A PROJECT ON

“OVERVIEW OF UNIVERSAL BANKING”

Submitted to

University Of Mumbai for Partial Completion of Degree of Bachelor of Commerce

(Banking & Insurance)

Semester VI 2018-19

Submitted By:

Mr. SONUSINGH RAMESHWAR RAJPUROHIT

Roll No. 345

Under the Guidance of

Professor: PRATIKSHA KARAMBE

UTTARI BHARAT SABHA’S

RAMANAND ARYA D.A.V. COLLEGE

DATAR COLONY BHANDUP (E), MUMBAI-400042.

March, 2018-19

1
 A PROJECT ON

“PERFORMANCE OF MARINE INSURANCE”

Submitted to

University Of Mumbai for Partial Completion of Degree of Bachelor of Commerce

(Banking & Insurance)

Semester VI 2018-19

Submitted By:

Mr. SONUSINGH RAMESWARSINGH RAJPUROHIT

Roll No. 345

Under the Guidance of

Professor: PRATIKSHA KARAMBE

UTTARI BHARAT SABHA’S

RAMANAND ARYA D.A.V. COLLEGE

DATAR COLONY BHANDUP (E), MUMBAI-400042.

March, 2018-19

2
 DECLARATION BY LEARNER

I the undersigned Mr. SONUSINGH RAMESHWARSINGH RAJPUROHIT hereby, declare that the
work embodied in this project work titled “OVERVIEW OF UNIVERSAL BANKING”, forms my
own contribution to the research work carried out under the guidance of MS. PRATIKSHA
KARAMBE is a result of my own research work and as not been previously submitted to any other
University for any other Degree / Diploma to this or any other University.

Wherever reference has been made to previous work of others, it has been clearly indicated as such and
included in the bibliography.

I, here by further declare that all information of this document has been obtained and presented in
accordance with academics rules and ethical conduct.

SONUSINGH RAMESHWARSINGH RAJPUROHIT

Certified By

PRATIKSHA KARAMBE

3
 Uttari Bharat Sabha’s
RAMANAND ARYA D.A.V. COLLEGE
DATAR COLONY BHANDUP (E),
MUMBAI – 400042.

CERTIFICATE
This is to certify that Mr. SONUSINGH RAMERSHWARSINGH RAJPUROHIT Roll No. 345 have
worked and duly completed His project work for the degree of Bachelor of Commerce (Banking &
Insurance) under the faculty of commerce in the subject of management and his project is entitled,
“OVERVIEW OF UNIVERSAL BANKING” under the supervision. I further certify that the entire
work has been done by the learner under my guidance and that no part of it has been submitted
previously for any degree of diploma of any University.

It is his own work and facts reported by his personal findings and investigation

Date - _________

Course Coordinator Principal

Mrs. Chandrakala Srivastava Dr. Ajay Bhamare

Project Guide/ Internal Examiner External Examiner

Prof. PRATIKSHA KARAMBE

4
 ACKNOWLEDGEMENT

To list who all have helped me is difficult because they are so numerous and the depth is so enormous.

I would like to acknowledge the following as being idealistic channels and fresh dimensions in the
completion of this project.

I take this opportunity to thank the University of Mumbai for giving me chance to do this project.

I would like to thank my Principal, Mr. Ajay M Bhamre for providing the necessary facilities
required for completion of this project.

I take this opportunity to thank our Coordinator Mrs. Chandrakala Shrivastava

for her moral support and guidance.

I would also like to express my sincere gratitude towards my project guide Ms. PRATIKSHA
KARAMBE whose guidance and care made the project successful.

I would like to thank College Library, for having provided various reference books and magazines
related to my project.

Lastly, I would like to thank each and every person who directly and indirectly helped me in the
completion of the project especially my parents and peers who supported me throughout my project.

5
 INDEX

CHAPTER TITTLE PAGE

NO

1 1.1 INTRODUCATION

1.2 MEANING

1.3 DEFINATION AND CONCEPTS

1.4 HISTORY

1.5 EMPIIRICAL BACKGROUND OF UNIVERSAL BANKING

1.6 UNIVERSAL BANKING IN INDIA

1.7 THE NEED BEHIND THE ADVENT OF UNIVERSAL

BANKING

2 2.1 REASEARCH METHODOLOGY

2.2 OBJECTIVE OF PROJECT

2.3 PRODUCTS AND SERVICE OFFERED BY UNIVERSAL

BANKING

2.4 COMMON BANKING PRODUCTS AVAILABLE

2.5 UNIVERSAL BANKING SERVICE

2.6 UNIVERSAL BANKING COUPLED WITH SWOT

3 3.1 KHAN COMMITTEE ON UNIVERSAL BANKING AND FIS

3.2 NEED OF UNIVERSAL BANKING IN INDIA

3.3 APPROACH TO UNIVERSAL BANKING

3.4 RBI GUIDELINES FOR EXISTINGBANK/FIs FOR

CONVERSION INTO UNIVERSAL BANK

3.5 IMPACT OF UNIVERSAL BANKING

3.6 UNIVERSAL BANKING PROS AND CONS

6
4 DATA ANALYSIS

5 5.1 THE INDIAN SITUATION AND DIVERSIFICATION OF BANKING

BUSINESS

5.2 ACTIVIES OF UNIVERSAL BANKING

5.3 TYPES OF UNIVERSAL BANKING

5.4 UNIVERSAL BANKING : SOLUATION TO FLs PROBLEM

5.5 UNIVERSAL BANKING CURRENT POSITION

6 6.1 INTRODUCATION TO ICICI BANK

6.2 MERGER OF ICICI AND ICICI BANK

6.3 ICICI BANK ONE YEAR AFTER UNIVERSAL BANKING

6.4 ISSUES AND CHALLENGES IN UNIVERSAL BANKING

6.5 THE FUTURE TREND OF UNIVERSAL BANKING IN DIFFERENT

COUNTRIES

7 7.1 FINDING

7.2 SUGGESTION

7.3 CONCUSION

7.4 REFERENCE

7
 EXECUTIVE SUMMARY

In general perception the term Universal Banking refers to a financial institution offering commercial as
well as investment banking services which also include services related to savings, loans and investments.
But in real practice, institutions which offer a wide range of financial services, beyond commercial
banking and investment and investment banking and various other activities including insurance are
regarded as universal banking. To study the products and services offered by universal bank, To study the
universal banking coupled with SWOT, To study RBI guidelines for existing bank/FIs for conversion into
universal bank and To study the issues and challenges face in the universal banking etc. These are the
area which cover in a project.

