traders, small and big industrialists, exporters
and importers, persons doing purchase and sales of shares etc.
5. Allocation of Resources
• Allocation and diversion of productive resources is done through financial
resources of banks. So the nature and direction of economic development
depends on the investment decision of banks.
6. Creation of Credit
• Due to creation of credit on a large scale by commercial banks, agriculture,
industry, commerce, trade and other sectors get essential credit supply for
their development. Ultimately the whole economy goes on the path of
development. It results in an increase in national income and rise in the
index of standard of living of the people. It leads to rise in amount of
savings and again these savings are available for investment through the
banking institutions. This cycle becomes beneficial to economic
development. Banks do the important role of accelerating the cycle of
economic development.
Therefore, banks have to play a very important role in economic
development. All round development of banking business is quite essential
for the development of all the sectors of the economy in an underdeveloped
country like India.
1.1.3 Structure of Indian Banking System
• The banking system of a country occupies a pivotal role in functioning and
development of a country's economy. In fact, it lies at the core of the money
market and also plays a complementary role in supporting the capital
market. We must therefore, take a comprehensive view of the structure of
the banking system in India.
It is necessary to remember that the structure of the banking and financial
system of any country is neither created at one stroke, nor is it permanent
1.3
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Universal Banking Evolution of Universal Banking System in India

for all times to come. The fact of the matter is that various institutions get
evolved over a period of time, either through the trial and error method
adopted by the people or at the instance of the Government.
A look at the structure of the Indian Banking system, would show how
various institutions have evolved as and when such a need arose and both
at the instance of the Government, as well as on the intitiative of the people
engaged in financial activities.
STRUCTURE OF INDIAN BANKING SYSTEM
CENTRAL BANK AND MONETARY AUTHORITY
RESERVE BANK OF INDIA
APEX BANKING INSTITUTIONS

Industrial Development NABARD Exim Bank IIBI National

Bank of lndia (IDBI) Housing
Bank
Small Industries Development
Bank of India (SIDBI)
BANKING INSTITUTIONS

Commercial Banks Regional Rural Co-operative

Banks Banks
Public Sector Private Sector
State Co-operative
Banks Ranks
Banks
Indian Foreign

Old New Local Area District Central

Banks Banks Banks Co-operative Banks
State Bank Nationalised
Group Group Primary Credit
Subsidiary Companies Co-operative
Societies
State Bank Subsidiary
of india Banks

Subsidiary Companies
Development Banks

Industrial Development Banks Land Development Banks

State Level Land
All India State Level
Development Banks

IFCI Ltd. ICICI SFCs SIDCs Primary Land

Subsidiary Development Banks
Subsidiary
Investment Institutions
Companies Companies
LIC GIC UTI
Credit Guarantee Institutions
ECGC DICGCI
Investmente Institutions
LC GIC UTI
Money Market institutions
Discount and Finance House of India Ltd.

Fig. 1.1 :Structure of Indian Banking System

14
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Universal Banking Evolution of Universal Banking System in India

1.1.4 Evolution of Universal Banking

• After the financial crises in the year 1907, the U.S. Monetary Commission
wanted to understand the major financial systems of the world.
• Jakob Reisser, the director of a Berlin bank, arqued, the German universal
banking system possess the important character that allows it to provide
inexpensive capital to industry and it leads to promote growth.
• Jacob Riesser was born in Frankfurt. He was German jurist and banker.
• In 1880he opened a lawyer's office in his home town.
• In 1888 he moved to Berlin. He served as a director of the Bank till 1905.
After that he became professor of law at the University of Berlin.
His writing on the legal aspect of German capital market influenced stock
exchange and also banking legislation.
It was on his initiative that the Zentralverb and Deutschemark Bank and
Bankiergewerbes was formed in 1901.
In 1905 he became the editor of Bankarchiv, the profession's leading
periodical
• The progress of Universal banking was very slow in United states. During the
great depression, Congress passed the Glass Steagall Act as a part of
Banking Act, 1933.
• The major objective of the Act was to prevent further banking failures. This
Act prohibited Universal Banking.
• The Glass-Steagall Act of 1933 forced commercial banks to refrain from
investment banking activities. Its objective is to protect depositors from
potential losses from speculation of stock. This Act aims to prevent a 1929
stock market crash repetition and failure of commercial banks.
The Glass-Steagall Act was intended to separate investment and commercial
banking activities. It was established in the wake of the 1929 Stock market
crash.
1.5
<br>

Universal Banking Evolution of Universal Banking System in India

Important Highlights of the Glass-SteagallAct

1. The Glass-Steagall Act was passed in 1933.
2. It separated investment and commercial banking activities in response to
involvement in stock market investment.
3.Combining commercial and investment banking was considered too risky
and speculative and widely considered as a culprit that led to the Great
Depression.
4. BankS were mandated to choose either commercial banking or investment
banking activities.
5. The Gramm-Leach-Bliley Act eliminated the Glass-Steagall Act's restrictions
against affiliations between commercial and investment banks in 1999.
Provisions of the Glass-Steagall Act
1. This Act created regulatory firewall between commercial banks and
investment banks.
2. Banks are forced to choose between specialising in commercial or
investment banking.
3. Commercial Bank's 10% income could stem for securities. In addition to that,
commercial banks allowed to underwrite Government issued bonds.
4. The law encourages banks to use their funds for lending rather than
investing their funds.
5. The amendment to the Act created the Federal Deposit Insurance
Corporation (FDIC).
6. The Glass-Steagall Act was repealed in 1999, during the Clinton
Administration, though some of its parts remained in force including the
FDIC.
7. The Glass-Steagall Act was repealed in 1999 amid long-standing concern
that thelimitations it imposed on the banking sector were unhealthy and
that allowing banks to diversify would reduce risk.
The 1999 Repeal and the Gramm-Leach-Bliley Act
• The limitations imposed on the banking sector by the Glass-Steagall Act
sparked debate over how restrictions are imposed.
1.6
<br>

Universal Banking Evolution of Universal Banking System in India

Many argue on the point, banks that diversify their activities reduce risk to
Consumers.
• Some economists believe the law stifled the commercial banking sector until
its repeal and prevented economic growth.
Some others believe that it prevented market volatility and aided the
prosperity of the post-war years.
Financial Crisis After Repeal
• Many
economists believe that speculative and risky activities followed the
repeal of Glass-Steagall Act, including the rise in subprime lending, which
led to the 2008 financial crisis.
Federal Deposit Insurance Corporation (FDIC)
1. The Federal Deposit Insurance Corporation (FDIC) is an independent federal
agency insuring deposits in U.S. banks and thrifts in the event of bank
failures.
2. The FDIC insures deposits up to $250,000 per depositor, as long as the
institution is a
member firm.
3. The FDIC covers checking and savings accounts, certificates of deposit
(CDs), money market accounts, IRAS, revocable and irrevocable trust
accounts, and employee benefit plans.
4. Mutual funds, annuities, life insurance policies, stocks, and bonds aren't
covered by the FDIC.
The primary purpose of the FDIC is to prevent "run-on-the-bank" scenarios,
which devastated many banks during the Great Depression.
• For example, with the threat of the closure of a bank, small groups of

worried customers rushed to withdraw their money in those years.

• After fears spread, a stampede of customers, seeking to do the same,
ultimately resulted in banks being unable to support withdrawal requests.
• Those who were first to withdraw their money from a troubled bank would
benefit, whereas those who waited risked losing their savings overnight.
• Before the FDIC, there was no guarantee for the safety of deposits beyond
the confidence in the bank's stability.
1.7
<br>

Universal Banking Evolution of Universal Banking System in India

Meaning of Universal Banking

Universal Banking is a combination of Commercial Banking and Investment
Banking.
• Universal Banking refers to the provision of most or all financial services
under one roof.
Examples of Universal Banking
• Examples of universal banks include JPMorgan Chase, Bank of America,

Wells Fargo, UBS, BNP Paribas, Deutsche Bank, and Barclays. AIl of these
banks provide a gamut of banking services, from retail banking to
investment banking.
Citigroup, Bank of America, UBS, Credit Suisse, HSBC, and Barclays are als0
Universal Banks.
In fact, the twenty largest banks in the world are all Universal Banks.
Universal Banking, means the financial entities like:
1. Commercial banks,
2. Financial Institutions,
3. NBFCs.
• They undertake multiple financial activities under one roof, thereby creating
a financial supermarket.
The entities focus on leveraging their large branch network and offer wide
range of services to consumers under single brand name.
The practice of universal banking is common in European countries in which
it is found in three forms:
1. In-house Universal Banks,
2. Universal banking through Separate Subsidiaries,
3. Universal banking through Holding Companies.
1. In House Universal Banking Eg. Germany, Switzerland
Bank
Securities Investments
Mutual Funds Insurance
Underwriting Advisory

1.8
<br>

Universal Banking Evolution of Universal Banking System in India

2. Through Separately Capitalized Subsidiaries Eg. England, Japan

Bank

Subsidiary
3. Operations Carried through a Holding Company Eg., USA, Japan
Bank Holding Company

Bank Securities

1.1.5 Development of Banking in India

• Since independence, banking in India evolved through four distinct phases.
These are as follows
:

Foundation Phase
The period for this phase is t1950s to 1960 till the
Nationalization of banks in 1969. It focuses on sound
banking system. This phase is witnessed for development
of legislative framework for re-organisation and consolidation of
banking system. A major development was transformation of
Imperial Bank of India into State Bank of India.

Expansion Phase
It had begun in mid 60's. It got momentum after nationalization
of banks and continued till 1984. Lots of efforts are made by
bank to make available facilities to the masses. Branch network
were widened. It also covered rural and semi-urban areas. Important
of this phase was x002ow of credit towards priority sectors.

Consolidation Phase
This phase started in the year 1985. In this phase, various
policy initiative were taken by RBI. Attention was given to
improving housekeeping. customer services, credit management
staff productivity and prox001table banks.

Reforms Phase
The macro-economic crisis faced by country in 1991.
It
leads to extension of x001nancial sectors reforms which
brought derogulation of interest rates, more competition,
technological changes, prudential guidelines on
asset classix001 cation and income recognition, capital adquecy
autonomy package etc.

