ABSTRACT

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 financial products and services in one

house, have experienced growing popularity in some industrialized countries. In India,

banking institutions have assumed a key role in the simplistic financial sector.

Commercial banks have made effort to diversify their products and services, but a

lengthy process is expected for their transition into truly universal banks. It is argued

that the current structure and practices of the local market also contribute to this lengthy

transformation. Thus, banks, which assume a leading position in most financial systems,

have to be prepared for the growing need of their customers. Also, government should

provide necessary assistance to banks for aiding them to get converted into universal

banking system for the benefit of Indian customers.

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THE CONCEPT OF UNIVERSAL BANKING

The entry of banks into the realm of financial services was followed very soon after the introduction of liberalization in the economy. Since the early 1990s structural changes of profound magnitude have been witnessed in global banking systems. Large scale mergers, amalgamations and acquisitions between the banks and financial institutions resulted in the growth in size and competitive strengths of the merged entities. Thus, emerged new financial conglomerates that could maximize economies of scale and scope by building the production of financial services organization called Universal Banking.

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

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

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

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

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LITERATURE REVIEW

Universal Banking is a multi-purpose and multi-functional financial supermarket (a company offering a wide range of financial services e.g. stock, insurance and real-estate brokerage) providing both banking and financial services through a single window.

Definition of Universal Banking: As per the World Bank, "In Universal Banking, large banks operate extensive network of branches, provide many different services, hold several claims on firms(including equity and debt) and participate directly in the Corporate Governance of firms that rely on the banks for funding or as insurance underwriters".

In a nutshell, a Universal Banking is a superstore for financial products under one roof. Corporate can get loans and avail of other handy services, while individuals can deposit and borrow. It includes not only services related to savings and loans but also investments.

However in practice the term 'universal banking' refers to those banks that offer a wide range of financial services, beyond the commercial banking functions like Mutual Funds, Merchant Banking, Factoring, Credit Cards, Retail loans, Housing Finance, Auto loans, Investment banking, Insurance etc. This is most common in European countries.

For example, in Germany commercial banks accept time deposits, lend money, underwrite corporate stocks, and act as investment advisors to large corporations. In Germany, there has never been any separation between commercial banks and investment banks, as there is in the United States.

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Advantages of Universal Banking

Economies of Scale. The main advantage of Universal Banking is that it results in greater economic efficiency in the form of lower cost, higher output and better products. Many Committees and reports by Reserve Bank of India are in favour of Universal banking as it enables banks to explit economies of scale and scope.

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

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

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

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

Investor Friendly Activities. Another manifestation of Universal Banking is bank holding stakes in a form : a bank's equity holding in a borrower firm, acts as a signal for other investor on to the health of the firm since the lending bank is in a better position to monitor the firm's activities.

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Disadvantages of Universal Banking

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

Universal bankers may be tempted to take excessive risks. In such cases, the government would be forced to step in to save the bank.

Vulnerable to high risks due to investment banking activities coupled with focus on commercial banking activities.

Universal banks may tend to work primarily with large established customers and ignore or discourage smaller and newly established businesses.

Universal banks could use such practices as limit pricing or predatory pricing to prevent smaller specialized banks from serving the market. This argument mainly stems from the economies of scale and scope.

There may be conflict between the investment banker's promotional role and the commercial banker's obligation to provide disinterested advice .

Banks may deploy their own assets in securities with consequent risk to commercial and savings deposits.

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Universal Banking in India

In the early nineties the forces of globalization were unleashed on the hitherto protected Indian environment. The financial sector was crying out for reform. Public sector banks which had a useful role to play earlier on now faced deteriorating performance. For these and certain other reasons private banking was sought to be encouraged in line with the Narasimham Committee's recommendations.

It would be pertinent to recapitulate the prevailing conditions in the banking industry in the early Nineties: the nationalized sector had outlived its utility; in fact they became burdened with unwelcome legacies; customer service had become a casualty; need for computerization, including networking among the vast branch network was felt. Private banking in that context was viewed a brand new approach, to bypass the structural and other shortcomings of the public sector.

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

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

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Indian Perspective on Universal Banking

Some argue that the approach is very slow, while some call for steady approach. The

debate of universal banking is very much on. Should India have universal banking and if

so when? Much has been written about it domestically; however the following are the

issues which are key in Indian context.

i. Regulatory burden

ii. Regulatory requirements

iii. Distinction between maturity and duration

iv. Optimum Transition path

i. Regulatory burden:

One of the major problems associated with universal banking is the issue of regulation.

DFIs in India are governed by separate Acts and banks are regulated by RBI and Banking

Regulation Act. DFIs in India have commercial banks as their subsidiaries, but due to the

separation of regulation, the DFIs cannot have direct access to the resource base of its

subsidiary bank. Without any doubt, the net regulatory burden for all participants in the

entire financial system should be equalized in order to ensure that no participant might

end up having a disadvantage relative to any other. The importance of this point can be

highlighted by citing the example of USA, Japan, West Germany and Britain where there

was a tremendous decline in the share of banks in composition of household financial

assets and its movement to mutual funds and insurance. The study revealed that the

decline has been due to very high net regulatory burden being imposed upon the entire

banking system relative to that on the mutual funds and insurance companies. In India

there is an urgent need to reduce the regulatory burden, particularly for banks vis-à-vis

mutual funds and insurance companies, if the banks are expected to compete in free

market place.

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ii. Regulatory requirements

Salient operational and regulatory issues of RBI to be addressed by the FI’s for

conversion into a universal bank

a)     Reserve requirements. Compliance with the cash reserve ratio and statutory

liquidity ratio requirements (under Section 42 of   RBI Act, 1934, and Section 24 of the

Banking Regulation Act, 1949, respectively) would be mandatory for an FI after its

conversion into a universal bank.

  b)     Permissible activities. Any activity of an FI currently undertaken but not

permissible for a bank under Section 6(1) of the B. R. Act, 1949, may have to be stopped

or divested after its conversion into a universal bank..

  c)     Disposal of non-banking assets. Any immovable property, howsoever acquired by

an FI, would, after its conversion into a universal bank, be required to be disposed of

within the maximum period of 7 years from the date of acquisition, in terms of   Section 9

of the B. R. Act.

  d)    Composition of the Board. Changing the composition of the Board of Directors

might become necessary for some of the FIs after their conversion into a universal bank,

to ensure compliance with the provisions of Section 10(A) of the B. R. Act, which

requires at least 51% of the total number of directors to have special knowledge and

experience.  

  e)    Prohibition on floating charge of assets. The floating charge, if created by an FI,

over its assets, would require, after its conversion into a universal bank, ratification by

the Reserve Bank of India under Section 14(A) of the B. R. Act, since a banking

company is not allowed to create a floating charge on the undertaking or any property of

the company unless duly certified by RBI as required under the Section.