8
CHAPTER 1

1.1INRODUCTION TO UNIVERSAL BANKING

It is a well known fact that economic growths implies a long term rise in per capita national output and
such increases are very much associated with drastic and extraordinary changes in technology,
institutional set up, psychological environment, organizations behavior, socio culture and attitude of
common people. For social development economic growth is necessary and for economic growth
industrialization is necessary and for industrial growth efforts, capital and knowledge are three important
elements and among these element capital is the most crucial component. However, metamorphic
environmental developments in and outside the political boundary and the open market policy with the
hedges cocooning the economy has been abolished by the computer and telecommunication revolution.
The net communications have explored geographical and functional integration of international financial
markets. Further, deregulation of financial market and intensified competition among banks and non
banking financial intermediaries have minimized the hurdles between money and capital markets and
explored more diversified, organized, multipurpose and innovative financial institutions functioning in
unprecedented dimensions.

It has been found that a wide spectrum of financial intermediaries in money market and capital markets
under the supervision and guidelines of central banks as an apex body has came into existence across the
world to fulfill varied requirements of savers and investors.Notable agencies among money market
institutionsengaged principally in providing term financing to investors and entrepreneurs are commercial
banks, discount houses, acceptance housesandindigenous agencies and among capital market institutions,
insurance companies, venture capitalists, vulture funds, mutual funds, investment banking, development
banking, virtual banking, merchant banking, mutual banking, and universal banking.

In general perception the term Universal Banking refers to a financial institution offering commercial as
well as investment banking services which also include services related to savings, loans and investments.
But in real practice, institutions which offer a wide range of financial services, beyond commercial
banking and investment and investment banking and various other activities including insurance are
regarded as universal banking. It is like a coordinated financial super market supplying innovative and
multifarious products under one roof. It is one spot ultimate shopping place for a customer who is willing
to deal in several financial products. It combines the complexities of investment banking with simpler

9
commercial banking services for individual and companies. In present global scenario universal banking
concept is an innovative high breed banking option and its pronounced business largely emphasizes in
terms of products, customer groups and regional activities. According to 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 Comparative
Governance of the firms that rely on the banks for funding or as insurance underwriters”.

Globally universal banking is functioning in various forms ‘like’ In House fully integrated universal
banking which is known as purest form of universal banking. In this form of UB single institution offers a
complete range of banking and other products to the customer. Under this form bank’s different
departments operate under one roof and perform various activities like, commercial banking, investment
banking, insurance, leasing, etc. in order to satisfy the consumer need. Under Universal Banking
Subsidiary Structure form of UB, there exists a net work of principal institution and subsidiaries. In
general principal institution undertakes both banking and investment activities and for remaining
activities subsidiaries are set up by the bank and in Holding Company structure form of UB one financial
holding company owns both banking and non banking subsidiaries which are legally separate and
individually capitalized and are allowed by the law.

10
1.2 MEANING

The financial and banking sector as it existed in the pre-reform days was highly regulated over-
administered and subject to discretionary control and direction. In this sense, financial sector reforms
were designed to infuse, in the words of the terms of reference of the Narsimham Committee, greater
competitive vitality in the system. In the financial system, the players can be broadly classified into the
following groups: public sector banks, private sector banks, foreign banks, cooperative banks, all- India
financial institutions and non-banks. A common element in all Development Financing Institution (DFI‘s)
is that they focus on investment rather than on conventional commercial banking operations, i.e., on
deposit taking and short-term credit. On the other hand, the commercial banks continue to concentrate on
their traditional business of accepting deposits and advancing loans. With encouragement and sometimes
pressure, they have broaden their activities to include term credit and a broad range of non-banking
finance, including leasing, venture capital, housing and household finance, mutual fund management,
credit-card sponsorship, etc. The term 'Universal Banking' in general refers to the combination of
commercial banking and investment banking. The concept of universal banking is spreading fast among
various types of banks.

It is a multipurpose and multi-functional financial supermarket providing both 'Banking and Financial
Services' through a single window. 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. Corporates can get loans and avail of other handy services, while individuals
can bank and borrow. It includes not only services related to savings and loans but also investment.
However in practice the term 'Universal Banking' refers to those banks that offer wide range of financial
services beyond the commercial banking functions like Mutual Funds, Merchant Banking, Factoring,
Insurance, Credit Cards, Retail loans, Housing Finance, Auto Loans, etc. However, Universal Banking
does not mean that every institution conducts every type of business with every type of customer. In the
spectrum of banking, specialized banking is on the one end and the Universal Banking on the other.

11
1.3 DEFINITION AND CONCEPTS

The term ‘universal bank’ has different meanings, but usually it refers to the combination of commercial
banking (collecting deposits & making loans) and investment banking i.e. issuing, underwriting and
trading in securities, this is the narrow definition of universal banking. In a very broad sense, the term
‗universal bank‘ refers to those banks that offer a wide range of financial services, such as, commercial
banking & investment banking and other activities especially insurance. It is a multi-purpose and multi-
functional financial supermarket providing both banking and financial services through a single window.
According to World Bank the concept is explained as follows - "In universal banking, large banks operate
extensive networks of branches, provide many different services, hold several claims on firms (including
equity and debt), and participate directly in the corporate governance of firms that rely on the banks for
funding or as insurance underwriters." Universal Banking (UB) usually takes one of the three forms, i.e.,
in-house, through separately capitalized subsidiaries, or through a holding a capital structure. Three well-
known countries in which these structures prevail are Sweden and Germany, the UK & US. Universal in
its fullest or purest form would allow a banking corporate to engage ‗in-house‘ in any activity associated
with banking, insurance, securities, etc. However, there are very few countries, such as, Sweden and
Hong Kong, which allow universal banking in its purest form. In Germany, banking and investment
activities are combined, but separate subsidiaries are required for certain other activities. Under German
banking statutes, all activities could be carried out within the structure of the parent bank except
insurance, mortgage banking and mutual funds, which require legally, separate subsidiaries. In the UK, a
broad range of financial activities is allowed to be conducted through 8 separate subsidiaries of the bank.
The third model, which is found in the US, generally requires a holding company structure and separately
capitalized subsidiaries. In certain countries these type of universal banking are successfully functioning.
Universal banking is nothing but broad based bank where you can do commercial banking, investment,
insurance, and other financial business. It is largely found in different countries in different forms.