Fig. 1.2 :Development of Banking in India

1.9
<br>

Universal Banking Evolution of Universal Banking System in India

1.1.6 Types of Banks

• There are various types of banks which are explained as follows:
Branch
Banking
Social Unit
Banking Banking

Universal
Mixed
Banking
Banking
Types
of
Banks
Correspondence Chain
Banking Banking

Relationship Retail
Banking Banking
Wholesale
Banking

Fig. 1.3 : Types of Banks

1. Branch Banking
• Branch Banking refers to a system in which a bank provides banking services
through a wide network of branch offices.
• The branch office will offer all services that are offered by the main branch.
• The main branch controls the operations of the branch office.
• Accountholders can choose a nearby branch to make deposits, withdrawals
and avail of other banking services.
2. Unit Banking
• A unit banking system is one where one bank, typically a tiny individual
bank, provides banking facilities to its surrounding area.
• The unit bank covers a small geographic area. Thus, it is familiar with the
issues and fundamental requirements of the communities.
1.10
<br>

Universal Banking Evolution of Universal Banking System in India

3. Mixed Banking
• Mixed Banking is the system in which banks undertake activities
of commercial and investment banking together.
• These banks give short-term and long-term loans to industrial concerns.
• The banks appoint experts which give valuable advice on various financial
issues.
• Mixed banking is that system of banking under which the commercial banks
perform the dual function of commercial banking and investment banking,
ie., it combines deposit and lending activity with investment banking.
4. Chain Banking
• Chain banking refers to the system where one or few individuals control two
or more banking companies which are independently chartered or by the
same group of persons through purchases of shares of such banks.
• Individuals secure enough stocks to get the controlling interest in the
banking corporations involved.
5. Retail Banking
• Retail banking, also known as Consumer Banking or Personal banking.
Retail banking that provides financial services to individual consumers rather
than businesses.
• Retail banking is a way for individual consumers to manage their money,
having access to credit, and deposit their funds in a secure manner.
6. Wholesale Banking
Wholesale banking involves banking services for high net-worth clients like
corporate, commercial banks, mid-size companies etc.
• India has a suitable investment climate and is seen as a favoured investment
destination so it hasa huge potential for the growth of this type of banking.
• It provides an ease of access to the complete financial portfolio of a client
who can easily browse through the same and make suitable allocations,
transfers etc.
1.11
<br>

Universal Banking Evolution of Universal Banking System in India

7. Relationship Banking
Relationship banking is when banks offer many different products and
services to meet the needs of loyal customers.
• As a relationship banking customer, you might qualify for exclusive services
and deals, such as better interest rates on deposit accounts or loan
products.
8. Correspondence Banking
•A correspondent bank is a third-party financial institution that acts as
an intermediary between domestic and international banks.
Correspondent banks effectively act as an agent of a foreign bank to
conduct business transactions with the domestic bank on its behalf.
They're able to provide a variety of financial senvices to both parties,
including treasury services, processing international wire transfers, handling
global investments, and trade financing.
• The correspondent bank charges a fee from the foreign bank for the
services rendered.
9. Universal Banking
• A universal bank is nothing but a commercial bank with additional authority.
• It acts as an investment house
• It invests its money in non-allied companies.
• It is a system through which banks offer their regular, retail, and high net
worth customers a bouquet of comprehensive financial services.
• They are customised or tailored investment, retail, and commercial services
etc.
10. Social Banking
"Social Banking" describes banking and related financial services whose
main objective is to contribute to the development of people and planet,
today and in the future.
• First and foremost, this means simultaneously taking into account the social,
environmental, governance, and economic impacts of activities on all levels,
with the aim of reducing their negative effects and increasing their positive
effects on the Common good.
Social Banking means banking with the purpose of creating positive impact
on society. It is not only about avoiding negative impact.
1,12
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Universal Banking Evolution of Universal Banking System in India

1.1.7 Evolution of Universal Banking in India

• Universal Banking means removal of distinction between the activities which
the financial institutions such as IDBI and other banks undertake and
allowing financial institutions and banks to undertake any activity of banking
development, financing, and activity associated with that, subject to
compliance of statutory and other requirements prescribed by RBI,
Government and related to legal Acts.
The R.H. Khan Committee has suggested the concept of Universal banking.
It had suggested to give banking licence to DFIs, merge banks with DFIs,
bring down CRR progressively, phase out SLR, redefine priority sector, set
up regulators to coordinate activities, develop risk based supervisory
framework, use legal reforms in debt recovery.
It had also suggested that state level FIs be allowed to go public and come
under RBI. DFIs be permitted to have wholly owned banking subsidiaries.
Removal of cap on FI's resources mobilization. Grant authorized dealers
licence to DFIs and set-up a standing committee to coordinate lending
policies.
• In 1997, the RBI Constituted a working group under the Chairmanship of
Khan (Chairman and the Managing Director of IDBI) to work on
Harmonising the Role and Operations of Development Financial Institutions
and Banks". This working group given a strong recommendation for a
progressive movement towards Universal Banking for the Development
Financial Institutions (DFIs).
• The second Narasimham Committee of 1998 gave an introductory remark
on the concept of the Universal banking. It is a different concept than the
Narrow Banking.
• Narsimham Committee I suggested that Development Financial Institutions
(DFIs) should convert ultimately into either Commercial Banks or Non
banking Finance Companies.
However, the concept of 'Universal Banking' was implemented in India
mainly on the recommendations of R. H. Khan Committee.
The Khan Working Group held the view that DFls (Development Finance
Institutions) should be allowed to become banks at the earliest.
1.13
<br>

Universal Banking Evolution of Universal Banking System in India

• Following are the recommendation of working group

1. progressive move towards universal banking.
A

2. Development of regulatory framework for the above purpose.

eventually granted to DFIs.
3. A full bank license is
4. RBI and Government should provide an appropriate level of financial
support in case of DFI and assure any developmental obligator.
5. Management of banks and DFI should be permitted to enter into the DFI
merge.
RBIGuidelines on Universal Banking (2001)
• As per RBI guidelines, the DFls are expected to continue to have special role
in Indian financial system till debt market demonstrate substantial
improvement in terms of liquidity and depth.
They have an option to transform into a bank provided they ensure
compliance with the following:
1. Reserve Requirement
Compliance with the Cash Reserve Ratio (CRR) and Statutory Liquidity Ratio
(SLR) requirement would be mandatory for an FI after its conversion into a
Universal Bank.
2. Permissible Activities
• Any activity currently undertaken but not permissible for a bank under
Section 61 of BR Act, 1949, may have to be stopped or divested after its
conversion into a Universal Bank.
3. Disposal of Non-banking Asset
• Any immovable property, howsoever acquired by an FI, would, after its
conversion into Universal Bank, be required to be dispose off within the
maximum period of 7 years from the date of acquisition in terms of Section
9 of BR Act.
4. Composition of 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 provision of Section 10(A) of BR Act, which
requires at least 51% of the total number of directors to have special
knowledge and experience in banking field.
1.14
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Universal Banking Evolution of Universal Banking System in India

Faced with the pressures of globalisation and international financial

liberalisation, it is quite obvious that policy makers in India want our
banking structure to consolidate and improve their competitive position in
both domesticand global marketplaces.
• Acquisition of a "Universal Banking" structure could be perceived as a
strategic reaction of certain players to these changed circumstances.
1.2 Meaning of Universal Banking
1.2.1 Meaning
Auniversal bank is nothing but a commercial bank with additional authority.
It acts as an investment house. It invests its money in non-allied companies.
• It is a system through which banks offer their regular, retail, and high net
worth (HNI) Customers a bouquet of comprehensive financial services. They
are customised or tailored investment, retail, and commercial services.
• Universal banking is a system of banking where banks undertake a blanket

of financial services like investment banking, commercial banking.

development banking, insurance and other financial services including
functions of merchant banking, mutual funds, factoring, housing finance,
insurance etc.
• In universal banking, youget easy access to facilities like :
1. Credit Requirements,
2. Deposits,
3. Securities Transactions,
4. Asset Management,
5. Financial Analysis,
6. Underwriting Services,

7. Payment Processing,
8. Investment Advisory.
• Thus, you get all the required financial services under one roof. This facility
reduces your transaction costs and saves you precious time as well.
1.15
<br>

Universal Banking Evolution of Universal Banking System in India

Features of Universal Banks

1. Universal banks are one-stop shops for all your financial needs.
2. Universal Banking is a superstore for financial products under one roof.
3. Universal Banking is usually undertaken by large banks who can manage the
cost of such widespread operations

4. Universal Banking is categorised into various sub-types.

5. Universal Banking encompasses investment banking services for private

investors and organisations.

6. Universal Banking also involves wholesale banking services designed for

large-scale companies.

7. Retail banking is another aspect of universal banking that includes everyday

banking services.
8. Most Indian banks have become a one-stop-shop for all your financial

needs. This transition has given birth to the idea of Universal Banking.

Universal Bank
Wholesale Banking
A bank that offers retail.
wholesale, and inyestment
banking services under one roof.

Retail
Banking
Checking'Savings
Universal Borowi
Massive Amounte
Bank
Overdrafts, Loans. Government, Giant
Retail Universal Investment & Debit Cards
Credit Companies, Pension
Banking Banking Banking Safe Deposit Vaults Funds, etc.

Investment Banking
Asset Management, M&A, Securities Trading. Raising
Capital, Securities Underwriting

Fig. 1.4 : Universal Bank

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Universal Banking Evolution of Universal Banking System in India

1.2.2 Types of Universal Banks

• There are mainly four different types of Universal Banks in the world. They
are as follows :
•Fully integrated Universal banks are those banks
Fully Integrated which function as a single institutional entity
Universal Banks offering a complete range of banking and
financial products and services

•it is aninstitutional set-up where the bank offers a range

Partly Integrated of services, with some of the services such as mortgage
Financial banking, leasing, and insurance being provided through wholly/
Conglomerates Owned or partially owned subsidiaries.

These are the banks that offer functions such as

Bank Subsidiary investment banking and insurance in addition to
Structure focusing on regular commercial banking functions.

Bank holding company structure is an institutional set-up

Bank Holding where banking and financial products are offered through a
Company Ompany that owns both banking and
a

Structure ,ngsubsidiaries that are legally separate.

Fig. 1.5: Types of Universal Banks

1.2.3 Types of Universal Banking Services
Services of Universal Banking are categorised into three types according to
functionality which are as follows:
Investment
Banking
Services

Services of
Universal
Banking
Wholesale
Retail
Banking Senio
Services

Fig. 1.6: Services of Universal Banking

1.17
<br>

Universal Banking Evolution of Universal Banking System in India

1. Investment Banking Services

• Several public and private sector banks in India have started offering
investment banking services.
• Banks focus on providing services to various private investors and
organisations.
• They are also known as merchant banking.
• These banks generally offer their clients assistance related to raising capital,
asset management, mergers and acquisitions, investment advisory services,
securities underwriting and securities trading, among other facilities.
• Such functions of universal banking do not apply to everyday banking
services.
2. Wholesale Banking Services
Wholesale Banking Services are designed for businesses and corporate
organisations, as opposed to individual bank customers.
These services usually involve lending and borrowing funds on a large-scale,
compared to retail banking services that deal with comparatively smaller
loan amounts for individual customers.
• Each transaction in wholesale banking is typically in the tunes of crores of
rupees and multiple accounts.
• For instance, a customer of a wholesale bank may need pension fund
accounts for its employees.
• Government organisations and multinational companies are typically the
customers who obtain wholesale banking services.
3. Retail Banking Services
• Retail banking is the most common type of universal banking service
available globally.
Under Retail banking, facilities include a wide variety of housing, auto
and personal loans and mortgage services.
It also includes offering different types of bank accounts i.e.; Salary,
Current, Savings Accounts, and more.
Banks provide safe deposit lockers facility, fixed and recurring deposits,
credit and debit cards, and other such everyday banking services under
retail banking services.
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<br>