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  f)     Nature of subsidiaries. If any of the existing subsidiaries of an FI is engaged in an

activity not permitted under Section 6(1) of the B R Act , then on conversion of the FI

into a universal bank, delinking of such subsidiary / activity from the operations of the

universal bank would become necessary since Section 19 of the Act permits   a bank to

have subsidiaries only for one or more of the activities permitted under Section 6(1) of B.

R. Act.

  g)     Restriction on investments. An FI with equity investment in companies in excess

of 30 per cent of the paid up share capital of that company or 30 per cent of its own paid-

up share capital and reserves, whichever is less, on its conversion into a universal bank,

would need to divest such excess holdings to secure compliance with the provisions of

Section 19(2) of the B. R. Act, which prohibits a bank from holding shares in a company

in excess of these limits.

  h)    Connected lending. Section 20 of the B. R. Act prohibits grant of loans and

advances by a bank on security of its own shares or grant of loans or advances on behalf

of any of its directors or to any firm in which its director/manager or employee or

guarantor is interested.   The compliance with these provisions would be mandatory after

conversion of an FI to a universal bank. 

  i)    Licensing. An FI converting into a universal bank would be required to obtain a

banking licence from RBI under Section 22 of the B. R. Act, for carrying on banking

business in India, after complying with the applicable conditions.  

  j)    Branch network An FI, after its conversion into a bank, would also be required to

comply with extant branch licensing policy of RBI   under which the new banks are

required to allot at least 25 per cent of their total number of branches in semi-urban and

rural areas.

  k)    Assets in India. An FI after its conversion into a universal bank, will be required to

ensure that at the close of business on the last Friday of every quarter, its total assets held

in India are not less than 75 per cent of its total demand and time liabilities in India, as

required of a bank under Section 25 of the B R Act.

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  l)    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 B R Act, as prescribed for a banking company under

Section 29 and Section 30 of the B. R. Act.   

  m)    Managerial remuneration of the Chief Executive Officers. On conversion into a

universal bank, the appointment and remuneration of the existing Chief Executive

Officers may have to be reviewed with the approval of RBI in terms of the provisions of

Section 35 B of the B. R. Act. The Section stipulates fixation of remuneration of the

Chairman and Managing Director of a bank by Reserve Bank of India taking into account

the profitability, net NPAs and other financial parameters. Under the Section, prior

approval of RBI would also be required for appointment of Chairman and Managing

Director.  

  n)      Deposit insurance. An FI, on conversion into a universal bank, would also be

required to comply with the requirement of compulsory deposit insurance from DICGC

up to a maximum of Rs.1 lakh per account, as applicable to the banks.

  o)       Authorized Dealer's License. Some of the FIs at present hold restricted AD

licence from RBI, Exchange Control Department to enable them to undertake

transactions necessary for or incidental to their prescribed functions.   On conversion into

a universal bank, the new bank would normally be eligible for full-fledged authorised

dealer licence and would also attract the full rigour of the Exchange Control Regulations

applicable to the banks at present, including prohibition on raising resources through

external commercial borrowings.

  p)     Priority sector lending. On conversion of an FI to a universal bank, the obligation

for lending to "priority sector" up to a prescribed percentage of their 'net bank credit'

would also become applicable to it .

q ) Prudential norms. After conversion of an FI in to a bank, the extant prudential

norms of RBI for the all-India financial institutions would no longer be applicable but the

norms as applicable to banks would be attracted and will need to be fully complied with.  

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iii. Distinction between Maturity and Duration

This is the issue of debate between long term and short term. Somehow DFIs are the

suppliers of term finance, where the maturity is clearly specified which could be between

3 years to 7 years, where as banks are providers of short-term finance where in reality

bank finance in a way amounts to financing in perpetuity since there are in general no

definite maturity dates. Usually the deposit base of the banks have are short duration but

with a variably high interest rates but its not the case with DFIs. Their funds have a

longer duration with less interest rate.

The interim report of S H Khan committee has argued that the distinction between

commercial and investment banking have become increasingly blurred with banks

providing both working capital and term loans to corporate but DFIs can provide only

term loans as they cannot accept short term deposits. The committee further argued that

DFIs should be given banking licenses eventually and until then they should be allowed

to establish 100 percent banking subsidiaries while they continue to play their present

role.

iv. Optimal Transition path

Viable transition path is one of the major areas of concern for institutions which are

desirous of moving in the direction of universal banking. The transition path contains

several operational and regulatory issues for information and guidance of DFIs. The S H

Khan working group and the discussion paper on the subject prepared by RBI eventually

felt that DFIs should transform themselves into commercial banks but in a phased

manner. The committee also recommended that DFIs can have 100 percent owned

banking subsidiaries which would be extremely beneficial to them. If this happens, then it

would allow DFIs to gain expertise in the area of commercial banking which would in

turn help the DFIs if they are seriously looking at the prospect of converting into a

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commercial bank. Also the 100 percent subsidarisation allows banks to have a full access

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

The RBI has asked FIs, which are interested to convert itself into a universal bank, to

submit their plans for transition to a universal bank for consideration and further

discussions. FIs need to formulate a road map for the transition path and strategy for

smooth conversion into a universal bank over a specified time frame. The plan should

specifically provide for full compliance with prudential norms as applicable to banks over

the proposed period.

In India Development financial institutions (DFIs) and refinancing institutions (RFIs)

were meeting specific sect oral needs and also providing long-term resources at

concessional terms, while the commercial banks in general, by and large, confined

themselves to the core banking functions of accepting deposits and providing working

capital finance to industry, trade and agriculture. Consequent to the liberalisation and

deregulation of financial sector, there has been blurring of distinction between the

commercial banking and investment banking.

The issue of universal banking resurfaced in Year 2000, when ICICI gave a presentation

to RBI to discuss the time frame and possible options for transforming itself into an

universal bank. Reserve Bank of India also spelt out to Parliamentary Standing

Committee on Finance, its proposed policy for universal banking, including a case-by-

case approach towards allowing domestic financial institutions to become universal

banks.

Now RBI has asked FIs, which are interested to convert itself into a universal bank, to

submit their plans for transition to a universal bank for consideration and further

discussions. FIs need to formulate a road map for the transition path and strategy for

smooth conversion into a universal bank over a specified time frame. The plan should

specifically provide for full compliance with prudential norms as applicable to banks over

the proposed period.