12
1.4 HISTORY OF UNIVERSAL BANKING IN INDIA

Historically, India followed a very compartmentalized financial intermediaries allowed to operate strictly
in their own respectively fields. However, in the 1980s banks were allowed to undertake various non-
traditional activities through subsidiaries. This trend got momentum in the early 1990s i.e., after initiation
of economic reforms with banks allowed undertaking certain activities, such as, hirepurchase and leasing
in –housing. While this in a way represented a gradual move towards universal banking, the current
debate about universal banking in India started with the demand from the DFIs that they should be
allowed to undertake banking activity in-house. In the wake of this demand, the Reserve Bank of India
constituted in December 1997, a working group under the chairmanship of Shri S.H. Khan, the Chairman
& the Managing Director of IDBI (hereafter referred to as Khan Working Group-KWG). The KWG,
which submitted its report in May 1998, recommended a progressive move towards universal banking.
The Second Narsinham Committee appointed by Government in 1998 also echoed the same sentiment. In
January 1999, the Reserve Bank issued a Discussion Paper setting out issues arising out of
recommendations of the KWG and the Second Narsinham Committee. Since then a debate has been going
on about universal banking in general and conversion of DFIs into universal banks in particular. With the
opening up of the insurance sector to the private participation, the debate has gone beyond the narrow
concept of universal banking.

13
1.5 EMPIRICAL BACKGROUND OF UNIVERSAL BANKING

The entry of banks into the realm of financial services was followed very soon after Liberalization in the
economy. Since the early 1990s, structural changes of profound magnitude came to be witnessed in global
banking systems. Large scale mergers, amalgamations and acquisitions among the banks and financial
institutions resulted in the growth in size and competitive strengths of the merged entities. There 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 activities in house. 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 sale of Insurance
products. At present, only an 'arms length' relationship between a bank and insurance entity has been
allowed by the regulatory authority, i.e.-IRDA (Insurance Regulatory & Development Authority).

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

14
1.6 UNIVERSAL BANKING IN INDIA

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 liberalization and deregulation of financial sector, there has been blurring of distinction between the
commercial 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 group.

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

15
1.7 THE NEED BEHIND THE ADVENT OF UNIVERSAL BANKING

Liberalization and the banking reforms have given new avenues to Development Finance Institutions
(DFIs) to meet the broader market. They can avail the options to involve in deposit banking and short
term lending as well. DFIs were set up with the objective of taking care of the investment needs of
industries. They have build up expertise in Merchant Banking and Project Evaluation.

So, saddled with obligations to fund long gestation projects, the DFIs have been burdened with serious
mismatches between their assets and liabilities of the balance sheet. In this context, the Narsimham
Committee II had suggested DFIs should convert into banks or Non-Banking Finance Companies.
Converting of these DFIs into Universal Banks will grant them ready access to cheap retail deposits and
increase the coverage of the advances to include short term working capital loans to Corporates with
greater operational flexibility. At that time DFIs were in the need to acquire a lot of mass in their volume
of operations to solve the problem of total asset base and net worth. So, the emergence of Universal
Banking was the solution for the problem of the banking sector.

16
 CHAPTER 2

2.1 REASEARCH METHODOLOGY

The primary data were supplemented by several secondary sources of data. secondary data were collected
from the various websites, published annual reports and literatures of the banking companies, RBI annual
report, IMF annual and periodical report and academic journals. Research is purely base on Secondary
data.

2.2 OBJECTIVE OF PROJCET

1) To study the product and service offered by universal bank.

2) To study the universal banking coupled with swot
3) To study the issue and challenges in universal banking
4) To study the RBI guidelines for conversion into universal bank.

17
2.3PRODUCTS AND SERVICES OFFERED BY UNIVERSAL BANKS

Broad Classification of Products in a Universal bank:

The different products in an universal bank can be broadly classified into:

 Retail Banking.
 Trade Finance.
 Treasury Operations.

Retail Banking and Trade finance operations are conducted at the branch level while the wholesale
banking operations, which cover treasury operations, are at the hand office or a designated branch.

Retail Banking

Retail banking is typical mass-market banking where individual customers use local branches
of larger commercial banks. Services offered include: savings and checking accounts, mortgages,
personal loans, debit cards, credit cards, and so

Retail banking aims to be the one-stop shop for as many financial services as possible on behalf of retail
clients. Some retail banks have even made a push into investment services such as wealth management,
brokerage accounts, private banking and retirement planning. While some of these ancillary services are
outsourced to third parties (often for regulatory reasons), they often intertwine with core retail banking
accounts like checking and savings to allow for easier transfers and maintenance.

Services provided by Retail Banks:

 Deposits
 Loans, Cash Credit and Overdraft
 Negotiating for Loans and advances
 Remittances
 Book-Keeping (maintaining all accounting records)
 Receiving all kinds of bonds valuable for safe keeping

Trade Finance

Trade finance is related to international trade. While a seller (the exporter) can request the purchaser (an
importer) to prepay for goods shipped, the purchaser (importer) may wish to reduce risk by requiring the
seller to document the goods that have been shipped. Banks may assist by providing various forms of
18
support. For example, the importer's bank may provide a letter of credit to the exporter (or the exporter's
bank) providing for payment upon presentation of certain documents, such as a bill of lading. The
exporter's bank may make a loan (by advancing funds) to the exporter on the basis of the export contract.