Universal Banking Evolution of Universal Banking System in India

1.3 Definition of Universal Banking

• According to the glossary of terms following is the definition of universal
bank:
1. "A universal bank is a financial service conglomerate combining retail,
wholesale and investment banking services under one roof and reaping
synergies between them."
2. "The notion is that they would benefit from economies of scale in
information technology and access to capital to serve companies and retail
customers around the world."
Universal banking refers to the combinations of commercial banking and
investment banking including securities business.
• Universal Banking is defined as (Saunders, Anthony. A and Walter Ingo,
1994) "the conduct of range of financial services comprising deposit taking
and lending, trading of financial instruments and foreign exchange (and
their derivatives), underwriting of new debt and equity issues, brokerage
investment management and insurance".
The term 'Universal Bank' has different meaning, but usually it refers to the
combination of Commercial banking and Investment banking.
It is a multi-purpose and multi-functional financial supermarket providing
both banking and financial services through a single window.
1.4 Objective of Universal Banking
Universal banking is related to banks providing both investment services as
well as savings and loan options to their customers.
• Many of the banks in Europe are related to and based on the basis of the
Universal Banking model.
The main objectives of such a model are an increased participation in
investment strategies, securing clients through saving and loan schemes,
development of private sectors. It also highlights on reduction of cost on
financial services.
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<br>

Universal Banking Evolution of Universal Banking System in India

Following are the main objectives of Universal Banking:

1. Participation in Investment
• This objective of Universal banking aims to secure the financial interests of
companies that have received direct investment and to protect the future
development of such institutions.
• By participating on the investment market, banks can directly exercise
decision-making power in the economy.
Universal banking focuses on performance of private firms by directly
investing into such entities
2. Development of Private Sector
• The main objective of Universal banking is the development of the private
sector.
• Universal banks target the private sector as a main source of their clients.
3. Cutting the Costs
• The idea of the universal banks is to reduce the costs of their financial
services.
• Many of the European continental banks are adopting the universal banking
approach to engage in more serious price reduction strategies.
• The European Central Bank has already partially achieved this objective.
• American and Asian banks also offer better prices for providing financial

services.
4. Provide Facilities Under One Roof
• Universal banking aims to provide easy access to facilities like credit
requirements, deposits, securities transactions, asset management, financial
analysis, and underwriting sevices, among other things. Essentially, you get
all the required financial services under one roof.
5. Saving and Loans
• Universal banking aims at delivering multiple financial services to their
customers.
• Universal banking aims to deliver immediate benefits for their clients.
1.20
<br>

Universal Banking Evolution of Universal Banking System in India

Universal banks aim for their clients with saving and loan options.
• Universal banks aim to diversify their range of services and have larger
influence on the financial markets.
• This makes such entities quite attractive for people who want to take care of
their all-financial needs at one place.
6. Additional Authority of Investment House
universal bank is nothing but a commercial bank with additional authority
A

to act as an investment house and invest its money in non-allied Companies.

• It is a system through which banks offer their regular, retail, and high net
worth customers financial services, including customised or tailored
investment, retail, and commercial services etc.
7. Creation of Efficiencies
• Universal banking creates efficiencies and synergies throughout an
organization.
By coordinating and planning though one platform,
all financial activities
Universal Banks are able to design solutions, unlock value and construct a
road map to achieve the objectives and goals for each client.
1.5 Characteristics of Universal Banking
The characteristics of Universal Banking mainly depends on two most
important factors namely.
1. The specificcountry's diversification rules and regulations.
2. The strengths of individual banks in enlarging the scope of the activities in
the various segmernts of financial services industry.
Characteristics of Universal Banking
• The important
characteristics of Universal Banking are as follows
:

1. Universal banking is a banking system that offers a wide range of banking

and financial services such as insurance, development banking, investment
banking, commercial banking, and other financial services.
2. Universal banking can also be understood as a combination of all three
services that is retail banking, investment banking, and wholesale banking.
1.21
<br>

Universal Banking Evolution of Universal Banking System in India

3. Universal banking offers different services like asset management, deposits,

payment processing. investment advisory, underwriting, securities
transactions, financial analysis, merchant banking, factoring, mutual funds,
credit cards, auto loans, insurance, housing finance, retail loans, etc to their
Customers.
4. Universal banks also provide services such as insurance.
5. Universal banks provide features of a business bank, such as keeping public

funds and lending credits to them and a variety of other services.

6. Universal banks also provide services for storing public funds.
7. Universal banking provide various services under one roof to provide easy
access to facilities like credit requirements, deposits, securities transactions,
asset management, financial analysis, and underwriting services, among
other things.
8. Banking companies, operating as Universal banks, holds equity shares of
many entities.

1.5.1 Components of Universal Banking

•Universal Banks also provide services for storing

Investing public funds
Banking

Universal Banks provide features of a business bank, such

as keeping public funds and lending credits to them and a

Commercial variety of other services.

Banking

Universal Banks also provide services such as insurance

Insurance

Fig. 1.7: Components of Universal Banking

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<br>

Universal Banking Evolution of Universal Banking System in India

1.6 Difference between Commercial Banking and Universal

Banking
1.6.1 Meaning of Commercial Banking
Commercial banking is central to understanding and meeting a typical
customer's basic financial needs and expectations.
• To address the basic needs of ordinary consumers, these banks provide
standard services such as a savings account, a current account, and credit.
• The credit rating of a customer will determine whether or not commercial

banks are interested in meeting their financial demands and expectations.

A commercial bank is a financial institution whose main purpose is to accept
deposits from people and provide loans and other facilities.
• Commercial banks offer basic services of banking to the public including
individual consumers as well as small and medium sized business.
1.6.2 Difference between Commercial Banking and Universal
Banking
Universal banks are commercial banks that offer various range of services
under one roof.
In contrast, a commercial bank provides mandatory services such as
accepting deposits from the customers, lending loans, locker facilities,
demand drafts, credit cards, remittance facilities, etc.
• In this context, it can be said that all universal banks are commercial banks,
but all commercial banks are not universal banks.
1. Universal Banking is a banking system in which bank offers various financial
services. Commercial Banking however, focuses on traditional banking
services such as accepting deposits and lending money.
2. Universal Banking offers more financial services, such as insurance and
investment banking. Commercial Banking focuses more on serving
businesses and individuals with their basic banking needs.
3. Universal Banking is more complex and it requires more resources.
Commercial Banking on the other hand, is simpler and more focused and
has a lower risk profile.
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<br>

Universal Banking Evolution of Universal Banking System in India

4. Universal Banking is a type of banking that performs the services of multiple

banking types. The primary motivation is not to make money in universal
banking. While commercial banking is a profit-making organisation that
carries out specific tasks. Earning money is thus the primary goal of
commercial banking.
• The major points of difference between Commercial Banking and Universal
Banking are as follows :
Points of Universal Banking Commercial Banking
Difference
1. Meaning It is a type of banking which It is a profit-earning
provides functions of more institution that performs
than one kind of banking. certain functions.
2. Definition A universal bank is a financial A commercial bank is
service conglomerate a financial institution
combining retail, wholesale which accepts deposits
and investment banking from the public and
services under one roof and gives loans for the
reaping synergies between purposes of
them. consumption and
investment to make
profit.
3. Role It performs functions of It mainly performs the
depositing money, lending functions of accepting
loans, investing and deposits and lending
insurance, etc. loans to the public.
4. Products Credit loan Deposits such as
Offered • Investment Advisory Cash Credit,
• Insurance Services Current, Fixed,
• Asset Management Time, Saving etc.
• Payment Processing Demand Loan
• Underwriting • Short-term Loan
• Financial Analysis

1.24
<br>

Universal Banking Evolution of Universal Banking System in India

Points of Universal Banking Commercial Banking

Difference
5. Motive Profit earning is not the main The main motive is
motive. profit earning.
6. Investment It performs functions of It does not provide any
Banking investment banking. such facilities.
7. Types of Financial customers who General Public and
Clients want to receive multiple Companies are the
services. clients.

8. DisadvantagesRisk of failure, Inflexibility, Expensive, Difficult

etc. Terms and Conditions
etc.
9. Qualification Provide combined services as The main task is

commercial banks and accepting deposit and

investment banks. advancing loans and
earn interest.

1.6.3 Meaning of Retail Banking

Retail banking is the most common type of commercial banking, and it
offers a variety of services mainly to retail customers rather than corporate
clients.
Retail banks offer a variety of products and services. Such services are
tailored to a significant portion of the population.
Checking accounts, savings accounts, debit cards, credit cards, money
orders, wire transfers, mortgages and home loans, vehicle loans, and other
products and services are available from retail banks.
• Retail banking has a large customer base due to its wide range of services.
As a result, they have a massive volume of small-value transactions.
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<br>

Universal Banking Evolution of Universal Banking System in India

1.6.4 Difference between Retail Banking and Universal Banking

Points of Difference Universal Banking Retail Banking
1. Meaning Universal banking is a Retail barnking helps the
framework in which country's monetary
banks provide a wide recovery by boosting
range of comprehensive creative activity and
financial services, providing banks with
including those tailored accessible assets.
to retail, business, and
venture administrations
2. Definition Universal banking is a A retail bank is a
system in which banks financial institution that
provide a wide range of provides monetary
Comprehensive services to the general
monetary services, public, such as
including those tailored managing their money
to retail, commercial, and giving them access
and venture to useful financial
administrations. services such as credit,
financial advice, and so
on.
3. Role
A
Universal Bank is a A retail bank manages
commercial and customers rather than
investment bank. It firms or different banks.
participates in financial
transactions.
4. Advantage Universal banks offer a Retail banking
variety of advantages, contributes to the
such as easy service country's monetary
marketing, profitable recovery by increasing
diversions, resource creation activity and
utilisation etc. establishing easy assets
for banks.
1.26
<br>

Universal Banking Evolution of Universal Banking System in India

Points of Difference Universal Banking Retail Banking

5. Disadvantage Universal banks have a A big disadvantage here
lot of disadvantages, is keeping track of and

including a lack of long following-up on the

term lending massive amount of
competence, the danger credit accounts that has
of failure, and the prompted banks to
problem of non invest heavily in the
performing assets. human asset division.
6. Purpose Universal banking is a Retail banking is
structure in which banks traditional monetary
provide a broad range ofauthority between
comprehensive money customers and their
related services, banks. A retail bank
including those provides customers with
specifically designed for essential financial
retail, business, and services such as financial
adventure organisations. records, venture records,
and credits.
7. Services Offered It performs functions Retail banking provides
such as money saving, monetary support to
credit lending, individuals and families.
contribution, and The two most important
protection, among elements are: credit,
others. deposit, and money
management.
1.7 Functions of Universal Banks
• Universal banking is combination of :
1. Retail Banking
2. Investment Banking
3. Wholesale banking
1.27
<br>

Universal Banking Evolution of Universal Banking System in India

• Universal banking as Retail banking, wholesale banking and investment

banking performs following functions which is shown in Fig. 1.8.

Universal Bank

A bank that offers retail, wholesale, and

investment banking services under one roof

Retail Banking Wholesale Banking Investment Banking

Checking!savings Borrowing and lending
Asset Management,
accounts, massive amounts to M&A, securities
overdrafts, e government, giant trading, raising capital.
credit & debit companies, pension securities underwriting
safe deposit vaults funds, etc.