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IS UNIVERSAL BANKING GOOD OR BAD FOR THE COUNTRY?

Universal banking is being peddled as a panacea to most of the ills that plague the financial

system in India. The issue of whether it is good for our country, in the current stage of

development, is being sidelined. Universal banking brings about convergence of financial

services under one roof. The initial impetus to the concept worldwide was the need to bring down

the intermediation costs. But this is surely not a driver for developments in India. It is being used

as an instrument to move into commercial banking as a source to raise low-cost funds and crowd

out smaller players. In the process, profit considerations over-ride the mandate with which

institutions were founded. The real issue here is who will fill the void that these institutions are so

eager to leave. Have we built alternative systems that will take over the functions of industrial

financing? Some may argue that our industries have passed the stage where no more

handholding is required. But look at the continuous decline in manufacturing output and the

virtual dearth of any new investment, and you will know how misplaced this view is. Indian

industry now needs to compete with global capacities. An economic size of 15,000 mt for which

licenses were issued during the license-permit raj and were considered economically viable

capacities for financing by FIs, now have to compete with producers with capacities of millions

of tones. The stage is set for a concerted effort to make these units survive. Some will say ‘let

them vanish from the scene if they can’t compete’. Let us import everything. Yes, we can, but how

do we pay for the imports? Unless we have areas where we build up, at least, certain segments in

the industry where we can match the price and quality, we will have no export earnings to pay for

imports. Universal banking, which may result in changed priorities of FIs, will seriously hinder

our efforts to build a manufacturing sector that can compete with the best on its own terms. What

FIs are today is on account of large amount of transfer of funds that came at the cost of

exchequer — through directed investments, tax shields and suppressed yields from investments.

Now that these sources are drying up, they are on to poach on the constituencies nurtured by

commercial banks, the retail and household sectors. Pundits of the financial world may call it

mergers.

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UNIVERSAL BANKING: THE MEANS AND THE ENDS ARE

CONTROVERSIAL

The move towards universal banking has not been by choice and — whatever one might say — has been dictated by the failure of the DFI model.

In India the growing literature on the subject, nearly all of it pro-universal banking, has been overtaken by certain practical developments. Universal banking is about to become a reality. On April 1, ICICI’s reverse merger with ICICI Bank was expected to be completed. Both in a de jure and in a de facto sense universal banking would have arrived in India. However there have been obstacles, mainly in the form of a legal challenge to the terms of the merger between ICICI and ICICI Bank. The predicament of the ICICI's top management shows that even the means to achieve the universal banking status can be controversial. Also, it should not be forgotten that it is the inadequacy and irrelevance of the DFI model (which ICICI and IDBI represent) that has pushed the universal bank model on to the centre stage. There has been no evolution, as the RBI had hoped, but a sudden jump into a new territory.

For that reason at least the controversy over universal banking will not end. Among other key issues waiting to be addressed is the role and efficacy of the regulator in the new set up. Even more basically the consumers for whom the universal banking model is touted to be a big virtue need to understand its rationale. In India, as in the U.S. and the U.K., commercial banks have had a clear cut role earmarked for them by law and practice. As a financial intermediary, banks accepted deposits which they lent and the difference between the interest earned (from the borrowers) and that paid (on deposits) called the spread has traditionally formed the major part of their income. All other income which came from say issuing a draft or confirming a letter of credit have been called miscellaneous income, probably because such business was originally considered to be incidental to the main banking activity of deposit taking and lending. DFIs, on the other hand, have primarily been into project financing for which they developed substantial expertise. They have been in the long end of the banking business, granting term loans (project loans) while banks have been primarily short-term lenders.

The difference between the two — banks and DFIs — is even more marked if one looks at the liabilities side of their balance sheets. To fund their long-term lending activities, DFIs looked to the government for cheap funds and tax breaks. Part of the SLR securities which banks have been compelled to buy were instruments issued by one of the DFIs. Banks meet their funding requirements by accepting deposits of less than three year duration.

Universal banking, involving manifold activities, can be successful only if there is no mismatch between their resources and their lending/investments. And for managing their risks better universal banks claim to undertake a wide variety of activities. To succeed uniformly across a spectrum of financial products, these banks should also nurture and develop a strong brand. Branding of financial products has become the new mantra. Any institution whether fully

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integrated as ICICI would be (post merger) or operating through a number of associates can be a "virtual" universal banking, offering a garland of financial products under one brand.

Hence, according to one view, universal banking is already in vogue and that it has arrived without the pains of a restructuring of a type attempted by ICICI. Interestingly, IDBI has also contemplated a similar move to acquire the universal banking status.

In the recent budget, there are two concrete moves to convert it into a universal bank eventually: legislative changes to "corporatize" it and conversion of certain long term loans to "appropriate" long term instruments. Critics, however, point out that it is not much the attractiveness of the idea as much as the sheer necessity of abdicating the DFI model that motivates the drive towards universal banking. It has been admitted that DFIs have to move on and into retail. But no thought has been given to the likely problems the banking regulator will face. At a larger level there is always the need for setting up a level playing field for all-former DFIs which have converted to universal banks as well the more established banks.

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WHAT UNIVERSAL BANKING CAN RESULT FOR INDIA

Banking will never be the same again. With official committees recommending a move towards universal banking, DFIs, led by ICICI, are getting set to storm the banking arena.

The Domestic banking sector is going through some interesting times -- not just economically, but on the policy front as well. And the major policy shift was heralded by the Narasimham committee's recommendation that development finance institutions (DFIs) ultimately convert into either commercial banks or non-banking finance companies. This, in a way, spelt the beginning of the end of specialized services from DFIs, and the introduction of universal banks.

With universal banking, banks will offer a wide range of financial services, beyond solely commercial banking or investment banking. The main advantage of universal banking is that it results in greater economic efficiency and enables asset diversification, not only in the nature of ventures financed but also in the age profile of assets. Additionally, it offers reasonable protection from economic cycles. For FIs, moving towards universal banking will mean the ability to raise short-term, low-cost funds.

In India, banks have traditionally been prime lenders for working capital loans and DFIs financed term loans. Now, with DFIs told to move towards universal banking, banks have been allowed to diversify into investments and long-term financing, and DFIs will lend for working capital.

Starting trouble. In spite of the Narasimham committee's recommendations -- later endorsed by the Khan working group -- the road to universal banking is proving far from smooth. One major impediment for FIs is the fact that they have past liabilities on which reserve requirements -- SLR, CRR and priority sector advances -- have not been met. Meeting this requirement in its current form and level would require FIs to raise huge resources from the capital market, which could give rise to liquidity concerns. Now, depending on the fiscal and monetary situation, RBI is slated to reduce the CRR requirement to a minimum of 3 per cent.