Other forms of trade finance can include trade credit insurance, export factoring, forfaiting and others. In
many countries, trade finance is often supported by quasi-government entities known as export credit
agencies that work with commercial banks and other financial institutions.

In short, 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.All banks have departments devoted to treasury management, as do
larger corporations

Bank Treasuries may have the following departments:

a) A Fixed Income or Money Market desk that is devoted to buying and selling interest bearing securities

b) A Foreign exchange or "FX" desk that buys and sells currencies

c) A Capital Markets or Equities desk that deals in shares listed on the stock market.

In addition the Treasury function may also have a Proprietary Trading desk that conducts trading
activities for the bank's own account and capital, an Asset liability management or ALM desk that
manages the risk of interest rate mismatch and liquidity; and a Transfer Pricing or Pooling function that
prices liquidity for business lines (the liability and asset sales teams) within the bank.

Banks may or may not disclose the prices they charge for Treasury Management products.

The operations include:

 Buying and selling of bullion. Foreign exchange

 Acquiring, holding, underwriting and dealing in shares, debentures, etc.
 Purchasing and selling of bonds and securities on behalf of constituents.
19
The banks can also act as an agent of the Government or local authority. They insure, guarantee,
underwrite, participate in managing and carrying out issue of shares, debentures, etc.

Apart from the above-mentioned functions of the bank, the bank provides a whole lot of other services
like investment counseling for individuals, shortterm funds management and portfolio management for
individuals and companies. It undertakes the inward and outward remittances with reference to foreign
exchange and collection of varied types for the Government.

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2.4COMMON BANKING PRODUCTS AVAILABLE

Some of common available banking products which are in universal banks are explained below:

Credit Card

Credit Card is “post paid” or “pay later” card that draws from a credit line-money made available by the
card issuer (bank) and gives one a grace period to pay. If the amount is not paid full by the end of the
period, one is charged interest.

A credit card is nothing but a very small card containing a means of identification, such as a signature
and a small photo. It authorizes the holder to change goods or services to his account, on which he is
billed. The bank receives the bills from the merchants and pays on behalf of the card holder.

These bills are assembled in the bank and the amount is paid to the bank by the card holder totally or by
installments. The bank charges the customer a small amount for these services. The card holder need not
have to carry money/cash with him when he travels or goes for purchasing.

Credit cards have found wide spread acceptance in the ‘metros’ and big cities. Credit cards are joining
popularity for online payments. The major players in the Credit Card market are the foreign banks and
some big public sector banks like SBI and Bank of Baroda.

Debit Cards

A debit card (also known as a bank card or check card) is a plastic card that provides an alternative
payment method to cash when making purchases. Functionally, it can be called an electronic check, as the
funds are withdrawn directly from either the bank account, or from the remaining balance on the card. In
some cases, the cards are designed exclusively for use on the Internet, and so there is no physical card.

In many countries the use of debit cards has become so widespread that their volume of use has
overtaken or entirely replaced the check and, in some instances, cash transactions. Like credit cards, debit
cards are used widely for telephone and Internet purchases and, unlike credit cards, the funds are
transferred immediately from the bearer's bank account instead of having the bearer pay back the money
at a later date.

Debit cards may also allow for instant withdrawal of cash, acting as the ATM card for withdrawing cash
and as a check guarantee card. Merchants may also offer cash back facilities to customers, where a
customer can withdraw cash along with their purchase.

21
Debit Card holder need not carry a bulky checkbook or large sums of cash when he/she goes at for
shopping. This is a fast and easy way of payment one can get debit card facility as debit cards use one‘s
own money at the time of sale, so they are often easier than credit cards to obtain.

Automatic Teller Machine

An automated teller machine (ATM), also known as a automated banking machine (ABM) or Cash
Machine and by several other names, is a computerized telecommunications device that provides the
clients of a financial institution with access to financial transactions in a public space without the need for
a cashier, human clerk or bank teller.

On most modern ATMs, the customer is identified by inserting a plastic ATM card with a magnetic
stripe or a plastic smart card with a chip that contains a unique card number and some security
information such as an expiration date or CVVC (CVV). Authentication is provided by the customer
entering a personal identification number (PIN).

Using an ATM, customers can access their bank accounts in order to make cash withdrawals, credit card
cash advances, and check their account balances as well as purchase prepaid cell phone credit. If the
currency being withdrawn from the ATM is different from that which the bank account is denominated in
(e.g.: Withdrawing Japanese Yen from a bank account containing US Dollars), the money will be
converted at a wholesale exchange rate. Thus, ATMs often provide the best possible exchange rate for
foreign travelers and are heavily used for this purpose as well.

ATMs are known by various other names including automatic banking machine (or automated banking
machine particularly in the United States) (ABM), automated transaction machine, cash point
(particularly in the United Kingdom), money machine, bank machine, cash machine, hole-in-the-wall,
autoteller (after the Bank of Scotland's usage), cashline machine (after the Royal Bank of Scotland's
usage), MAC Machine (in the Philadelphia area), Bankomat (in various countries particularly in Europe
and including Russia), Multibanco (after a registered trade mark, in Portugal), Minibank in Norway, Geld
Automaat in Belgium and the Netherlands, and All Time Money in India.

Advantages of ATM’s:

To the Customers

 ATM‘s provide 24 hrs, 7 days and 365 days a year service.

 Service is quick and efficient
 Privacy in transaction
 Wider flexibility in place and time of withdrawals.

22
  The transaction is completely secure – you need to key in Personal Identification Number (Unique
number for every customer).

To Banks

 Alternative to extend banking hours.

 Crowding at bank counters considerably reduced.
 Alternative to new branches and to reduce operating expenses.
 Relieves bank employees to focus an more analytical and innovativework.
 Increased market penetration.

ATM‘s can be installed anywhere like Airports, Railway Stations, Petrol Pumps, Big Business arcades,
markets, etc. Hence, it gives easy access to the customers, for obtaining cash.