Fig. 1.8 : Functions of Universal Banking

1. Functions of Universal Banking as Retail Banking Services
• Retail banking is the most common type of universal banking service
available globally.
• Retail banking encapsulates the qeneral banking facilities that include a
wide variety of housing, auto and personal loans and mortgage services.
• It also includes:
(a) Offering different types of bank accounts, i.e.; Salary, Current, Savings

Accounts, and more.

(b) Providing safe deposit lockers.
(c) Fixed and recurring deposits, credit and debit cards facilities,

(d) Providing multiple payments and settlement systems. The payment and
settlement system comprises of various arrangements that is used to
systematically, efficiently and securely transfer money, cheques, demand
draft through various electronic channels.
• This banking services are utilized in everyday banking services under retail
banking.
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<br>

Universal Banking Evolution of Universal Banking System in India

2. Functions of Universal Banking as Wholesale Banking Services

• Wholesale Banking Services are typically designed for businesses and
corporate organisations. These services usually involve :

(a) Lending and borrowing funds on a large scale, compared to retail banking
services that deal with comparatively smaller loan amounts for individual
customers.
(b) Each transaction in wholesale banking is typically in the tunes of crores of
rupees and multiple accounts. For instance, a customer of a wholesale bank
may need Pension Fund accounts for its employees.
(c) Government organisations and multinational companies are typically the
customers who obtain wholesale banking services.
(d) The bank can also act as an agent of the Government or local authority.
They insure, guarantee, underwrite, participate in managing and carrying
out issues of shares, debentures, etc.

(e) It undertakes the inward and outward remittances with reference to foreign
exchange.
3. Functions of Universal Banking as Investment Banking Services
• Several public and private sector banks started offering
in India have

investment banking services. Such banks typically focus on providing

services to various private investors and organisations. Also known as
Merchant Banking, these banks generally offer their clients:
(a) Merchant Banking Services.

(b) Assistance with asset management/and portfolio management.

(c) Mergers and acquisitions advisory services.
(d) Incensing Capital requirements.
(e) Securities underwriting and securities trading, among other facilities.
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<br>

Universal Banking Evolution of Universal Banking System in India

• As isapparent, these functions of universal banking do not apply to

everyday banking services. These functions are explained in detail as follows:
(a) Merchant Banking Services
• Merchant banking is a combination of banking and consultancy services.
It provides consultancy to its clients for financial, marketing, managerial, and
legal matters.
• Merchant banker advises regarding identification of the project, preparing
feasibility report, selection of location of the project, size of organisation,
investment decisions and obtaining government approval etc.
(b) Assistance with Asset Management/and Portfolio Management
• Asset management is the day-to-day running of a wealth portfolio.
• It is usually headed by an investment manager.
• The management of assets involves building a portfolio of investments.
• This includes assessing risks, finding opportunities, and developing an
overarching strategy for reaching a set of financial objectives.
• Portfolio management is a process of investment in securities. It involves a
proper investment decision- making.
• The objective of this service is to help investor with the expertise of
professionals.
• It involves construction of a portfolio based upon the fact sheet of the
investor giving out his objectives; constraints, preferences and tax liability.
(c) Mergers and and Acquisition Advisory Services
• Universal banking as an Investment Banks advise on Mergers and

Acquisition.
Investment banking services majorly comprise conducting M & A advisory
services for organizations.
• Some of the advisory services under mergers and acquisitions include:

(i) Due Diligence Services.

(ii) Corporate Advisory.
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<br>

Universal Banking Evolution of Universal Banking System in India

(ii) Pre-deal and Post-deal advisory services.

(iv) Buyer Side Advisory.

(v) Seller Side Advisory.

(d) Increasing Capital Requirements
The primary services offered by Universal Bank as an investment bank is to
raise the capital for a company.
• When a company needs funds for a project, an investment bank's advice is
required to fund the project.
Raising equity and other capital for a company also comes under the
activities of investment banking advisory services.
(e) Securities Underwriting and Securities Trading, among Other Facilities
Companies that want to increase capital go for options such as primary
offerings or Initial Public Offerings (POs).
In an IPO, securities are offered to the public in a stock exchange, which is

regulated by the Securities Exchange Board of India (SEBI) in India.

The SEBI is the primary authority to seek permission to raise funds through
the public.
Questions For Discussion
1. Define Universal Banking. State its Objectives.
2. Explain the Evolution of Universal Banking in India.
3. State the Characteristics of Universal Banking.
4. Differentiate between Universal Banking and Commercial Banking.
5. Explain the various Functions of Universal Banking.
6. Write Short Notes
(A) Types of Banks
(B) Universal Banking Services
(C) Universal Banking v/s. Retail Banking
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<br>

Universal Banking Evolution of Universal Banking System in India

References
1. Publishing House Gorden Natrajan
2. https://www.encyclopedia.com/religion/encyclopedias-almanacs-transcripts

and-maps/riesser-jacob
3. https://www.investopedia.com/terms/t/fdic.asp
4. https:/www.gktoday.in/universal-banking/
5. https://marketbusinessnewS.com/financial-glossary/universal-bank/
6. https://techykhushi.medium.com/universal-banking-meaning-introduction
advantages-and-disadvantages-a4c7b4ab69a0
7. https://askanydifference.com/difference-between-universal-banking-and
commercial-banking/#google_vignette
8. https://www.gktoday.in/types-of-banking/#Branch_Banking
9. https://www.lawctopus.com/academike/transformation-financial
institutions-universal-banks/

1.32
<br>

Chapter 2..
Practices of Universal Banks
Contents ..
2.1 Practices of Universal Banks
2.1.1 Practices of Universal Banks

2.1.2 Overview of Universal Banking in India

2.1.3 Universal Banking in India

2.1.4 Structure Followed in India

2.1.5 Regulation on Universal Banking by Government of India

2.1.6 Guideline for Licensing of Universal Banking
2.2 Advantages and Disadvantages of Universal Banking
2.2.1 Advantages of Universal Banking

2.2.2 Success of ICICI Bank after conversion into Universal Banking

2.2.3 Disadvantages of Universal Banking

2.3 Problems Faced by the Universal Banks
2.3.1 Problems Faced by Universal Banks

2.3.2 Debate on Universal Banks

2.3.3 Challenges Faced by Universal Banks

2.4 Recent Trends in Universal Banking in India

2.4.1 SWOT Analysis of Universal Banking

2.4.2 Recent Trends in Universal Banking in India

• Questions for Discussion

References
2.1
<br>

Universal Banking Practices of Universal Banks

2.1 Practices of Universal Banks

Introduction
Universal Banking, a concept that has gained a lot of importance in recent
years. It can be defined as a multi-purpose and multi-functional
supermarket providing both banking and financial services through a single
window.
In simple words, a Universal Bank can be described as a big superstore for
financial products.
• Under one roof,
1. Corporate can get loans and acquaint with of other handy services,
2. Individuals can bank and borrow.
As mentioned in the Discussion Paper by Reserve Bank of India,' the term
Universal banking, in general, refers to the combination of Commercial
banking and Investment banking.
It also deals in underwriting, investing and trading in securities.
In a broad sense, however, the term Universal banking refers to those banks
that offer a wide variety of financial services especially insurance (Reddy.
2000).
• As per the World Bank, TIn Universal Banking, large banks operate extensive
network of branches, provide many different services, hold several claims on
firms (including equity and debt) and participate directly in the Corporate
Governance of firms that rely on the banks for funding or as insurance
underwriters (Katkar, 2006).
• In simple words, Universal Banking means the financial entities - the
Commercial banks, Financial Institutions, NBFCS - that undertake multiple
financial activities under one roof, thereby creating a financial supermarket
(Chaitanya, 2005).
Universal banking is the entity focus on leveraging their large branch
network and offer a wide range of services under a single brand name.
2.1.1 Practices of Universal Banks
• Different types of financial products and services penetrate our daily
activities.
• As a major group of financial institutions, banks have been expanding their
service Scope, and hence, universal banks, which provide a variety of
2.2
<br>

Universal Banking Practices of Universal Banks

financial products and services in one house, have experienced growing

popularity in some industrialised countries.
• Germany is the typical example of the universal banking system.
Canada and Switzerland, among others, are moving towards universal
banking.
Despite the growing popularity of universal banks in a global context, the
United States continues to block commercial banks from engaging in
securities transaction and underwriting.
Full Universal Universal Subsidiary
Universal Subsidiary
Bank Parent Holding
Universal Bank Commercial Banking Company
Commercial Banking
Insurance underwriting
Insurance Sales Commercial Investment
Securities trading and Insurance Bank Bank
underwriting Company
Asset administration Insurance Fund
and trust Company Management)
Financial consulting Investment Company
Trust Co.
Dealer

Fig. 2.1: Universal Banks in Different Forms

Germany is one of the countries with a full universal banking system.
German universal banks have successful before the Second World War.
Universal banks can offer the entire range of financial services within the
bank or through subsidiaries.
• Most countries permit universal banking. In contrast, the United States is

served only by specialized banks.

Universal banking, particularly in Germany, is contrasted with specialized
banking with respect to their effect on financial stability, economic
development, other financial institutions, concentration of political and
economic power, consumer choice, and conflicts of interest
Cable (1985) has an analysis of the country's banking system. In particular,
he emphasis that the profitability of enterprises monitored by universal
banks is more likely to be promising.
• German universal banks finance enterprises mainly in two ways:
1.Current account credit, and
2. Organisation of issues of new securities.
2.3
<br>

Universal Banking Practices of Universal Banks

External finance for investment is of great importance to German

industrialisation since internal financial resources are obviously inadequate
for the development of capital-intensive industries. As a result, universal
banks prove to be a major source of external finance to enterprises.
• Examples of universal banks include JPMorgan Chase, Bank of America,
Wells Fargo, UBS, BNP Paribas, Deutsche Barnk, and Barclays. Al of these
banks provide a gamut of banking services, from retail banking to
investment banking.
Nowadays all banking is moving towards merchant banking. As such the
distinction in the operations of Commercial banks, Development Financial
Institutions and Non-Banking Financial Companies (NBFC) is gradually
blurring.
Universal banking earning income through interest, fees, commission etc.
It is performing various activities.
Universal banking adopts and achieves the basic objectives of business
through technology.
• Universal Banks are characterized by the presence in the breadth and depth
of different segments of the financial market particularly debt market
Banks in India are present in the following areas of the universal banking
activity:
1. Credit market 2. Consumer finance market
3. International banking
4. Advisory service market (merchant banking)
5. Investment banking 6. Pension market
7. Project financing 8. Venture capital
9. On-line share broking 10. Internet banking
11. Telephone banking 12. Insurance market
13. Savings market 14. Money market
15. Capital market 16. Forex market
17. Commodities market 18. Factoring
19. Credit, Debit, and Smartcards 20. Mobile banking
21. Securitization
In India, most of the commercial banks are rendering almost allthe activities
mentioned above.
• Except for the ICICI Bank Limited, which enjoys the status of Indian Universal
Banks, the other banks which are also rendering the above-mentioned
services, however, they do not enjoy the same status.
2.4
<br>