It has been suggested that reserve requirements apply only to the incremental liabilities, but this may not be a prudent move when the huge backlog of liabilities is not covered. The most plausible solution would be to adhere to the reserve requirements over a period of time to be specified by the FI. In fact, RBI has mentioned that DFIs would need to prepare a transition path in order to fully comply with the regulatory requirement of a bank and such requests will be considered on ‘case by case’ basis.

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Services on offer ICICI IDBI SBI HDFC LIC

Insurance Yes No Yes Yes Yes

MF Yes Yes Yes Yes Yes

Banking Yes Yes Yes Yes Yes

Merchant banking Yes Yes Yes No No

Broking Yes Yes Yes Yes No

Retail finance

Housing Yes No Yes Yes Yes

Credit/debit cards Yes No Yes Yes No

Moving to universal banking may also create some pressure on the asset and liability

side of balance sheets. On the liability side -- sources of funds (at least for banks) -- there

will be increasing competition from investment alternatives such as MFs where schemes

with similar liquidity but a better return are available. On the asset side -- deployment of

funds -- the growth of capital markets, new players and efficient investment banking have

enabled corporate to raise funds directly from the market.

The new bankers. The shift from specialized to universal banks is not restricted to FIs --

SBI and LIC can be considered universal banks. SBI deals with MFs and investment

banking, and its insurance initiative with Cardiff SA brings it closer to the universal bank

objective. And LIC's move to acquire a stake in Corporation Bank makes it a serious

candidate.

ICICI, which will have to raise something like Rs 20,000 crore for reserve compliance,

has decided to join the few universal banks. It has begun reducing the number of its

subsidiaries, and is planning to merge with ICICI Bank, in a bid to turn into a universal

bank in 12-18 months.

ICICI will benefit

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ICICI ICICI Bank

CAR (%) 14.6 11.57

Net NPAs (%) 5.2 2.19

Cost of funds (%) 11.71 7.77

ROA (%) 0.79 0.82

Spread (%) 1.83 2.00

While this may be good news for customers, shareholders have reason to be wary. ICICI

is seen to benefit more from the deal (see table above) as ICICI Bank is the better placed

company on most counts. The better financials from ICICI Bank will aid in reducing the

cost of funds. And the bank's lower NPA, in view of the higher NPA provisioning by

ICICI, augurs well for the merged entity. The possibility of the swap ratio being skewed

in favour of ICICI in view of its 47 per cent holding in ICICI Bank cannot be ruled out.

Investors should, therefore, wait for clarity on the merger proposal before taking any

decision to buy or sell.

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THE ROAD AHEAD TO INDIA

Economic historians have long emphasized the importance of financial institutions in

industrialization. More recently, economists have begun more intensive investigation of the links

between financial system structure and real economic outcomes. In theory, the organization of

financial institutions partly determines the extent of competition among financial intermediaries,

the quantity of financial capital drawn into the financial system, and the distribution of that

capital to ultimate uses. The choice between universal and specialized banking may affect interest

rates, underwriting costs, and the efficiency of secondary markets in securities. Furthermore, the

presence or absence of formal bank relationships may affect the quality of investments

undertaken, strategic decision-making, and even the competitiveness of industry.

Particularly since World War II, many economists and historians have argued that German-style

universal banks offer advantages for industrial development and economic growth. Universal

banking efficiency combined with close relationships between banks and industrial firms, they

hypothesize, spurred Germany’s rapid development at the end of the nineteenth century and

again in the post-World War II reconstruction. A corollary to this view holds that countries that

failed to adopt the universal-relationship system suffered as a consequence. Adherents suggest

that British industry has declined over the past hundred years or more, and that the American

economy has failed to reach its full potential, due to short-comings of the financial system that

lead to relatively high costs of capital.

In Indian context, the phenomenon of universal banking, as different from narrow banking, has

been in the news in the recently. With the last Narasimham Committee and the Khan Committee

reports recommending consolidation of the banking industry through mergers and integration of

financial activities, the stage seems to be set for a debate on the entire issue.

A universal bank is a one-stop supplier for all financial products and activities, like deposits,

short-term and long-term loans, insurance, investment banking etc. Global experience with

universal banking has been varied. Universal banking has been prevalent in different forms in

many European countries, such as Germany, Switzerland, France, Italy etc. For example, in

these countries, commercial banks have been selling insurance products, which have been

referred to as Banc assurance or Allfinanz. After the stock market crash of 1929 and banking

crisis of the 1930s, the US banned all forms of universal banking through what is known as the

Glass-Steagall Act of 1933. This prohibited commercial banks from investment banking activities,

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taking equity positions in borrowing firms, selling insurance products etc. The idea was to

mitigate risky behaviour by restricting commercial banks to their traditional activity of accepting

deposits and lending. Research on the effects of universal banking has been inconclusive as there

is no clear-cut evidence in favour of or against it anywhere.

Nevertheless, the United States has once again started moving cautiously towards universal

banking through the Gramm-Leach-Bliley Act of 1999 which rolled back many of the earlier

restrictions. Some recent phenomenon, like the merger between Citicorp (banking group) and

Travelers (insurance group) confirmed the fact that universal banking is here to stay. Hence it

becomes all the more imperative to know whether we need universal banks in India and whether

it is a more efficient concept than the traditional narrow banking. The standard argument given

everywhere in favor of universal banking is that it enables banks to exploit economies of scale

and scope. What it means is that a bank can reduce average costs and thereby improve spreads if

it expands its scale of operations and diversifies its activities. By diversifying, the bank can use its

existing expertise in one type of financial service in providing the other types. So, it entails less

cost in performing all the functions by one entity instead of separate specialized bodies. A bank

possesses information on the risk characteristics of its clients, which it can use to pursue other

activities with the same clients. This again saves cost compared to the case of different entities

catering to the different needs of the same clients. A bank has an existing network of branches,

which can act as shops for selling products like insurance. This way a big bank can reach the

remotest client without having to take recourse to an agent. Many financial services are inter-

linked activities, e.g. insurance and lending. A bank can use its instruments in one activity to

exploit the other, e.g., in the case of project lending to the same firm which has purchased

insurance from the bank.

Now, let us turn to the benefits accruing to the customers. The idea of one-stop-shopping saves a

lot of transaction costs and increases the speed of economic activity. Another manifestation of

universal banking is a bank holding stakes in a firm. A bank’s equity holding in a borrower firm

acts as a signal for other investors on the health of the firm, since the lending bank is in a better

position to monitor the firm’s activities. This is useful from the investors point of view. Of course,

all these benefits have to be weighed out against the problems. The obvious drawback is that

universal banking leads to a loss in economies of specialization. Then there is the problem of the

bank indulging in too many risky activities.