The ATM services provided first by the foreign banks like Citibank, Grind lays bank and now by many
private and public sector banks in India like ICICI Bank, HDFC Bank, SBI, UTI Bank etc. The ICICI has
launched ATM Services to its customers in all the Metropolitan Cities in India. By the end of 1990 Indian
Private Banks and public sector banks have come up with their own ATM Network in the form of
“SWADHAN”. Over the past year upto 44 banks in Mumbai, Vashi and Thane, have became a part of
“SWADHAN” a system of shared payments networks, introduced by the Indian Bank Association (IBA).

E-Cheques

E-cheques are a mode of electronic payments. E-cheques work the same way as paper cheques and are a
legally binding promise to pay. This technology was developed couple of years ago by a consortium of
Silicon Valley IT researchers and merchant bankers and since then has been promoted by many of the
financial bodies. E-cheques work the same way as paper cheques and are a legally binding promise to
pay. The payment system uses digitally signed XML documents that provide mechanism to authenticate
parties to a transaction. Echeques are defined using FSML (financial services markup language) which
allows for addition and deletion of document blocks, signing, co-signing, endorsing, etc.

Signatures are accompanied by bank-issued certificates which tie the signer's key to a bank account. It
seems that consumers would gain from having E-cheques available to make payments for online
purchases. The online merchants on the other hand could receive payments instantly and since the
customer‘s bank will be involved in the transaction. It would be impossible for E-cheques to bounce.
Banks can do paperless, efficient transactions.

A typical electronic cheque transaction takes place in the following manner:

23
  The customer accesses the merchant server and the merchant serverpresents its goods to the
customer.
 The consumer selects the goods and purchases them by sending an echeque to the merchant.
 The merchant validates the e-cheque with its bank for payment authorisation.
 The merchant electronically forwards the e-cheque to its bank.
 The merchant‘s bank forwards the e-cheque to the clearing house for cashing.
 The clearing house jointly works with the consumer‘s bank clears thecheque and transfers the
money to the merchant‘s banks.
 The merchant‘s bank updates the merchant‘s account.
 The consumer‘s bank updates the consumer‘s account with the withdrawal information.

The e-chequing is a great boon to big corporate as well as small retailers. Most major banks accept e-
cheques. Thus this system offers secure means of collecting payments, transferring value and managing
cash flows.

Electronic Funds Transfer (EFT)

Many modern banks have computerised their cheque handling process with computer networks and other
electronic equipments. These banks are dispensing with the use of paper cheques. The system called
electronic fund transfer (EFT) automatically transfers money from one account to another. This system
facilitates speedier transfer of funds electronically from any branch to any other branch. In this system the
sender and the receiver of funds may be located in different cities and may even bank with different
banks. Funds transfer within the same city is also permitted. The scheme has been in operation since
February 7, 1996, in India.

The other important type of facility in the EFT system is automated clearing houses. These are the
computer centers that handle the bills meant for deposits and the bills meant for payment. In big
companies pay is not disbursed by issued cheques or issuing cash. The payment office directs the
computer to credit an employee‘s account with the person‘s pay.

Telebanking

Telebanking refers to banking on phone services a customer can access information about his/her account
through a telephone call and by giving the coded Personal Identification Number (PIN) to the bank.
Telebanking is extensively user friendly and effective in nature.

 To get a particular work done through the bank, the users may leave hisinstructions in the form of
message with bank. Facility to stop payment on request. One can easily know about the cheque
status.

24
  Information on the current interest rates.
 Information with regard to foreign exchange rates.
 Request for a DD or pay order.
 D-Mat Account related services.
 And other similar services.

Mobile Banking

A new revolution in the realm of e-banking is the emergence of mobile banking. On-line banking is now
moving to the mobile world, giving everybody with a mobile phone access to real-time banking services,
regardless of their location. But there is much more to mobile banking from just on-line banking. It
provides a new way to pick up information and interact with the banks to carry out the relevant banking
business. The potential of mobile banking is limitless and is expected to be a big success. Booking and
paying for travel and even tickets is also expected to be a growth area.

According to this system, customer can access account details on mobile using the Short Messaging
System (SMS) technology where select data is pushed to the mobile device. The wireless application
protocol (WAP) technology, which will allow user to surf the net on their mobiles to access anything
and everything. This is a very flexible way of transacting banking business.

Already ICICI and HDFC banks have tied up cellular service provides such as Airtel, Orange, Sky Cell,
etc. in Delhi and Mumbai to offer these mobile banking services to their customers.

Internet Banking

Internet banking involves use of internet for delivery of banking products and services. With internet
banking is now no longer confirmed to the branches where one has to approach the branch in person, to
withdraw cash or deposits a cheque or requests a statement of accounts. In internet banking, any inquiry
or transaction is processed online without any reference to the branch (anywhere banking) at any time.

The Internet Banking now is more of a normal rather than an exception due to the fact that it is the
cheapest way of providing banking services. As indicated by McKinsey Quarterly research, presently
traditional banking costs the banks, more than a dollar per person, ATM banking costs 27 cents and
internet banking costs below 4 cents approximately. ICICI bank was the first one to offer Internet
Banking in India.

Benefits of Internet Banking:

 Reduce the transaction costs of offering several banking services anddiminishes the need for
longer numbers of expensive brick and mortar branches and staff.
25
  Increase convenience for customers, since they can conduct many banking transaction 24 hours a
day.
 Increase customer loyalty.
 Improve customer access.
 Attract new customers.
 Easy online application for all accounts, including personal loans andmortgages

Financial Transaction on the Internet:

Electronic Cash: Companies are developing electronic replicas of all existing payment system: cash,
cheque, credit cards and coins.

Automatic Payments: Utility companies, loans payments, and other businesses use on automatic
payment system with bills paid through direct withdrawal from a bank account.

Direct Deposits: Earnings (or Government payments) automatically deposited into bank accounts, saving
time, effort and money.

Stored Value Cards: Prepaid cards for telephone service, transit fares, highway tolls, laundry service,
library fees and school lunches.