Universal Banking Practices of Universal Banks

2.1.2 Overview of Universal Banking in India

• In the year 2000, ICICI gave presentation to RBI to discuss the time frame
and possible options for transformation into an Universal banking.
• Reserve Bank of India (RBI) also spelt out to Parliamentary Standing
Committee on Finance, its proposed policy for universal banking, including a
case-by-case approach towards allowing domestic financial institutions to
become universal banks.
RBI then approached to financial institutions to ask about their interest for
conversion into Universal bank.
• Financial institution felt need to formulate road map of transaction path and
strategy for converting them into Universal Banking.
• The plan should specifically provide for full compliance with prudential
norms as applicable to banks over the proposed period.
The Narsinham Committee II suggested that DFI should convert into
Commercial banks or Non-banking Financial Companies.
• The second Narasimham committee of 1998 gave an introductory remark on
the concept of the Universal banking. It is a different concept than the
Narrow Banking.
• Narsimham Committee I suggested that Development Financial Institutions
(DFIS) should convert ultimately into either commercial banks or non-bank
finance companies
• The Khan committee group emphasis that DFI should convert into banks.
However, the concept of Universal Banking conceptualized in India after
the RH Khan Committee recommended it as a different concept.
• The Khan Working Group held the view that DFIs (Development Finance
Institutions) should be allowed to become banks at the earliest.
• The Khan Committee on harmonizing the role and operations of
development of financial institutions and banks submitted the report on
April 24 1998 with following recommendations:
1. Gave banking licence to DFls
2. Merge banks with banks, DFIs
3. Bring down CRR progressively
4. Phase out SLR
5. Redefine priority sector
6. Develop risk base supervisory framework
2.5
<br>

Universal Banking Practices of Universal Banks

7. Set-up a super regulator to coordinate regulators activity

8. State level FIs be allowed to go public and come under RBI
9. Grant authorised dealers' licence to DFIs
10. Set-up standing committee to coordinate lending policies
11. DFIs be permitted to have wholly owned banking subsidiaries.
The RBI released Discussion paper in January 1999 for the public debate on
wider scale.
• The analysis of feedback was that universal banking is desirable for the point
of efficient utilisation of resources.
• The attention requires for major areas such as: the status of financial sector
reform, the status of preparedness of the concerned institutions, the
evolution of the regulatory regime for moving towards Universal banking.
1. ICICI estimated a timeframe of 12 to 18 months in converting itself into a
Universal Bank.
2. ICICI has received favourable response from Indian investors and FIls on its
move to merge with ICICI Bank and become a universal bank.
3. ICICI was the first one to propagate universal banking as an ideal concept
for the DFIS to support industries with low-cost funds.
4. In Auqust, ICICI executive director Kalpana Morparia said that ICICI has to
obtain a separate banking licence from RBI for becoming a universal bank. It
can avoid the stamp duty burden by first converting ICICI into bank, instead
of going for a direct merger of ICICI into ICICI Bank.
2.1.3 Universal Banking in India
• In early 1980s there was explosive growth in financial market. It has resulted
into disintermediation. (Rajadhyaksha 2004).
Disintermediation means reduction in the use of intermediaries between
producers and consumers, for example by investing directly in the securities
market rather than through a bank.
• Due to disintermediation process, there was extensive change into banking
sector. (Suneja 1994).
• Indian banks have resorted to diversification in a big way. Moreover, the
disintermediation process has been followed by financial sector reforms,
which was initiated in the early 1990s after the First Narasimham Committee
recommendation.
2.6
<br>

Universal Banking Practices of Universal Banks

The disintermediation process and reforms helped the way for

diversification of business activities in the banking sector.
• Nowadays, the financial services industry has become entirely market
oriented.
• The innovation of new services and the development of new instruments
have become an integral and essential part of this market.
1. In India, there is no legislative distinction between Commercial banking and
Investment banking.
2. In India, there is no explicit legislative restriction for the banks to operate in
investment banking activities,
3. In India, the banks have traditionally been maintaining the 'arms length'
distance from investment banking.
4. In India, DFIs (Development Finance Institution) and RFIs (Rapid Financial
Instrument) were meeting needs of specific sectors of the economy and also
providing long-term resources at concessional terms.
5. The commercial banks in qeneral, at large were confined to their core
banking function of accepting deposits and providing working capital
finance to industry, trade, and agriculture.
6. In 1990 after the financial sector reforms, banks were given abundant
freedom to go much beyond their traditional conservative commercial
banking and this has facilitated banks in providing a host of financial
products to meet varied customer needs.
7. At the same time, there has been blurring of the distinction between the
commercial banking and investment banking.
8. Later in the year 2000, the issue of universal banking resurfaced after ICICI
gave a presentation to RBI to discuss the time frame and possible options
for transforming itself into a Universal bank.
9. Reserve Bank of India also spelt out to Parliamentary Standing Committee
on Finance, its policy for universal banking.
10. Eventually, the first Indian Universal bank was born on March 31, 2002, with
the ICICI Bank formally given the recognition by the Reserve Bank of India.
2.7
<br>

Universal Banking Practices of Universal Banks

11. Another mega financial institution, IDBI has also adopted the same strategy,
and has transformed itself into a universal bank (Leeladhar, 2005).
12. In India, although many of the banks are ofering a host of banking and
financial services like a universal bank but they formally do not enjoy the
status similar to the ICICI Bank.
13. Export Import Bank (EXIM Bank), Industrial Finance Corporation of India
(IFCI) and Industrial Investment Bank of India (1BI) also plunged into the
race of becoming Universal banks but things did not materialise for them.
14. According to the RBI's "On Tap'" licensing guidelines, the initial minimum
paid-up voting equity capital for a universal bank should be 500 crore.
Thereafter, the bank should have a minimum net worth of 500 crore at all
times.
15. In April 2014, the RBI had given the green signal to Bandhan Bank and IDFC
Bank for the commencement of universal banking operations. Subsequently,
IDFC Bank merged with Capital First Ltd to form IDFC First Bank.
16. Few specialized Financial Institutions, like IDBI, IIB, are now talking of
turning into a universal bank. Also, Kotak Mahindra Finance, one of the
largest NBFC in India, also converted itself from an NBFC into a bank, after
acquiring a license to undertake banking business from RBI.
2.1.4 Structure Followed in India
• Nowadays there is tremendous competition in financial sector, banking
sector as well as non-banking sector. It leads to need for diversification in
business line.
• In the process of offering both banking and financial products, they started
to experiment with organizational structures hitherto unfamiliar in India.
In India, Holding company structure is followed for Universal banking.
On universal level, two holding company model is followed such as Bank
Holding Company model and Financial Holding Company model.
• In India, as per Reserve Bank of India, there are major motivations for
banks/financial institutions to adopt for Bank Holding Company (BHC)/
Financial Holding Companies (FHC).
2.8
<br>

Universal Banking Practices of Universal Banks

In terms of existing instruction of RBI, a bank's aggregate investment in the

x001nancial services companies including subsidiaries is limited to 20% of the paj
up capital and reserves.
In a BHC/FHC structure, this restriction will not apply as the investment in
subsidiaries and associates will be made directly by the BHC/FHC.
First
• Once the subsidiaries are separated from the banks, the growth of the
subsidiarieslassociates would not be constrained on account of capital

The context of public sector banks, the Government holding through a

BHC/FHC will not be possible in the existing statutes.
If the statutes are amended to count for effective holding then, the most
important advantage in shifting to BHC/FHC model would be that the
capital requiremernts of banks.
Second
• Subsidiaries would be de-linked from the banks' capital.

• Holding Capital structure in a banking or X001nancial group, a holding company

can be the parent of the group or an intermediate holding company.
It is anticipated that due to the above motivational factors, X001 nancial entities
offering diversix001 ed oducts swOuld opt for Holding Company structure
y

Third
• A multi-layered x001 nanc conglomerate may also have a few tiers of
intermediate holding companies part from the holding company at the top.

Fig. 2.2 : Structure of Universal Banks

2.1.5 Regulation on Universal Banking by Government of India
• The regulatory issues to be addressed by the Financial Institutions for
conversion into a Universal Bank as per RBI Circular are as follows
:

1. Reserve Requirements
Compliance with the cash reserve ratio and statutory liquidity ratio
requirements is given under Section 42 of RBI Act, 1934, and Section 24 of
the Banking Regulation Act, 1949. It is would be mandatory for the Financial
Institutions after its conversion into a universal bank.
2. Disposal of Non-banking Assets
According to Section 9 of the Banking Regulation Act, any immovable
property, howsoever acquired by an F, 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.
3. 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 after its
conversion into a universal bank.
2.9
<br>

Universal Banking Practices of Universal Banks

4. Prohibiting on Floating Charge of Assets

• According to Section 14(A) of Banking Regulation Act, 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.
5. Composition of the Board
• According to Section 10(A) of Banking Regulation Act, the composition of
the Board of Directors is necessary for some Financial Institutions after their
conversion into Universal bank.
• According to this Act, 51% of the total number of directors must have
special knowledge and experience.
6. Restrictions on Investment
• Section 19(2) of the Banking Regulation Act, prohibits a bank from holding
shares in company in excess of limit of its own capital.
• 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.
7. Assets in India
• Under Section 25 of the Banking Requlation Act, 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.
8. 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 Banking Regulation 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.
9. Licensing
• An FI converting into a Universal Bank would be required to obtain a
banking license from RBI as per the Section 22 of the Banking Regulation
Act, for carrying on banking business in India.
2.10
<br>

Universal Banking Practices of Universal Banks

10. 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 forms set out in the
third schedule to the Banking Regulation Act, as prescribed for a banking
company under Section 29 arnd Section 30 of the Banking Regulation Act.
11. Branch Network
• An FL, 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 least 25 per cent of their total number of branches in
semi-urban and rural areas.
12. Connected Lending
• Section 20 of the Banking Regulation Act prohibits the grant of loans and
advances by a bank on the 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.
2.1.6 Guideline for Licensing of Universal Banking
The Reserve Bank of India released on its website,
"Guidelines for 'on tap' Licensing of Universal Banks in the Private Sector".
• Some of the key aspects of the Guidelines include:
1. Resident individuals and professionals having 10 years of experience in
banking and finance at a senior level are eligible to promote universal
banks;
2. Large industrial houses are excluded as eligible entities but are permitted to
invest in the banks up to 10 per cent;
3. Non-Operative Financial Holding Company (NOFHC) has been made non
mandatory in case of promoters being individuals or standalone
promoting/converting entities who/which do not have other group entities;
4. Not less than 51l per cent of the total paid-up equity capital of the NOFHC
shall be owned by the promoter/promoter group, instead being wholly
owned by the promoter group; and
5. Existing specialised activities have been permitted to be continued from a
separate entity proposed to be held under the NOFHC subject to prior
approval from the Reserve Bank and subject to it being ensured that similar
activities are not conducted through the bank as well.
2.11
<br>