20

To account for this, appropriate regulation can be devised, which will ultimately benefit all the

participants in the market, including the banks themselves. In spite of the associated problems,

there seems to be a lot of interest expressed by banks and financial institutions in universal

banking. In India, too, a lot of opportunities are there to be exploited. Banks, especially the

financial institutions, are aware of it. And most of the groups have plans to diversify in a big way.

Even though there might not be profits forthcoming in the short run due to the switching costs

incurred in moving to a new business. The long-run prospects, however, are very encouraging. At

present, only an arms-length relationship between a bank and an insurance entity has been

allowed by the regulatory authority, i.e. the Insurance Regulatory and Development Authority

(IRDA). This means that commercial banks can enter insurance business either by acting as

agents or by setting up joint ventures with insurance companies. And the RBI allows banks to

only marginally invest in equity (5 per cent of their outstanding credit). Development financial

institutions (DFIs) can turn themselves into banks, but have to adhere to the statutory liquidity

ratio and cash reserve requirements meant for banks. Even then, some groups like the HDFC

(commercial banking and insurance joint venture with Standard Assurance), ICICI (commercial

banking), SBI investment banking) etc., have already started diversifying from their traditional

activities through setting up subsidiaries and joint ventures. In a recent move, the Life Insurance

Corporation increased its stakes in Corporation Bank and is planning to sell insurance to the

customers of the Bank. Corporation Bank itself has been planning to set up an insurance

subsidiary since a long time. Even a specialized DFI, like IIBI, is now talking of turning into a

universal bank. All these can be seen as steps towards an ultimate culmination of financial

intermediation in India into universal banking.

21

IMPACT OF UNIVERSAL BANKING

Since the early 1990s, banking systems worldwide have been going through a rapid transformation. Mergers, amalgamations and acquisitions have been undertaken on a large scale in order to gain size and to focus more sharply on competitive strengths. The general trend has been towards downstream universal banking where banks have undertaken traditionally non-banking activities such as investment banking, insurance, mortgage financing, securitization, and particularly, insurance. Upstream linkages, where non-banks undertake banking business, are also on the increase. The global experience can be segregated into broadly three models. There is the Swedish or Hong Kong type model in which the banking corporate engages in in-house activities associated with banking. In Germany and the UK, certain types of activities are required to be carried out by separate subsidiaries. In the US type model, there is a holding company structure and separately capitalized subsidiaries. In India, the first impulses for a more diversified financial intermediation were witnessed in the 1980s and 1990s when banks were allowed to undertake leasing, investment banking, mutual funds, factoring, hire-purchase activities through separate subsidiaries. By the mid-1990s, all restrictions on project financing were removed and banks were allowed to undertake several activities in-house. In the recent period, the focus is on Development Financial Institutions (DFIs), which have been allowed to set up banking subsidiaries and to enter the insurance business along with banks. DFIs were also allowed to undertake working capital financing and to raise short-term funds within limits. It was the Narasimham Committee II Report (1998) which suggested that the DFIs should convert themselves into banks or non-bank financial companies, and this conversion was endorsed by the Khan Working Group (1998). The Reserve Bank’s Discussion Paper (1999) and the feedback thereon indicated the desirability of universal banking from the point of view of efficiency of resource use, but it also emphasized the need to take into account factors such as the status of reforms, the state of preparedness of the institutions, and a viable transition path while moving in the desired direction. Accordingly, the mid-term review of monetary and credit policy, October 1999 and the annual policy statements of April 2000 and April 2001 enunciated the broad approach to universal banking and the Reserve Bank’s circular of April 2001 set out the operational and regulatory aspects of conversion of DFIs into universal banks. The need to proceed with planning and foresight is necessary for several reasons. The move towards universal banking would not provide a panacea for the endemic weaknesses of a DFI or its liquidity and solvency problems and/or operational difficulties arising from under capitalization, non-performing assets, and asset liability mismatches, etc. The overriding consideration should be the objectives and strategic interests of the financial institution concerned in the context of meeting the varied needs of customers, subject to normal prudential norms applicable to banks. From the point of view of the regulatory framework, the movement towards universal banking should entrench stability of the financial system, preserve the safety of public deposits, improve efficiency in financial intermediation, ensure healthy competition, and impart transparent and equitable regulation.

22

RESEARCH OBJECTIVE

To find out Impact of universal banking in the Banking sector of India.

To find out the road ahead of India.

To find out Indian perspective on universal banking.

To find out the steps undertaken by banks for adopting universal banking.

To find out what universal banking can result for India.

To offer valuable suggestions for improvement.

23

RESEARCH METHODOLOGY

Research Design:

Exploratory research design is used.

Sampling Method:

Convenience sampling method was used to select the respondents. 140 respondents from

various regions in Delhi having sound banking knowledge were interviewed. The

questionnaire includes various dimensions related to attractiveness of universal banking,

its influence on customer’s product choice behavior, advantages of universal banking, the

most suitable model and service provider in India which can readily be converted into

Universal Bank.

Data Collection:

Primary Data were collected using questionnaires and through personal interviews.

Secondary data is collected from websites, magazines, journals and news paper.

LIMITATIONS AND PROBLEMS

No company can rely on it finding through any bind or study because the customers and

the future is uncertain. Therefore organization has to develop an eagle’s site grab each

and every opportunity existing in the market

Time is a limiting factor in any research.

This research is based on secondary data.

This is not an exhaustive study some import conclusions might have escaped my

observation.

Only Delhi NCR region was taken for doing the research.

24

140

00

20

40

60

80

100

120

140

160

yes no

Tota

l no

. of

resp

ond

ent

s

Series1

RESULTS AND DISCUSSION:

As the countries of Western Europe and other areas of the world move increasingly

toward universal banking, it is a useful time for India to examine how these institutions

might affect financial stability, economic development, and other financial institutions,

concentration of political and economic power, consumer choice, and conflicts of

interest. Thus, through the following research, I try to examine some of these parameters.

As per the responses of the respondents, the following results could be interpreted.

Are you aware about the concept of UNIVERSAL BANKING

Yes No

c

Since, I only approached those respondents who are aware about the concept of Universal

Banking. Therefore, the following stats show that everyone whom I approached replied in

affirmative.