Point of Sale transactions: Acceptance of ATM/Cheque at retail stores and restaurants for payment of
goods and services. This system has made functioning of the stock Market very smooth and efficient.

Cyber Banking: It refers to banking through online services. Banks with web site “Cyber” branches
allowed customers to check balances, pay bills, transfer funds, and apply for loans on the Internet.

Demat:

Demat is short for de-materialisation of shares. In short, Demat is a process where at the customer‘s
request the physical stock is converted into electronic entries in the depository system.

In January 1998 SEBI (Securities and Exchange Board of India) initiated DEMAT ACCOUNTANCY
System to regulate and to improve stock investing. As on date, to trade on shares it has become
compulsory to have a share demat account and all trades take place through demat.

One needs to open a Demat Account with any of the branches of the bank. After opening an account with
any bank, by filling the demat request form one can handover the securities. The rest will be taken care by
the bank and the customer will receive credit of shares as soon as it is confirmed by the
Company/Register and Transfer Agent. There is no physical movement of share certification any more.
Any buying or selling of shares is done via electronic transfers.
26
1. If the investor wants to sell his shares, he has to place an order with his broker and give a “Delivery
Instruction” to his DP (Depository Participant). The DP will debit hi s account with the number of shares
sold by him.

2. If one wants to buy shares, he has to inform his broker about his Depository Account Number so that
the shares bought by him are credited in to his account.

3. Payment for the electronic shares bought or sold is to be made in the same way as in the case of
physical securities.

27
2.5UNIVERSAL BANKING SERVICES

Banking covers so many services that it is difficult to define it. However, these basic services
have always been recognized as the hallmark of the genuine banker. These are:

 The receipt of the customer‘s deposits

 The collection of his cheques drawn on other banks
 The payment of the customer‘s cheques drawn on himself

There are other various types of banking services like:

 Advances – Overdraft, Cash Credit, etc.

 Deposits – Saving Account, Current Account, etc.
 Financial Services – Bill discounting etc.
 Foreign Services – Providing foreign currency, travelers cheques, etc.
 Money Transmission – Funds transfer etc.
 Savings – Fixed deposits, etc.
 Services of place or time – ATM Services.
 Status – Debit Cards, Credit Cards, etc.

28
2.5UNIVERSAL BANKING COUPLED WITH SWOT

The solution of Universal Banking was having many factors to deal with which further
categorized under Strengths, Weaknesses, Opportunities and Threats:

Strengths:

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. Various Reserve Banks Committees and reports in
favor of Universal Banking, is that it enables banks to exploit economies of scale and scope. It means a
bank can reduce average costs and thereby improve spreads if it expands its scale of operations and
diversifying activities.

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 it can use to
pursue other activities with the same client. A data collection about the market trends, risk and returns
associated with portfolios of Mutual Funds, diversifiable and non diversifiable risk analysis, etc are useful
for other clients and information seekers. Automatically, a bank will get the benefit of being involved in
Research.

Easy marketing on the foundation a of Brand name

A bank has an existing network of branches, which can act as shops for selling products like
Insurance, Mutual Fund without much efforts on marketing, as the branch will act here as a parent
company or source. In this way a bank can reach the remotest client without having to take recourse to an
agent.

One stops 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 customers.

29
Investor friendly activities

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

Easy handling of business cycles

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

Weaknesses:

Grey area of Universal Bank

The path of Universal Banking for DFIs is strewn with obstacles. The biggest one is overcoming
the differences in regulatory requirements for a bank and DFI. Unlike banks, DFIs are not required to
keep a portion of their deposits as cash reserves.

No expertise in long term lending

In the case of traditional project finance an area where DFIs tread carefully, becoming a bank may
not make a big difference. Project finance and Infrastructure Finance are generally long gestation projects
and would require DFIs to borrow long term. Therefore, the transformation into a bank may not be of
great assistance in lending long-term.

NPA problem remained intact

The most serious problem of DFIs have had to encounter is bad loans or Non Performing Assets
(NPA). For the DFIs and Universal Banking or installation of cutting edge technology in operations are
unlikely to improve the situation concerning NPAs. Most of the NPAs came out of loans to commodity
sectors, such as steel, chemicals, textiles, etc. the improper use of DFI funds by project promoters, a sharp
change in operating environment and poor appraisals by DFIs combined to destroy the viability of some
projects. So, instead of improving the situation Universal Banking may worsen the situation, due to the
expansion in activities banks will fail to make thorough study of the actual need of the party concerned,
the prospect of the business, in which it is engaged, its track record, the quality of the management, etc.
30
ICICI suffered the least in this section, but the IDBI has got worst hit of NPAs, considering the negative
developments at Dabhol Power Company (DPC).

Threats:

Big Empires

Universal Banking is an outcome of the mergers and acquisitions in the banking sector. The Finance
Ministry is also empathetic towards it. But there will be big empires which may put the economy in a
problem. Universal Banks will be the largest banks, by their asset base, income level and profitability
there is a danger of 'Price Distortion'. It might take place by manipulating interests of the bank for the self
interest motive instead of social interest. There is a threat to the overall quality of the products of the
bank, because of the possibility of turning all the strengths of the Universal Banking into weaknesses.
(e.g. - the strength of economies of scale may turn into the degradation of qualities of bank products, due
to over expansion. If the banks are not prudent enough, deposit rates could shoot up and thus affect
profits. To increase profits quickly banks may go in for riskier business, which could lead to a full in asset
quality. Disintermediation and securitization could further affect the business of banks.

Opportunities:

To increase efficiency and productivity

Liberalization offers opportunities to banks. Now, the focus will be on profits rather than on the
size of balance sheet. Fee based incomes will be more attractive than mobilizing deposits, which lead to
lower cost funds. To face the increased competition, banks will need to improve their efficiency and
productivity, which will lead to new products and better services.

To get more exposure in the global market

In terms of total asset base and net worth the Indian banks have a very long road to travel when
compared to top 10 banks in the world. (SBI is the only Indian bank to appear in the top 100 banks list of
'Fortune 500' based on sales, profits, assets and market value. It also ranks II in the list of Forbes 2000
among all Indian companies) as the asset base sans capital of most of the top 10 banks in the world are
much more than the asset base and capital of the entire Indian banking sector. In order to enter at least the
top 100 segment in the world, the Indian banks need to acquire a lot of mass in their volume of
operations.