Universal Banking Practices of Universal Banks

Key Features of the Guidelines

1. Eligible Promoters
(a) Individuals/professionals who are 'residents' and have 10 years of
experience in banking and finance at a senior level.
(b) Entities/groups in the private sector that are 'owned and controlled by
residents' [as defined in FEMA Requlations, as amended from time to time]
and have a successful track record for at least 10 years, provided that if such
entity/group has total assets of 50 billion or more and that the non
financial business of the group does not account for 40 per cent or more in
terms of total assets/in terms of gross income.
(c) Existing non-banking financial companies (NBFCS) that are 'controlled by
residents' and have a successful track record for at least 10 years. For the
sake of clarity, it is added here that any NBFC, which is a part of the group
that has total assets of 50 billion or more and that the non-financial
businesS of the group accounts for 40 per cent or more in terms of total
assets/in terms of gross income, is not eligible.
2. "Fit and Proper' Criteria
Promoter/promoting entity/promoter group should have a past record of
sound financials, credentials, integrity and have a minimum 10 years of
successful track record.
3. Corporate Structure
• The requirement of Non-Operative Financial Holding Company (NOFHC) is
not mandatory for individual promoters or standalone promoting/
converting entities who/which do not have other group entities. Individual
promoters/promoting entities/converting entities that have other group
entities, shallset-up the bank only through an NOFHC. Not less than 51 per
cent of the total paid-up equity capital of the NOFHC shall be owned by the
Promoter/Promoter Group.
• Specialised activities would be permitted to be conducted from a separate
entity proposed to be held under the NOFHC subject to prior approval from
the Reserve Bank and subject to being ensured that similar activities are not
conducted through the bank.
• No shareholder, other than the promoters/promoter group, shall have
significant influence and control in the NOFHC.
2.12
<br>

Universal Banking Practices of Universal Banks

4. Minimum Capital Requirement

The initial minimum paid-up voting equity capital for a bank shall be five
billion. Thereafter, the bank shall have a minimum net worth of five billion
at all times.
The promoter/s and the promoter group / NOFHC, as the case may be, shall
hold a minimum of 40 per cent of the paid-up voting equity capital of the
bank which shall be locked-in for a period of five years from the date of
commencement of business of the bank. The promoter group shareholding
shall be brought down to 15 per cent within a period of 15 years from the
date of commencement of business of the bank.
5. Foreign Shareholding in the Bank
• The foreign shareholding in the bank would be as per the existing foreign
direct investment (FDI) policy subject to the minimum promoter
shareholding requirement indicated in paragraph (4) above. At present, the
aggregate foreign investment limit is 74 per cent.
6. Corporate Governance, Prudential and Exposure Norms
The bank shall comply with the provisions of Banking Regulations Act, 1949
and the existing guidelines on prudential norms as applicable to scheduled
commercial banks.
The bank is precluded from having any exposure to its promoters, major
shareholders who have shareholding of 10 per cent or more of paid-up
equity shares in the bank, the relatives of the promoters as also the entities
which they have significant influence or control.
7. Business Plan for the Bank
• The business plan submitted by the applicant should be realistic and viable
and address how the bank proposes to achieve financial inclusion.
8. Other Conditions
The bank shall get its shares listed on the stock exchanges within six years of
the commencement of business by the bank.
The bank shall open at least 25 per cent of its branches in unbanked rural
centres (population up to 9,999 as per the latest census).
The bank shall comply with the priority sector lending targets and sub
targets as applicable to the existing domestic scheduled commercial banks.
• The board of the bank should have a majority of independent directors.
2.13
<br>

Universal Banking Practices of Universal Banks

9. Procedure for Application

(a) The licensing window will be open on-tap, and the applications in the
prescribed form along with requisite information could be submitted to the
Reserve Bank at any point of time.
(b) The applications will be referred to a Standing External Advisory Committee
(SEAC) to be set-up by the Reserve Bank.
(c) The Committee will submit its recommendations to the Reserve Bank for
consideration. The Internal Screening Committee ((SC), consisting of the
Governor and the Deputy Governors, will examine all the applications and
then submit its recommendations to the Committee of the Central Board of
the Reserve Bank for the final decision to issue in-principle approval.
(d) The validity of the in-principle approval issued by the Reserve Bank will be
18 months from the date of granting in-principle approval and would
thereafter lapse automatically.
(e) Applicants aggrieved by the decision of the Committee of the Central Board
can prefer an appeal against the decision to the Central Board of Directors,
within one month from the date of receipt of communication from the
Reserve Bank relating to the application not being considered.
(f) In order to ensure transparency, the names of the applicants for bank
licences and the names of applicants that are found suitable for grant of in
principle approval will be placed on the Reserve Bank's website periodically.
2.2 Advantages and Disadvantages of Universal Banking
2.2.1 Advantages of Universal Banking
Universal banks are sophisticated commercial banks that provide various
services under one roof.
• Investment banking, retail banking, and wholesale banking are all examples
of universal banking. It provides an incredible range of services that neither
traditional banking nor its competitors can match.
The two main functions of Universal Banks are commercial banking and
investment banking.
The main advantage of universal banking is that it allows anyone to
establish offices for multiple types of banks under one roof.
It assists consumers in placing and proposing the ideal arrangement in
investments and ensuring that funds are appropriately spent.
2.14
<br>

Universal Banking Practices of Universal Banks

• Universal Banks generally provides the following services:

1. Asset management, 2. Auto loans
3. Insurance, 4. Deposits
5. Investment counselling 6. Underwriting, mutual funds
7. Credit cards, securities transactions 8. Financial analysis
9. Merchant banking 10. Payment processing
11. Factoring 12. Home finance
13. Retail loans and many other services are available through the system.
• Major Advantages of Universal banking are as follows:
Economic

Scale
Under one
roof Prox001tatle
Diversions

Advantages
Easy of
Marketing Universal
Banking Resources
Utilization,

One-stop Investors
Shopping
Trust

Fig. 2.3 : Advantages of Universal Banking

1. Economics of Scale
• Universal banking results in economic efficiency. Universal banking result in
greater economic efficiency in the form of low cost, higher output and
better products and services.
• In India, RBI is in favour of universal banking because it result in economics
of scale.
2. Profitable Diversions
• Universal banks diversify their activities. So, they can use the same financial
experts to provide different financial services. This saves cost for the
universal bank.
• The banks can utilize its existing skill in single type of financial services in
offering other kinds by diversifying the activities. Therefore, it involves lower
cost in performing all types of financial functions by one unit instead of
other institution.
2.15
<br>

Universal Banking Practices of Universal Banks

Even the day-to-day expenses will be saved because all financial services are
provided under one roof, i.e. in the same office.
3. Resources Utilization
• Universal banks use their client's resources as per the client's ability to take a
risk. If the client has a high risk taking capacity, then the universal bank will
advise him to make risky investments and not safe investments.
A bank possesses all types of information about the existing customers
which can be utilized to perform other financial activities with the same
customer.
• Similarly, clients with a low risk-taking capacity are advised to make safe
investments.
• Nowadays universal banks invest their client's money in different types of
Mutual funds and also directly invest it into the stock market. They also do
equity research. So, they can also manage their client's portfolios effectively.
4. Investors Trust
• Universal banks hold equity shares of many companies.
• These companies can easily get other investors to invest in their business.
This is because other investors have full confidence and faith in the
Universal banks.
They know that the Universal banks will closely watch all the activities of the
companies in which they hold a share.
5. One-stop Shopping
• Universal banking offers all financial products and services under one roof.
One-stop shopping saves a lot of time and transaction costs.
One-stop shopping is beneficial for the bank and its customers as it saves
lot of transaction costs by increasing the speed of economic activities.
• It also increases the speed or flow of work. So, one-stop shopping gives
benefits to both banks and their clients.
6. Easy Marketing
• Universal banks can easily market (sell) all their financial products and
services through their many branches.
• They can ask their existing clients to buy their other products and services.
This requires less marketing efforts because of their well-established brand
name.
• A bank with established brand name can easily use its existing branches and
staff to sell the other financial products like insurance policies, mutual fund
plans without spending much effort on marketing.
2.16
<br>

Universal Banking Practices of Universal Banks

For example, ICICI may ask their existing bank accountholders in all their
branches, to take home loans, insurance, to buy their Mutual funds, etc. This
is done very easily because they use one brand name (CICI) for all their
financial products and the services.
7. Under One Roof
• Universal banking offers all financial products and services under one roof.
It saves transaction cost and time. It also increases the speed of work. Hence
it is beneficial bank as well as customer.
In short, Universal banking is advantageous in various manner.
(a) It is flexible and adapting to fast changing environment.
(b) It provides better and innovative products.
() It is easily accessible to international financial markets.
(d) It is known for higher output due to specialisation.
(e) Large scale operations in Universal banking can avoid the wasteful
duplication of marketing, research and development and information
gathering efforts.
() Universal banks are the broader set of financial products than what a
specialized bank generally provides.
(g) 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-windo.
2.2.2 Success of ICICI Bank after Conversion into Universal Banking
• CRISIL has reaffirmed its triple A rating for ICICI and Flls also expects its
profit margins to improve after the merger due to the access to low-cost
deposits and the scope to increase income from fee-based activities.
1. ICICI has started increasing its international presence and associating closely
with NRI community in various countries.
2. ICICI InfoTech is based in US and also has an office in Singapore.
3. ICICI Securities has been registered as a broking firm in the US.
4. ICICI Bank is leveraging on strong network of 400 branches and extension
counters and more than 600 ATMs.
5. For offering products to NRIs; NRIs can transfer their money to 200 locations
in India by internet.
6. The payment will be made within 72 hours. It also offers loan products for
helping their relatives in India.
7. Besides, the Visa Card helps them to withdraw cash through the ATM
network.
2.17
<br>

Universal Banking Practices of Universal Banks

2.2.3 Disadvantages of Universal Banking

When a bank enters into universal banking, it tends to grow larger in size.
However, when banks expand, there are greater effects of their failure on
the banking system as a whole.
There is the fear that such institutions would gain monopoly power in the
market. This can have undesirable consequences for economic efficiency.
Universal banks are likely to have substantial risks of conflict of interest.
A conflict of interest arises when one is serving two or more interests.
Conflict of interests was one of the major reasons for the introduction of
Glass-Steagall Act in the US.
• Normally, critics associate universal banking with excessive risk, moral
hazard created by the expectation of government bailouts, monetary
instability, the concentration of political and economic power, a lack of
consumer choice and availability of credit etc.

f
interos
between
bank and Risk of
Risk of investor concentration
Failure process

Non
Performing
Assets Different
Rules and
Problem Regulations
Disadvantages
of
Universal
No Banking
Expertise
in Long
otentials
Term
Lending inx002uence
)
Effect of
failure on
anking
System Monopoly
Bureaucratic
and
Inx002exible

Fig. 2.4: Disadvantages of Universal Banking

2.18
<br>

Universal Banking Practices of Universal Banks

1. Conflicts of Interests Between Bank and Investor

• Universal banking is a term for banks that ofer a variety of comprehensive
financial services, including both commercial banking and investment
banking services.
• Normally Banks provide savings deposits by offering a favourable rate of
interest.
Private investors, however, would usually prefer investments in securities to
realize higher interest earnings.
Combining commercial and investment banking can result in conflict of
interest. Some banks may give more importance to one types of banking
and less importance to another one.
2. Risk of Concentration Process
• Concentration Banking is a facility where funds from the regional banks/
locations get collected into a single bank account.
Allthese local deposits show up in on Potente place centrally.