Dimension 1: Attractiveness of Universal Banking to potential customers

25

16

114

100 00

20

40

60

80

100

60

Strongly Agree Agree Uncertain Disagree StronglyDisagree

Tota

l no

. of

resp

ond

ent

s

Series1

Ques 1. Concept of Universal Banking attracts me

Thus, the above chart shows majority of respondents agree to the point that they are attracted

towards the concept of Universal Banking. And none of the respondents disagree with the point

that universal banking tends to be an attractive concept for them.

Ques 2. The concept can become very popular in India.

Thus, the above result shows that the majority of people agree that concept, if

implemented in India, can become very popular in India. Only few disagree with the

following result.

26

12

32

19

520

5

10

15

20

25

30

35

Strongly Agree Agree Uncertain Disagree StronglyDisagree

Tota

l no.

of r

espo

nden

ts

Series1

40

72

14 1400

10

20

30

40

50

60

70

80

Strongly Agree Agree Uncertain Disagree StronglyDisagree

Tota

l no

. of

resp

ond

ent

s

Series1

Ques 3. Availability of all products information under one roof can make me pay more

attention to product details

Hence, above result can be examined in the respect that concept of ‘all products under

one roof’ can help people examine and analyse the product details with greater attention.

Dimension 2: Influence of Universal Banking on customer’s product choice

behaviour

Ques1. Idea of ‘one stop shopping’ may help me to make my investing and financing

decisions more wisely.

27

16

40

8 600

5

10

15

20

25

30

35

40

45

Strongly Agree Agree Uncertain Disagree StronglyDisagree

Tota

l no.

of r

espo

nden

ts

Series1

20

72

32

1240

10

20

30

40

50

60

70

80

Strongly Agree Agree Uncertain Disagree StronglyDisagree

Total no. of respondents

Series1

Thus, the above result shows that majority of the respondents agree to the point that the

idea of ‘one stop shopping’ can help them make their investing and financing decisions

more wisely by availing more information about product attributes.

Ques 2. Availability of all products under one roof can help me remember the products

with their details

Majority of the respondents feel that availability of all products under one roof can help

them remember much about the product and its details and thus can prove to be beneficial

in planning their financing activities. Very few are uncertain about the benefits they can

avail through the above concept.

Ques 3. Universal Banking may increase acceptance of endorsed products.

28

12

37

138

00

5

10

15

20

25

30

35

40

Strongly Agree Agree Uncertain Disagree StronglyDisagree

Tota

l no.

of r

espo

nden

ts

Series1

32

96

120 00

20

40

60

80

100

120

Strongly Agree Agree Uncertain Disagree StronglyDisagree

Tota

l no

. of

resp

ond

ent

s

Series1

Thus, the above result shows that the large number of respondents believe that the

availability of greater degree of information with much ease can increase their acceptance

of products being endorsed.

Ques 4. Universal Banking can enhance my awareness of available products

Thus the above stats shows, that the concept of all products under one roof can enhance

the awareness of the customers regarding products, its attributes and various other

products being offered by the service provider.

Dimension: 3 Advantages of universal Banking

1. Economies of Scale to bank

29

19

36

13

2 00

5

10

15

20

25

30

35

40

Strongly Agree Agree Uncertain Disagree StronglyDisagree

Tota

l no.

of r

espo

nden

ts

Series1

20

88

28

4 0010

2030405060708090100

Strongly Agree Agree Uncertain Disagree StronglyDisagree

Tota

l no

. of

resp

ond

ent

s

Series1

60 64

16

0 00

10

20

30

40

50

60

35

Strongly Agree Agree Uncertain Disagree StronglyDisagree

Tota

l no

. of

re

spon

dent

s

Series1

Majority of respondents agree that Universal Banking results in greater economic

efficiency in the form of lower cost, higher output and better products.

2. Profitable Diversions

The above result shows that 54 out of 70 respondents agree or strongly agree to the point

that by diversifying its activities bank can utilise its existing expertise in one type of

financial products for providing financial services in other type.

3. Resource Utilization

30

46

84

100 00

10

20

30

40

50

60

70

80

90

Strongly Agree Agree Uncertain Disagree StronglyDisagree

Tota

l no

. of

resp

ond

ent

s

Series1

Approximately, all of the respondents being approached agree that Universal Banking

can help the bank in effective utilisation of their resource. A bank, possessing the

information on the risk characteristics of the clients, can utilize it to pursue other

activities with the same clients.

4. Easy Marketing on the Foundation of a Brand Name

A large number of respondents agree or strongly agree that Universal Banking concept

can help bank in easy marketing of their products as bank’s existing branch can act as a

shop for selling financial products, acting as a parent company or source, without

requiring to spend much effort on marketing. None of the respondents being approached

disagree with the above mentioned advantage.

5. One-stop shopping

31

41

23

60 00

5

10

15

20

25

30

35

40

45

Strongly Agree Agree Uncertain Disagree StronglyDisagree

Tota

l no.

of r

espo

nden

ts

Series1

32

62

38

800

10

20

30

40

50

60

70

Strongly Agree Agree Uncertain Disagree StronglyDisagree

Series1

Respondents agree to the point that the concept of ‘one-stop shopping’ can act as an

advantage both to the banks as well as customers as it can save lot of transaction cost and

speed up the economic activities.

6. Investor Friendly Activities

Majority of respondent agree that availability of greater details about the product can help

them in making their investing decisions more wisely. Only few disagree with the above

stated advantage.

Dimension 4: Applicability of Model

32

Total no. of respondents

Acceptance of models

55%27%

18%

GermanEnglandUS

The above results shows that the acceptance of German banking system over others by

Indian customers. Thus the Indian service provider who wants to bring in Universal

Banking, are recommended to implement the system in line with German Universal

Banking system for achieving greater acceptability.

Dimension 5: Service provide which can readily be converted into Universal Bank

Service providers

40%

12%

32%

6%10%

ICICI

IDBISBI

HDFC

LIC

33

Thus, the above results shows that the ICICI bank has been voted by the respondents as

the most favoured service provider for Universal Banking services, closely followed by

largest public sector bank, SBI.