Pure routine banking operations alone cannot take the Indian banks into the league of the Top
100 banks in the world. Here is the real need of universal banking, as the wide range of financial services

31
in addition to the Commercial banking functions like Mutual Funds, Merchant banking, Factoring,
Insurance, credit cards, retail, personal loans, etc. will help in enhancing overall profitability.

To eradicate the 'Financial Apartheid'

A recent study on the informal sector conducted by Scientific Research Association for Economics
(SRA), a Chennai based association, has found out that, 'Though having a large number of branch
network in rural areas and urban areas, the lowest strata of the society is still out of the purview of
banking services. Because the small businesses in the city, 34% of that goes to money lenders for funds.
Another 6.5% goes to pawn brokers, etc.

The respondents were businesses engaged in activities such as fruits and vegetables vendors, laundry
services, provision stores, petty shops and tea stalls. 97% of them do not depend the banking system for
funds. Not because they do not want credit from banking sources, but because banks do not want to lend
these entrepreneurs. It is a situation of Financial Apartheid in the informal sector. It means with the help
of retail and personal banking services Universal Banking can reach this stratum easily.

32
 CHAPTER 3

3.1 KHAN COMMITTEE ON UNIVERSAL BANKING AND FIS

KHAN COMMITTEE ON UNIVERSAL BANKING & FIS The khan committee on harmonizing the
role and operations of development financial institutions and banks submitted its report on April 24, 1998
with following recommendations: -

 Give banking license to DFIs

 Merge banks with banks, DFIs
 Bring down CRR progressively
 Phase out SLR
 Redefine priority sector
 Set up a super regulator to coordinate regulators‘ activities
 Develop risk-based supervisory framework
 Usher in legal reforms in debt recovery
 State level FIs be allowed to go public and come under RBI
 DFIs be permitted to have wholly-owned banking subsidiaries
 Remove cap on FIs‘ resources mobilization
 Grant authorized dealers‘ license to DFIs
 Set up a standing committee to coordinate lending policies

SOME CONCEPTS

Universal Banking

Universal banking refers to elimination of the distinction between the development financial institutions
and the banks and market segmentation that presently exists between them.

Harmonization Of Role Of Banks And DFIs

Harmonization means the introduction of universal banking in a limited sense, wherein the DFIs could
become banks and intermediate in the short-term end of the financial market (say finance for working
capital) and commercial banks could enter the long-term end of the financial market (say project
financing). In other words, the harmonization allows the DFIs and banks to move freely to the other end
than where they are presently placed.

33
The Main Areas Of Operations Of DFIs And Banks Presently And How Universalisation Will
Change That Role In Future.

DFIs are specialist institutions catering to different sectors, appraising projects from technical and
financial parameters and finance long-term investment requirements. This specialization has given edge
to DFIs in terms of project appraisal. On the other hand, the banks meet the short term investment and
production requirements and they have developed expertise in providing working capital finance to
industry, exports, imports, small industry, agriculture etc. They can take as intermediates in a big way at
the other end of their markets where they are less dominant presently. Some of them may even diversify
into insurance and other related areas.

Requirement Of Cost Considerations In Universalisation

Cost of funds differentiates the DFIs from banks, as DFIs incur higher costs for mobilizing long-term
finance. Banks do not normally mobilize substantial deposit resources with maturities in excess of 5
years, which limits their capacity to extend long-term loans. This has resulted in participation type of
relationship in financing by banks and DFIs.

The Areas Of Conflict arising Between Banks And DFIs

There are conflicts relating to securities for the loans sanctioned by the banks and DFIs. While the DFIs
have first charge over block assets, the banks have first charge on current assets, which place both the
banks and DFIs in different positions.

Another area of conflict is extension of refinance by DFIs to banks to supplement banks‘ long-term
resources. But due to higher cost of their funds, the DFIs find it a losing proposition.

The Committee Which Recommended Universal Banking & What ItSuggested

The SH Khan Committee suggested the concept of Universal Banking. It also suggested to give banking
licence to DFIs, merging banks with banks or DFIs, bring down CRR progressively, phase out SLR,
redefine priority sector, set up a super regulator to coordinate regulators‘ activities, develop risk-based
supervisory framework, usher in legal reforms in debt recovery, allow State level FIs to go public and
come under RBI, permit DFIs to have wholly-owned banking subsidiaries, remove cap on FIs‘ resources
mobilization, grant authorized dealers‘ licence to DFIs, set up a standing committee to coordinate lending
policies etc.

34
The Likely Gains From Universalisation

The universalisation is expected to result in expansion of banks and diversification into new financial and
Para-banking services. The business focus of the banks would emerge on profit lines. This may at the
same time result in reluctance on their part to enter the smaller end of retail banking particularly, the
small borrowers in rural areas, who may find it difficult to access the banking services, since they do not
contribute substantially to Banks‘ Business Volumes Or Profits.

The Apprehensions Of Universalisation

The financial services may not become the privilege of elitist. If the reforms with a human face are what
we want, the universal banking has to make adjustments and ensure that financial services are available to
all at affordab

35
3.2 NEED OF UNIVERSAL BANKING IN INDIA

1. The phenomenon of universal banking—as different from narrow banking is suddenly in the news.
With the second Narsimham Committee (1998) and the Khan Committee (1998) 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.

2. A universal bank is a ‗one-stop‘ supplier for all financial products and activities, like deposits, short-
term and long-term loans, insurance, investment etc.

3. The benefits to banks from universal banking are the standard argument given everywhere also by the
various Reserve Bank committees and reports—in favour of universal banking is that it enables banks to
exploit economies of scale and scope.

4. So that a bank can reduce average costs and thereby improves spreads if it expands its scale of
operations and diversifies its activities.

5. The bank can diversify 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.

6. 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 any agent.

7. 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 banking

8. 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.