• This central account or the bank is termed a Concentration Bank.

• Nowadays, there is decrease in number of banks especially private banks. In
spite of a decreasing number of banks, especially the private banks, neither
a suppression strategy of big universal banks against smaller competitors
nor a cartelization(to control or regulate an industry price or supply of a
commodity by forming cartel) is to constate in the banking sector.
3. Different Rules and Regulations
Universal banking offers all financial products and services under one roof.
However, all these products and services have to follow different rules and
regulations of RBI, SEBI, IRDA. This will lead to various problems.
• For example, Mutual Funds, Insurance, Housing Loans, etc. have to follow
different sets of rules and regulations, but they are provided by the same
bank.
4. Potentials of Influence
In particular big banks, as a result of their broad offering of financial
products are to be expected to have special influential possibilities on other
economic subjects also.
2.19
<br>

Universal Banking Practices of Universal Banks

5. Monopoly
• Universal banks are very large. There is more possibility that they can easily
get monopoly power in the market. This will have many harmful effects on
the other banks and also on the general public. This is also harmful to
economic development of the country as a whole.
6. Bureaucratic and Inflexible
• Universal banks tend to be bureaucratic and inflexible. They normally work
primarily with large established customers. They generally ignore or
discourage smaller and newly established businesses.
7. Effect of Failure on Banking System:
• Universal banking is performance of very large banks. If these huge banks
suffer from the problem of failure, then it will have a very bad effect on the
banking system as a whole.
• The confidence of the public will be decrease.
• For example, Recently, Lehman Brothers, a very large universal bank failed. It
had very bad effects in the USA, Europe and even in India.
8. No Expertise in Long Term Lending
• These are different types of long-term loans like project finance and
infrastructure finance, having long gestation projects. They can not properly
handled by the single bank.
9. Non-Performing Assets (NPAS) Problem
• One of the most serious problems faced by universal banking is Non
performing Assets.
• A non performing asset (NPA) s a loan or advance for which the principal or
interest payment remained overdue for a period of 90 days.
10. Risk of Failure
• The larger the banks, the greater the effects of their failure on the system.
• The failure of a larger institution could have serious consequences for the
entire banking system.
If one universal bank were to collapse, it could lead to a systemic financial
crisis.
2.20
<br>

Universal Banking Practices of Universal Banks

2.3 Problems Faced by the Universal Banks

2.3.1 Problems Faced by UniversalBanks
Universal banks are known as Financial Institutions that are engaged in
offering various financial services.
They have ability in mobilizing huge amount of capital.
• They support companies by investing capital for long period of time in

companies.
• They supports companies in various ways.

Despite the fact that they play an important role in many countries, universal
banks have been controversial for over a century (e.g. Hilferding, 1910).
• Regarding the economic effects of universal banks, there are two opposing
views:

The x001rst view holds that The other view holds that
universal banks are: Universal banks are damaging
because the multitude of linkS
Efx001cient institutions which gives rise to conx002icts of interst.
overcome problems of
asymmetric information The opponents assert that
inevitablyy associated with universal banks will run
external x001nance. afx001 liated companies in their own
interest, especially in an
Universal bank relations are environment with weak legal
characterized by a multitude of systems and poor investor
links which allow universal protection.
banks to reuse costly Consequently, multiple relations
information and to built up
technical expertise between companies and
universal banks will not always
reduce but may, on the contrary.
increase agency problems

Fig. 2.5
.
The consequence of inefficient monitoring could lead to financial instability.
2.21
<br>

Universal Banking Practices of Universal Banks

• Benston (1994) states that universal banks tend to be larger so that collapse
of a single bank of this type could cause substantial distress in the financial
system.
Difficulty in monitoring large universal banks is also a major concern.
• When several of those large universal banks are to collapse, this will greatly
increase the risk to the economy's payments system.
• At the same time, it is more difficult to regulate universal banks because of
their close and complex ties businesses.
• In such a situation, financial requlators either have to requlate universal
banks very tightly, to increase economic efficiency, or be faced with the
possibility of a taxpayer bailout.
Conx0024t
of Interest
Due tto
Monopoly
harmful Deploy own
eiects on the asset into
ther banks
securities
by banks
Problems
Unsound faced by
Universal Universal
loans Banks ignore
Banks smaller and
established
businesses,

Risk of Government)
failure interference)

2.6: Problems Faced by Universal Banks

Fig.
1. Conflict of Interest
• Combining commercial and investment banking gives rise to conflict of
interests.
• Universal banks may not objectively advise their clients on optimal means of
financing.
• Universal banking may have an interest in securities because of underwriting
activities.
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<br>

Universal Banking Practices of Universal Banks

Universal banking is a term for banks that offer a variety of comprehensive

financial services, including both commercial banking and investment
banking services.
• Normally Banks provide savings deposits at a favourable rate of interest.
Private investors, however, would usually prefer investments in securities to
realize higher interest earnings.
• Combining commercial and investment banking can result in conflict of
interest. Some banks may give more importance to one types of banking
and less importance to another one.
There may be conflict between the investment banker's promotional role
and the commercial banker's obligation to provide disinterested advice.
2. Deploy Own Asset into Securities by Banks
• Banks may deploy their own assets in securities with consequent risk to
commercial and savings deposits.
• The Volcker Rule prohibits banks from using their own accounts for short
term proprietary trading of securities, derivatives, and commodity futures, as
well as options on any of these instruments.
• The Volcker Rule aims to protect bank customers by preventing banks from
making certain types of speculative investments that contributed to the
2007-2008 financial crisis in USA.
• The rule, exists as it is, but it allows banks to continue market making,
underwriting, hedging, trading government securities, engaging in insurance
company activities, offering hedge funds and private equity funds, and
acting as agents, brokers, or custodians.
Banks may continue to offer these services to their customers to generate
profits.
However, banks cannot engage in these activities, if doing so would create a
material conflict of interest, expose the institution to high-risk assets or
trading strategies.
3. Universal Banks Ignore Smaller and Newly Established Businesses
Universal banks may tend to work primarily with large established customers
and ignore or discourage smaller and newly established businesses.
Universal banks face many challenges The lending decision is taken by the
lending officer and reviewed by the board of directors.
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<br>

Universal Banking Practices of Universal Banks

• This means bearing additional costs (the agency) and the possibility of
neglecting the loan for small companies even though it is a good
opportunity because of the size and granting such loans to smal
companies.
4. Government Interference
Universal bankers may be tempted to take excessive risks. In such cases, the
government would be forced to step in to save the bank.
5. Risk of Failure
• The failure of a larger institution could have serious ramifications for the
entire banking 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.
6. Unsound Loans
• Unsound loans may be made in order to shore up the price of securities or
the financial position of companies in which a bank had invested its own
assets.
7. Due to Monopoly Harmful Effects on the Other Banks
• By virtue of their sheer size, universal banks may gain monopoly power in
the market, which can have significant undesirable consequences for
economic efficiency.
Universal banks are very large in size.
There is more possibility that they can easily get monopoly power in the
market. This will have many harmful effects on the other banks and also on
the public at large.
This is also harmful to economic development of the country.
(a) Universal banks are vulnerable to high risks due to investment banking
activities coupled with focus on commercial banking activities.
(b) A commercial bank's financial interest in the ownership, price, or distribution
of securities inevitably may tempt bank officials to press their banking
customers into investing in securities which the bank itself was under
pressure to sell because of its own pecuniary stake in the transaction.
(c) Universal banks could use such practices as limit pricing or predatory pricing
to prevent smaller specialised banks from serving the market. This argument
mainly stems from the economies of scale and scope.
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Universal Banking Practices of Universal Banks

2.3.2 Debate on Universal Banks

• In India, as per the Banking Regulation Act, 1949 banks are allowed to
function as universal banks. Many financial institutions are also permitted to
function as universal banks in the international sense but are subject to
some restrictions which are purely Indian in character.

Optimal Maturity of
Regulatory Role of Status
Transition and RBI DFI
burden path duration

Fig. 2.7 : Debate on Universal Bank

• Debate on universal banking in India can be discussed as followS.
1. Regulatory Burden
• The concept of universal banking in India has raised the question of
regulatory burden on financial intermediaries.
• DFI's (Development Financial Institutions) is also allowed to act as a
universal bank.
• Strict regulations need to be imposed on them as implied on commercial
banks. This point is neglected in the Khan working group.
• There is a requirement to reconsider the current SLR and CRR as per the new

changing scenarios.
• In India, there is an urgent requirement to reduce the regulatory burden,
particularly for banks, mutual funds and insurance companies, as the banks
are expected to compete in free market place.
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Universal Banking Practices of Universal Banks

2. Optimal Transition Path

• The transition path contains several operational and regulatory issues for
information and guidance of DFIs.
• The S. H. Khan working group also suggests that DFIs should transform
themselves into commercial banks but in a phased manner.
3. Maturity and Duration
• Duration of finance between commercial banks and financial institution is a
matter of debate under universal banking concept.
DFIs are the providers of long-term finance. DFIs take fixed assets as security
which is helpful to them.
• The banks are also providers of short-term or medium-term finance.
• The real distinction is in the nature of security that is taken by each entity.
In reality, commercial banks finances in a way which amounts to financing in
perpetuity as in general, there are no definite maturity dates.
4. Role of RBI
• RBI governs commercial banks in India. There is no time-limit prescribed for
a DFI to become universal bank only an individual or ideal time frame has
been mentioned. The RBI has to decide appropriate regulatory framework
that enables rather than controlling DFIs to operate as universal banks while
also ensuring consistency with monetary policy and prudential standards.
The shift of DFIs towards universal banking concept will be governed by the
consumer demands and the response of the concerned banks of DFIs.
5. Status of DFI
• For the regulation purpose, formal, clearly defined and legally acceptable
regulatory framework of the RBI is available basically for banks and for non
bank finance companies.
• DFls as a category are still not clearly defined as indicated in discussion
paper. They are still in a way of merger of state or central government level,
company or corporate forms with different extents and degrees of public
sector ownership and performing refinance, direct finance and other
functions.
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<br>

Universal Banking Practices of Universal Banks

2.3.3 Challenges Faced by Universal Banks

• There are certain challenges in front of the Universal Banks. These are as
follows:
1. DFIs opting for conversion into Universal Banks by following merger. They
have to face certain difficult situations on many grounds like on account of
(a) Asset Liability Mismatches,
(b) Burden of high NPAs, and
(c) Differences in regulatory prescriptions applicable to Financial Institution and
banks such as CRR and SLR requirement and priority sector lending.
2. The requlatory norms for DFI's in India are different. It cannot be compared
with the banking system norms. DFIs do not form part of the monetary
system.
3. In case of DFI's conversion into banks, they would also be require to follow
the reserve requirement like banks. This would mean that all liabilities issued
by the DFIs in the past would also be subject to the reserve requirement.
The assets structure of DFls is largely of long-term nature. It would be very
difficult for them to maintain the required level of SLR and CRR.
4. For the sensitive customer, a wide range of services is not enough but they
also want efficiency in terms of cost, time and convenience.
• For Universal banks, risk Management of priority sector lending might also
create difficult situations. It is one of the major challenges.
5. Different techniques have to be adopted for various financial products. The
nature of risk is different for different financial products. Universal Banks
requires developing comprehensive system for each product and each kind
of risk.
6. It is not feasible for any institution to rely only on short term funds or on
long term funds. To diversify risks and uncertainty, it is necessary that the
liabilities of a bank or a DFI has an appropriate mixture of short-and long
term securities
7. To meet increased competition and manage risk, the demand for specialized
banking functions using IT as a competitive tool has to go up. The twin
pillars of the banking sector ie. human resources and IT will have to be
strengthened. Special skills in retail banking, treasury, risk management,
foreign exchange etc. will need to be cautiously encouraged and built
systematically.
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<br>