In addition to above results, some answers to following questions were

also found out:

1. Do Universal Banks Increase the Risk of Financial Instability?

Universal banks tend to be large, so large that failure of even one such bank could bring the entire system down or at least cause substantial distress. In addition, universal banks are said to be particularly vulnerable, because of their close ties to business, particularly their role in underwriting and distributing securities. In this scenario, universal banking might result in a variety of negative consequences for the economy. If one or several universal banks were to collapse, it might lead to a systematic financial crisis, possibly including a risk to the economy's payments system. There is concern that universal banks would be more difficult to regulate, because their ties to business would be more complex. Furthermore, these banks' officers would realize that their banks were too big to be allowed to fail. Hence, they might succumb to the temptation of taking excessive risks. Government regulators, recognizing this threat, would either have to regulate universal banks very tightly, thus hindering economic efficiency, or be faced with the possibility of a taxpayer bailout.However, the claim that universal banks are more risky than specialized banks, while plausible in some ways, is not borne out by experience. Most recently, specialized U.S. savings and loans failed in large numbers because their assets, liabilities, and operations were not well diversified. This $150 billion-plus disaster is due largely to the fact that

34

these institutions specialized in fixed-interest long-term mortgages funded with short-term savings, blend that took them into deep trouble when interest rates rose rapidly over the period of 1979-81. These risks are exacerbated by the U.S. prohibition against nationwide branching, which has made depository institutions vulnerable to unexpected declines in natural resource and farm-product prices, along with changes in regional real estate values. Indeed, all except ten of the over 9,000 banks that failed during the Great Depression were unit (single office) banks, most of which were located in small towns. In addition, specialized depository institutions have been affected adversely by shifts in consumer preferences and advances in technology. In contrast to the fragility of many specialized banks, failures among the much better diversified universal banks are almost unknown. Even if, in a worst-case scenario, several very large universal financial firms failed, it need not cause a failure of the financial system. If the Federal Reserve maintains the money supply, there is no reason for the financial system to collapse, even though some banks or other financial firms fail. In fact, if the government wants to conduct economic policy through control of bank loans, such control is likely to be more effective if relatively fewer firms made the loans. For this purpose, specialized banking presents the government with a greater problem than universal banking.Neither theory nor evidence support the assumption that limitations on banking—like the separation of commercial and investment banking—either were or are likely to be effective in reducing risk-taking. Most of the activities in which universal banks engage are no more risky than ordinary commercial bank activities. Empirical evidence on the combined risks of various activities can be obtained from past experience and simulations. As noted above, commercial banks that engaged in investment banking before passage of the Glass-Stengel Act experienced relatively few failures. The expected effect of combining commercial and investment banking on risks has been much studied. Most of commercial banks can take interest rate risk with options and futures, by holding duration-unbalanced portfolios, and by making loans that bear both high risk and promised fees and interest. Although, compared to commercial banking alone, returns from combined commercial and investment banking (and other activities, such as mortgage banking, insurance, and real estate investment) would be significantly higher, and risk would be slightly higher.In short, both theory and evidence support the expectation that risks are more likely to be reduced than increased should banks be permitted to engage in securities, insurance, and other products and services. Any remaining concerns about the failure of large depository institutions should be dealt with not by restricting the size or scope of banks (whether universal or specialized), but by allowing greater diversification, higher required levels of capital, and explicit rules forcing banks to replace lost capital or be resolved (liquidated, sold or merged) by the authorities before their economic (rather than book) capital falls below zero.

35

2. Will Universal Banks Deploy Capital as Efficiently as the Stock Market?

A key function of financial markets is to deploy capital as efficiently as possible. Economists have long praised stock markets for fulfilling this role. Critics of universal banking worry that such institutions will injure stock markets, because when universal banks trade and hold equity securities, they are sometimes said to discourage the development of an active stock exchange and independent stock brokers and dealers. One essential issue, then, is the role of the stock market versus universal banks in facilitating the efficient deployment of corporate resources.However, the evidence that universal banks reduce stock market activity is actually quite weak. In addition, without disparaging the importance of the stock market in monitoring firms, there is good reason to believe that universal banks also have some strength in this regard. Universal banks also have certain advantages in restructuring firms. The transactions cost of takeovers and mergers are high in a stock market system. and might well be lower with a universal bank If, instead [of being restricted to loans], a bank were to own the full range of classes of both the firm's debt and equity, the bank could gain the control necessary to effect reorganization much more economically. The covenants of the loans and other liabilities can be designed to give the bank progressively greater authority to intercede in the management of the firm as dividend and interest payment performance deteriorates. Moreover, because the debt holder is also the equity holder, there are no conflicts between holders of debt and equity securities to impede a needed reorganization. The result would be fewer agency problems, lower costs in "work-outs" of financial problems, and a resultant increase in organizational efficiency.

3. Will Universal Banks Crowd Out Other Financial Institutions?Opponents of universal banks expect them to be large, bureaucratic and inflexible; hence, they fear that such banks would tend to work primarily with large, established customers and ignore or discourage smaller and newly formed businesses. Moreover, the indictment continues, universal banks could use such tactics as limit pricing or predatory pricing (Limit pricing refers to the strategy whereby prices are lowered to the point where entrants cannot expect to offset the costs of entry with sufficient revenue. With predatory pricing, prices are reduced to below competitors' marginal costs, until the competitors are driven out of business, at which point the existing institution can exploit its monopoly position if it can restrain reentry) to prevent smaller specialized banks from serving that market. These problems will be especially salient if universal banks are more efficient, perhaps because of economies of scale or scope, or for other reasons.Economies of scale and scope and efficiency indicate some advantage for universal banks over specialized banks. However, considering that specialized banks are able to survive in direct competition with universal banks (and vice versa), it does not appear that the efficiency advantages of either form of banking are overwhelming. Data on the

36

performance and growth of banking in countries that have universal or specialized banking are so difficult to interpret that not much can be concluded about the "revealed" efficiency of either banking organization.4. Can Universal Banks Give Impartial Investment Advice?

Having discussed the risk of tie-in sales, and the risk that universal banks might dominate the financial or nonfinancial sector, one additional form of possible abuse remains: the fear that universal banks will not advise their clients objectively on securities. The generic answer to such problems is that if a banker is inclined to such conflicts of interest (and doesn't care about the bank's reputation) and customers are blind to the possibilities, then such conflicts can occur as easily under specialized as well as universal banking. Furthermore, many of the possible conflicts specified either do not disadvantage consumers or would occur only if the bank were operated contrary to the interests of its shareholders.

5. It is seen that the most successful financial intermediaries globally are the one-stop shops. What are the global trends?Some of the most successful entities have adopted the universal banking mode. But the success or otherwise is not a function of the organizational structure but more due to management practices. In other words universal banking parse is not a sufficient condition for success. After all individuals who are running them and not based on inanimate structure.

6. What would be the challenge in terms of risk management, market orientation, client service, etc?The options, [either in the case of DFI’s or the Universal Banks] which should be considered in the context of changes both in domestic and global scenario, are as follows:Grant them greater autonomy –only then will they be able to stand up to the competition from domestic as Well as international players Reduce government stake over period of time and make them private. Make them more market driven both from lending practices as well as compensation packets.. Allow for external experts to be inducted at senior levels.. Introduce strict risk management practices and internal controls.. Have to enter in to the global financial system through more sophisticated financial instruments.. Last but not the least is a proper succession planning, without leaving these institution head less form on this. The form of organization is only a minor part of the solution, the

37

major issue is regarding flexibility and autonomy given to these institution.

