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Presentation By:Itulung KauringRahul ShahRaman KaimSaadhika Chawla1WHATS UNIVERSAL BANKING? The term 'Universal Banking' in general refers to the combination of commercial banking and investment banking. It is a multipurpose and multi-functional financial supermarket providing both 'Banking and Financial Services' through a single window.

2EMERGENCE OF UNIVERSAL BANKINGGlobalisation and modernisationSerious mismatches between DFIs assets and liabilities balance sheet .Liberalisation and banking reforms.DFI (Development Finance Institutions)Micro finance institutions, community development financial institution and revolving loan funds.Provide credit in form of higher risk loans, equity positions and risk guarantee instruments to private sector investments in developing countries.Ex

4Retail Banking.Trade Finance.Treasury Operations.

RETAIL BANKINGRETAIL BANKINGServices provided by Retail Banks:DepositsLoans, Cash Credit and OverdraftNegotiating for Loans and advancesRemittancesBook-Keeping (maintaining all accounting records)Receiving all kinds of bonds valuable for safe keepingwealth management, brokerage accounts, private banking and retirement planning.

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TRADE FINANCETrade finance is related to international trade.trade finance means money lent to exporters or importers.It includes the following services:Issuing and confirming of letter of credit.Drawing, accepting, discounting, buying, selling, collecting of bills of exchange, promissory notes, drafts, bill of lading and other securities.

TREASURY OPERATIONS

Treasury management (or treasury operations) includes management of an enterprise's holdings. It includes activities like trading in bonds, currencies, financial derivatives and also encompasses the associated financial risk management.The operations include:Buying and selling of bullion. Foreign exchangeAcquiring, holding, underwriting and dealing in shares, debentures, etc.Purchasing and selling of bonds and securities on behalf of constituents.

ADVANTAGES OF UNIVERSAL BANKING:Economies Of Scale Profitable DiversionsResource UtilizationEasy Marketing on the Foundation of a Brand NameOne-stop shoppingInvestor Friendly Activities

12DISADVANTAGES OF UNIVERSAL BANKING Differences in regulatory requirement for a bank and DFI.No Expertise in Long term lending.- Project finance and Infrastructure finance are generally long- gestation projects and would require DFIs to borrow long- term. Therefore, the transformation into a bank may not be of great assistance in lending long-term.NPA Bad loans or Non-Performing Assets (NPAs).

13Are the specialized banks doomed to disappear?This question cannot be answered with a simple yes or noFirst,universal banks no doubt will continue to play an important roleAs we saw in the preceding slides, universal banks may also suffer from various shortcomings. However, in an increasingly competitive environment, these defects will likely carry far less weight than in the past.Second,although universal banks have expanded their sphere of influence, the smaller specialized institutions have not disappeared.Third,universality of banking may be achieved in various ways. No single type of universal banking system existsCurrency riskA form of risk that arises from the change in price of one currency against another. MNCs especially face this kind of risk.

Example-Suppose U.S. subsidiary of British Petroleum (BP) with pound debt and operates domestically in the U.S. marketOperating cash inflows DollarsInterest payments (to parent) - PoundIF #1 Dollar appreciates with respect to poundDebt becomes less of a burdenIF #2 Dollar depreciates with respect to poundDollar interest might be unable to cover pound interest

A U.S. multinational with a British subsidiary will face similar exposure but in the opposite direction.So an MNC would prefer that different currencies are not involved in the inflows and the outflows of its subsidiaries.

Also throughout the 1970s, the U.K imposed a tax on cross border currency transactions involving pound as a way of slowing the flow of pound out of the country, which made it expensive for both British and multinational companies to transfer funds.So, how can MNCs fund their foreign operations in such conditions??Alternative #1- Borrow foreign currency in foreign market.This strategy is advantageous when the foreign country has a well developed capital market and the MNC is well known in the foreign market.

Debt raised in the foreign currency is a natural hedge in the sense that interest is paid in functional currency, which eliminates currency riskThe livelihood of the foreign subsidiary depends on its operating performance and not on changes in exchange rates over which it has no controlExample :-COUNTRYBPFordU.K5%7%U.S8%6%

Each MNC has a relative advantage borrowing in domestic markets where firms have established reputations and information costs are minimal.

Ford (U.K) +X -1.07X

BP (U.S) +X $ -1.08X $Alternative #2- Parallel loanInvestopedia says A parallel loan involves 2 parent companies taking loans from their respective national financial institutions and then lending the resulting funds to the other companys subsidiary. This combines the low domestic borrowing rates with foreign-source financing of the foreign subsidiary

Example- One possible arrangement could be

GBP@5% GBP@7%

USD@6% USD@8%U.S PERSPECTIVEU.K PERSPECTIVEBenefits of parallel loansIt legally circumvents the tax restrictions on cross border transactionsParallel loans allow each multinational to borrow domestically where it enjoys low borrowing costsReduce exposure to currency risk