Universal Banking Practices of Universal Banks

2.4 Recent Trends in Universal Banking in India

2.4.1 SWOT Analysis of Universal Banking
• The solution of Universal banking was having many factors to deal with. It is
categorised into: Strengths, weaknesses,Opportunities and Threats.
Strength Weakness
1. Economies of scale 1. Grey area of Universal bank.
2. Prox001table diversions 2. No expertise in long term lending
3. Resource Utilization 3. NPA problem remained intact
4. Easy marketing on the foundation
of brand
5. Investor Friendly activity

SWOT analysis of
Universal Banking
Opportunities
Threats
1. To increase efx001 ciency and 1. Big empire
productivity
2. To get more exposure in the global
market
3. To eradicate the x001 nanéaartheid

Fig. 2.8 : SWOT Analysis of Universal Banking

Strength
1. Economies of Scale
Universal banking results in economic efficiency. Universal banking result in
greater economic efficiency in the form of low cost, higher output and
better products and services. In India, RBI is in favour of universal banking
because it result in economics of scale.
2. Profitable Diversions
• Universal banks diversify their activities. So, they can use the same financial
experts to provide different financial services. This saves cost for the
universal bank.
• The banks can utilize its existing skill in single type of financial services in
offering other kinds by diversifying the activities. Therefore, it involves lower
cost in performing alltypes of financial functions.
Even the day-to-day expenses will be saved because all financial services are
provided under one roof, i.e. in the same office.
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<br>

Universal Banking Practices of Universal Banks

3. Resources Utilization
• Universal banks use their client's resources as per the client's ability to take a
risk. If the client has a high-risk taking capacity, then the universal bank will
advise him to make risky investments and not safe investments.
• A bank possesses all types of information about the existing customers
which can be utilized to perform other financial activities with the same
customer.
• Similarly, clients with a low risk-taking capacity are advised to make safe
investments.
• Nowadays, universal banks invest their client's money in different types of
Mutual funds and also directly invest into the stock market.
• They also do equity research. So, they can also manage their client's
portfolios effectively.
4. Easy Marketing on the Foundation of Brand
Universal banks can easily market (sell) all their financial products and
services through their many branches. They can ask their existing clients to
buy their other products and services. This requires less marketing efforts
because of their well-established brand name.
• A bank with established brand name can easily use its existing branches and
staff to sell the other financial products like insurance policies, mutual fund
plans without spending much effort on marketing.
5. Investors Friendly Activity
• Universal banks hold equity shares of many companies. These companies
can easily get other investors to invest in their business. This is because
other investors have full confidence and faith in the Universal banks.
They know that the Universal banks will closely watch allthe activities of the
companies in which they hold a share.
Weaknesses
1. Gray Area of Universal Bank
• The path of Universal Banking for DFls strew with obstacles. The biggest one
is overcoming the differences in regulatory requirement for a bank and DFL.
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Universal Banking Practices of Universal Banks

2. No Expertise in Long-term Lending

• Converting in to universal banking will diversify and increase business
opportunity for DFIs, but project which have long gestation period require
expertise to generate and control long term funds.
3. NPA Problem Remained Intact
• NPAS come from commodity sector loan and advances. Using technology
also cannot solve this problem.
• Universal banking will add fuel in NPAs growth due to its expansion and
diversification in activities without skilled and efficient manpower
Opportunities
1. To Increase Efficiency and Productivity
Liberalization and globalization have led banks to cross the political
boundary and become universal. The main focus will be ultimate profit
rather than size of balance sheet.
• To increase the profit margin, banks will prefer more of fee-based

opportunities rather than mobilizing deposit, which will also save cost and
for paying interest on deposits, banks have to improve their efficiency and
productivity.
2. To Get More Exposure in the Global Market
• In terms of total asset base and net worths the Indian banks have a very
long road to travel when compared to top 10 banks in the world.
• SBI is one of the largest Indian public sector bank to appear in top 100
banks list of fortune 500 which is based on sales, profit, assets and market
value. It also ranks I in the list of Forbes 2000 among.
• To enter into top 100 segment, Indian Banks have to expand their volume of
operations.
3. To Eradicate the Financial Apartheid
• Lower segments of society like fruit and vegetable vendors, petty shop
owners, tea stall owner etc. are unable to avail advantage of banking
services. They become the victim of money lender. This is due to Indian
banking policy which prone towards big entrepreneur and do not want to
lend to the entrepreneur of small strata.
This can be easily controlled by universal, personal, and retail banking.
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Universal Banking Practices of Universal Banks

Threats
1. Big Empire
• Universal banking is the outcome of mergers and acquisitions in the
banking sector. The finance minister is also empathetic towards it. But then
there will be big empire which put the economy in a problem.
Universal banking will be largest banks by their assets, income level,
profitability.
• There will be danger of price distortion. It might take place by manipulating
interests of the bank for the self interest motive than social interest. There is
a threat to the overall quality of the products of the banks.
• There is possibility that strength will convert in weakness.
• If the banks are not prudent enough, deposit rates could go up.
• It will affect profit and to increase profit, bank will go to more riskier
business.
2.4.2 Recent Trends in Universal Banking in India
• In order to bring out an efficient and effective financial system in India, the
RBI constituted a Working Group in December 1997 under the Chairmanship

of Mr. S.H. Khan. In January 1999, RBI released a discussion paper on

Harmonizing the role and operations of Financial Institutions and Banks. This
helped to review the role, structure and operations of Financial Institutions
and Commercial banks and give the measures for harmonizing the lending
and working capital operations of both banks and Financial Institutions.
Global experience with universal banking has been varied. The concept of
universal banking has been prevailing in many European countries. This
sometimes-prohibited commercial banks from investment banking activities,
taking equity positions in borrowing firms, selling insurance products etc.
• The main purpose of universal banking was to reduce the risky behaviour by
checking commercial banks to their traditional activity of accepting deposits
and lending.
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Universal Banking Practices of Universal Banks

1. The recommendations of the Khan Working Group and Narsimhan

Committee-II reports relating to banks and DFIs were seen when huge
banking organizations like ICICI, SBI, IDBI, etc. started proposing plans for
taking up the in-demand status of universal bank.
2. The ICICI Bank, HDFC Bank, Kotak Mahindra Bank have adopted aggressive
approach towards universal banking and they turn themselves from term
lending in to virtual banking in respect of providing corporate and retail
financial services like lending activities life and general insurance, consumer
credit, private equity, investment banking, retail credit, credit cards etc. For
this, they enter in to strategic alliance with several foreign giant insurance
companies and banks to sell their products ICICI and IDBI adopted merger
route to convert themselves in to universal banking.
3. Many public sector banks set-up subsidiaries for providing various financial
services.
4. Deregulation process opened up, so there are now more opportunities for
banks to increase revenues by diversifying their activities into investment
banking, insurance, credit cards, depository services, mortgage financing.
securitization etc.
5. Interest rates have been relaxed over a period of time. Branch licensing
procedures have been liberalized and SLR, CRR havebeen reduced.
6. Financial system has been deregulated and liberalised.
7. India's financial system has shown a great amount of flexibility Crises in
many countries have alerted policy makers and regulators to the possible
fragility of financial intermediaries in a deregulated environment like crises
in East Asia in 1997, Turky in 2000 and more recently in Argentina.. India
appears to be survived from many crises caused due to external
macroeconomic shock of the East Asian countries, because of its flexibility in
exchange rate.
8. In recent years, India has been significantly improving in financial sector
regulation. Prudential norms have been tightened.
9. The commercial banking sector in India is going through interesting phase
not just economically, but on the policy front as well.
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Universal Banking Practices of Universal Banks

10. Narasimham committee's recommendation indicated major policy shift by

that development finance institutions(DFls) ultimately convert into either
commercial banks or nonbanking finance companies. This, in a way,
indicated the new beginning of the end of specialized services from DFls,
and the introduction of universal banks. In India, commercial banks have
traditionally been prime lenders for working capital loans and DFIs financed
term loans. Now, DFIs will be moving towards universal banking, banks have
been allowed to diversify into investments and long-term financing, and
DFIS will lend for working capital.

11. In Indian context, universal bank will become a one-stop provider for all
financial products and activities, like deposits, short-term and long-term
loans, insurance, investment banking etc.
Though many associated problems are there in universal banking concept,
but lot of interest expressed by banks and financial institutions in universal
banking.
• The idea of one-stop-shopping solution saves a lot of transaction costs and

increases the speed of economic activity.

• For this, appropriate regulation can be followed, which will ultimately benefit
allthe participants in the market, including the banks themselves.
In India, also, many opportunities are there to be explored. Banks, especially
the financial institutions, are conscious of it. And many organisations plan to
diversify in a big manner in future.
Questions For Discussion
1. Discuss the different Practices of Universal Banks.
2. Explain the Advantages of Universal Banks.
3. Explain the Disadvantages of Universal Banks.
4. Discuss the Problems faced by Universal Banks.
5. Discuss the Recent Trends in Universal Banking in India.
6. Write Short Notes
(A) Universal Banking in India
(B) SWOT Analysis of Universal Banks
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Universal Banking Practices of Universal Banks

References
1. Approach to universal banking, Mid-term Review of the Monetary and
Credit Policy of Reserve Bank of India for 1999-2000.
2. Bharathi V. Pathak, "Indian Financial System", Pearson Education, first
edition, 2003, pp. 346
3. Ibid.
4. https//www.rbi.org.in/
5. Mor, Dr. Nachiket, "An Indian Perspective on Universal Banking. paper
presented at 'National Seminar on Financial Markets & Institution' at
Mumbai,1999
6. Nair, Dr. KRS, "Universal Banking", Indian Management, 1999, pp. 48-51.
7. RBI Circular paper on 'Salient operational and regulatory issues to be
addressed by the FIs for conversion into a Universal Bank.'
8. "Universal Banking", Banking Briefs (Internal Circulation), SBI Staff College,
Sixth edition, 2001, pp. 94
9. https://www.sciencedirect.com/science/article/abs/pi/S0014498308000260
10. https://www.mbaknol.com/business-finance/universal-banking-in-india/
11. https://www.slideshare.net/Dharmikpatel7992/universal-banking-24277831
12. https://ejournal.theiihs.com/paper/VolumelVIssuel/3.pdf

2.34