FINDINGS

After considering issues of financial stability, economic development, competition among

financial institutions, concentration of economic and political power, consumer choice,

and conflicts of interest, I find that universal banking will provide considerable benefits

and would also pose few problems for the economy. It does not follow, though, that

specialized providers of financial services should not or would not also exist. Experience

and logic indicate that these companies can do many things better than can universal

banks. In particular, specialized firms are more likely to handle many important aspects

of investment banking. Takeovers, leveraged buyouts, mergers, spin-offs, and other

capital restructurings often must be completed quickly and imaginatively. Furthermore,

companies not designated as "banks" and individuals provide a wide range and

considerable volume of financial services in countries characterized by universal or by

specialized banking.

There is room for disagreement over what form of universal banking makes the most

sense for India. The above research results in Germany making a most suitable model for

India. However, either approach would generate significant advantages over our present

system of specialized banking. We agree that the Glass-Steagall Act's separation of

38

commercial and investment banking and the Bank Holding Company Act's and other

legislative restrictions against banks offering a full range of financial services should be

repealed. Restricting banks' securities activities was either a misguided reaction to the

financial crisis of the 1930s or a means of enhancing the position of investment bankers

(or punishing banks) at the expense of the general public (Benston, 1990). The fact that

the restrictions have not been repealed is evidence of the power of well-focused suppliers

to maintain their legal advantage over poorly organized competitors and consumers.

39

RECOMMENDATIONS:

The following are the steps suggested for successful implementation of Universal

Banking in India:

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

mutual funds, NBFCs and Insurance companies).

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

c. Promote and encourage strong competition.

d. Do not allow the merger of a weak bank with a viably strong DFI or vice-versa.

e. DFIs should be permitted to set up a 100 percent owned banking subsidiaries.

f. Need is felt to re-examine the minimum level of SLR requirement in order to meet the

best of international standards.

40

CONCLUSION:

The banking scenario has changed drastically. The changes which have taken place in

the last ten years are more than the changes took place in last fifty years because of the

institutionalization, liberalization, globalization and automation in the banking industry.

Universal banking is the fastest growing sector of the banking industry with the key

success by attending directly the needs of the end customers is having glorious future in

coming years.

Universal banking sector as a whole is facing a lot of competition ever since financial

sector reforms were started in the country. Walk-in business is a thing of past and

banks are now on their toes to capture business. Banks therefore, are now competing

for increasing their business.

41

There is a need for constant innovation in universal banking. This requires product

development and differentiation, micro-planning, marketing, prudent pricing,

customization, technological upgradation, home / electronic / mobile banking, effective

risk management and asset liability management techniques.

However, the kind of technology used and the efficiency of operations would provide the

much needed competitive edge for success in universal banking business. Furthermore,

in all these customer interest is of chief importance. The banking sector in India is

representing this and I do hope they would continue to succeed in this traded path.

At the End I would Like to Conclude that Universal Banking Is beneficial for India.

ANNEXURE

QUESTIONNAIRE

Objective:

To study the potential of universal Banking for Indian market consumers

CONCEPT: Universal Banking is a superstore for financial products under one roof. It is

a multi-purpose and multi-functional financial supermarket (a company offering a wide

range of financial services e.g. stock, insurance and real-estate brokerage) providing both

banking and financial services through a single window.

Instructions:

Questionnaire consists of three dimensions. Please tick the appropriate level of

agreement/disagreement in front of each question.

42

This research is for academic purpose. All information provides will remain strictly

confidential, will not be disclosed in any form to any organization and will be used

only for fulfilling research objective.

Name:

Age:

Occupation:

Contact Number:

Are you aware about the concept of UNIVERSAL BANKING

Yes No

If yes, answer the questions under following dimensions:

Dimension 1: Attractiveness of Universal Banking to potential customers

Statements Strongly Agree

Agree Uncertain DisagreeStrongly Disagree

a.Concept of Universal Banking attracts me

b.The concept can become very popular in India

c.Availability of all products information under one roof can make me pay more attention to product details

Dimension 2: Influence of Universal Banking on customer’s product choice behaviour

Statement Strongly Agree Uncertain Disagree Strongly

43

Agree Disagree

a.Idea of ‘one stop shopping’ may help me to make my investing and financing decisions more wisely.

b.Availability of all products under one roof can help me remember the products with their details

c.Universal Banking may increase acceptance of endorsed products.

d.Universal Banking can enhance my awareness of available products.

Dimension 3: Advantages of universal Banking

No. ParametersStrongly Agree

Agree Uncertain DisagreeStrongly Disagree

1.Economies of Scale to bank

2.Profitable Diversions

3.Resource Utilization

4.Easy Marketing on the Foundation of a Brand Name

5. One-stop shopping

6.Investor Friendly Activities

Dimension 4: Applicability of Model

44

Amongst the three, two different model should not be voted on the same level of applicability.

No. Model more suitable for IndiaHighly Applicable

Applicable Inapplicable

1.

Germans Model, where commercial banks accept time deposits, lends money, underwrite corporate stocks, and act as investment advisors to large corporations.

2.England Model, where securities and other such activities are conducted in separately capitalized subsidiaries of banks.

3.United States model, where there is separation between commercial banks and investment banks

Dimension 5: Service provide which can readily be converted into Universal BankAmongst the five listed, two different service providers should not be voted at the same level of agreement/disagreement.

No.Name of service providers

Strongly Agree

Agree Uncertain DisagreeStrongly Disagree

1 ICICI

2 IDBI

3 SBI

4 HDFC

5 LIC

45

Bibliography

BOOKS

Kothari C.R. (2007) Research Methodology, New Age International Publishers, 2nd

edition.

Shekhar K.C (2005), Banking Theory and Practice, Vikas Publishing House.

WEBSITES

http://www.banknetindia.com/banking/ubfeature.htm

http://www.answers.com/topic/universal-banking: Universal Banking: definition

http:// www.investopedia.com/terms/u/universalbanking.asp Universal Banking: definition

46

http://timesofindia.indiatimes.com/business/india-business/SBI-to-transform-itself-into-universal-bank/articleshow/173944.cms#ixzz1FGdP2SVl

Magazines and Journals

The Universal Banking: introduction, concept, pros and cons.  Journal of Professional Banker, October 2006 pg 24-27

Annual reports of State bank of India

47