Problems with parallel loansDefault risk Each loan in this arrangement is a separate agreement, so if one party defaults it does not release the other party from its obligationsBalance sheet impact- Parallel loans increase the debt to equity ration of a company which can impair the ability of the parent firm to raise additional debtSearch costs- When parallel loans were first introduced, there was not an active market for them. The absence of dealers able to make a market in parallel loans results in high search costs and slow growth Syndicated loansWhat is a syndicated loan ?A loan offered by a group of lenders (called a syndicate) who work together to provide funds for a single borrower. The borrower could be a corporation, a large project, or a sovereignty (such as a government)The loan may involve fixed amounts, a credit line, or a combination of the twoInterest rates can be fixed for the term of the loan or floating based on a benchmark rate such as the London Interbank Offered Rate (LIBOR)Syndicated credits are a very significant source of international financing, with signings of international syndicated loan facilities accounting for no less than a third of all international financingSyndicated loans are also used to fund large corporate takeoversHistoryThe first phase of expansion began in the 1970s. Between 1971 and 1982, medium-term syndicated loans were widely used to channel foreign capital to the developing countries of Africa, Asia and especially Latin America. Syndication allowed smaller financial institutions to acquire emerging market exposure without having to establish a local presence. Syndicated lending to emerging market borrowers grew from small amounts in the early 1970s to $46 billion in 1982, steadily displacing bilateral lending.Lending came to an abrupt halt in August 1982, after Mexico suspended interest payments on its sovereign debt, soon followed by other countries including Brazil, Argentina, Venezuela and the Philippines. Lending volumes reached their lowest point at $9 billion in 1985.

In 1987, Citibank wrote down a large proportion of its emerging market loans and several large US banks followed suit. That move catalysed the negotiation of a plan, initiated by US Treasury Secretary Nicholas Brady, which resulted in creditors exchanging their emerging market syndicated loans for Brady bonds, eponymous debt securities whose interest payments and principal benefited from varying degrees of collateralisation on US Treasuries.By the beginning of the 1990s, banks, which had suffered severe losses in the debt crisis, started applying more sophisticated risk pricing to syndicated lending (relying in part on techniques initially developed in the corporate bond market). While banks became more sophisticated, more data became available on the performance of loans, contributing to the development of a secondary market which gradually attracted non-bank financial firms, such as pension funds and insurance firms. Eventually, guarantees and risk transfer techniques enabled banks to buy protection against credit risk while keeping the loans on the balance sheet. The advent of these new risk management techniques enabled a wider circle of financial institutions to lend on the market, including those whose credit limits and lending strategies would not have allowed them to participate beforehand.

As a result of these developments, syndicated lending has grown strongly from the beginning of the 1990s to date. Signings of new loans including domestic facilities totaled $1.6 trillion in 2003, more than three times the 1993 amount.

Main goal of a syndicated loan The main goal of syndicated lending is to spread the risk of a borrower default across multiple lenders (such as banks) or institutional investors like pensions funds and hedge funds. Because syndicated loans tend to be much larger than standard bank loans, the risk of even one borrower defaulting could cripple a single lender. Syndicate membersSyndicate members play different roles, some just lend money while others facilitate the processIt is common to speak of an arranger, lead bank or lead lender that originates the loan, forms the syndicate and processes payments; however, several syndicate members may share these tasksSyndications with two or more arrangers are not uncommon A bank may be called an arranger for nothing more than contributing a large part of the loanThe creditors can be divided into two groups.Senior syndicate members: led by one or several lenders, typically acting as mandated arrangers, arrangers, lead managers or agents The junior banks: typically bearing manager or participant titlesReasons for participatingSenior banks: It can be a means of avoiding excessive single-name exposure, in compliance with regulatory limits on risk concentration, while maintaining a relationship with the borrower. Or it can be a means to earn fees, which helps diversify their income. In essence, arranging a syndicated loan allows them to meet borrowers demand for loan commitments without having to bear the market and credit risk alone.Junior banks: These banks may be motivated by a lack of origination capability in certain types of transactions, geographical areas or industrial sectors, or indeed a desire to cut down on origination costs. While junior participating banks typically earn just a margin and no fees, they may also hope that in return for their involvement, the client will reward them later with more profitable business, such as treasury management, corporate finance or advisory work.

Types of syndicated loans Underwritten loan: In this case, the arrangers commit to a particular sized loan. It is up to them to recruit enough syndicate members to secure that full amount. Should they fail, they make up the shortfall, extending a larger portion of the loan than they had perhaps wanted Best efforts deal: Here the arrangers try to recruit enough syndicate members to achieve a desired loan size. If they fail, however, the borrower simply receives a smaller loan than it had hoped forClub deal: This is a smaller loan usually between $25100 million, but can be as high as $150 million. The arranger is generally a first among equals, and each lender gets a full cut, or nearly a full cut, of the fees.Expenses of the BorrowerThe borrower in a syndicated loan incurs two expenses. One is the interest on the loan. The other is fees.

Credit FacilitiesSyndicated loans facilities (Credit Facilities) are basically financial assistance programs that are designed to help financial institutions and other institutional investors to draw notional amount as per the requirement

A revolving credit line allows borrowers to draw down, repay and re-borrow as often as necessary. The facility acts much like a corporate credit card, except that borrowers are charged an annual commitment fee on unused amounts, which drives up the overall cost of borrowingA term loan is simply an installment loan, such as a loan one would use to buy a car. The borrower may repay it based on either a scheduled series of repayments or a one-time lump-sum payment at maturity.There are two principal types of term loans:

An amortizing term loan (A-term loan or TLA) is a term loan with a progressive repayment schedule that typically runs six years or less. These loans are normally syndicated to banks along with revolving credits as part of a larger syndicationAn institutional term loan (B-term, C-term or D-term loan) is a term-loan facility with a portion carved out for nonbank, institutional investors. These loans are priced higher than amortizing term loans because they have longer maturities and repayment schedules