9. 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.

10. 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.
36
11. 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, which they are lobbying to avoid.

All these can be seen as steps towards an ultimate culmination of financial intermediation in India
into universal banking.

37
3.3 APPROACH TO UNIVERSAL BANKING

The Narsimham Committee II suggested that Development Financial Institutions (DFIs)

should convert ultimately into either commercial banks or non-bank finance companies. The Khan
Working Group held the view that DFIS should be allowed to become banks at the earliest. The
RBI released a 'Discussion Paper' (DP) in January 1999 for wider public debate. The feedback on
the discussion paper indicated that while the universal banking is desirable from the point of view
of efficiency of resource use, there is need for caution in moving towards such a system by banks
and DFIs.
The principle of "Universal Banking" is a desirable goal and some progress has already
been made by permitting banks to diversify into investments and long-term financing and the
DFIs to lend for working capital, etc. However, banks have certain special characteristics and as
such any dilution of RBI's prudential and supervisory norms for conduct of banking business
would be inadvisable.
Though the DFIs would continue to have a special role in the Indian financial
System, until the debt market demonstrates substantial improvements in terms of liquidity and
depth, any DFI, which wishes to do so, should have the option to transform into bank (which it
can exercise), provided the prudential norms as applicable to banks are fully satisfied. To this end,
a DFI would need to prepare a transition path in order to fully comply with the regulatory
requirement of a bank. The DFI concerned may consult RBI for such transition arrangements.
Reserve Bank will consider such requests on a case-by-case basis. Financing requirements, which
is necessary. In due course, and in the light of evolution of the financial system, Narsimham
Committee's recommendation that, ultimately there should be only banks and Restructured
NBFCs can be operationalised.

38
3.4 RBI Guidelines for Existing Banks/FIs for Conversion into Universal Banks

Salient operational and regulatory issues to be addressed by the FIs For the conversion into Universal
bank are: -

Reserve Requirements:

Compliance with the cash reserve ratio and statutory liquidity ratio requirements (under Section 42 of
RBI Act, 1934, and Section 24 of the Banking Regulation Act, 1949, respectively) would be mandatory
for an FI after its conversion into a universal bank

Permissible activities:

Any activity of an FI currently undertaken but not permissible for a bank under Section 6(1) of the B. R.
Act, 1949, may have to be stopped or divested after its conversion into a universal bank.

Disposal of non-banking assets:

Any immovable property, howsoever acquired by an FI, would, after its conversion into a universal bank,
be required to be disposed of within the maximum period of 7 years from the date of acquisition, in terms
of Section 9 of the B. R. Act.

Composition of the Board:

Changing the composition of the Board of Directors might become necessary for some of the FIs after
their conversion into a universal bank, to ensure compliance with the provisions of Section 10(A) of the
B. R. Act, which requires at least 51% of the total number of directors to have special knowledge and
experience

Prohibition on floating charge of assets:

The floating charge, if created by an FI, over its assets, would require, after its conversion into a
universal bank, ratification by the Reserve Bank of India under Section 14(A) of the B. R. Act, since a
banking company is not allowed to create a floating charge on the undertaking or any property of the
company unless duly certified by RBI as required under the Section.

Nature of subsidiaries:

39
If any of the existing subsidiaries of an FI is engaged in an activity not permitted under Section 6(1) of
the B R Act, then on conversion of the FI into a universal bank, delinking of such subsidiary / activity
from the operations of the universal bank would become necessary since Section 19 of the Act permits a
bank to have subsidiaries only for one or more of the activities permitted under Section 6(1) of B. R. Act.

Restriction on investments:

An FI with equity investment in companies in excess of 30 per cent of the paid up share capital of that
company or 30 per cent of its own paid-up share capital and reserves, whichever is less, on its conversion
into a universal bank, would need to divest such excess holdings to secure compliance with the provisions
of Section 19(2) of the B. R. Act, which prohibits a bank from holding shares in a company in excess of
these limits.

Connected lending:

Section 20 of the B. R. Act prohibits grant of loans and advances by a bank on security of its own shares
or grant of loans or advances on behalf of any of its directors or to any firm in which its director/manager
or employee or guarantor is interested. The compliance with these provisions would be mandatory after
conversion of an FI to a universal bank.

Licensing:

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

Branch network:

An FI, after its conversion into a bank, would also be required to comply with extant branch licensing
policy of RBI under which the new banks are required to allot at least 25 per cent of their total number of
branches in semi-urban and rural areas.

Assets in India:

An FI after its conversion into a universal bank, will be required to ensure that at the close of business on
the last Friday of every quarter, its total assets held in India are not less than 75 per cent of its total
demand and time liabilities in India, as required of a bank under Section 25 of the B R Act.

Format of annual reports:

40
After converting into a universal bank, an FI will be required to publish its annual balance sheet and profit
and loss account in the in the forms set out in the Third Schedule to the B R Act, as prescribed for a
banking company under Section 29 and Section 30 of the B. R. Act.

Managerial remuneration of the Chief Executive Officers:

On conversion into a universal bank, the appointment and remuneration of the existing Chief Executive
Officers may have to be reviewed with the approval of RBI in terms of the provisions of Section 35 B of
the B. R. Act. The Section stipulates fixation of remuneration of the Chairman and Managing Director of
a bank by Reserve Bank of India taking into account the profitability, net NPAs and other financial
parameters. Under the Section, prior approval of RBI would also be required for appointment of
Chairman and Managing Director.

Deposit insurance:

An FI, on conversion into a universal bank, would also be required to comply with the requirement of
compulsory deposit insurance from DICGC up to a maximum of Rs.1 lakh per account, as applicable to
the banks.

Authorized Dealer's License:

Some of the FIs at present hold restricted AD license from RBI, Exchange Control Department to enable
them to undertake transactions necessary for or incidental to their prescribed functions. On conversion
into a universal bank, the new bank would normally be eligible for fullfledged authorized dealer license
and would also attract the full rigor of the Exchange Control Regulations applicable to the banks at
present, including prohibition on raising resources through external commercial borrowings.

Priority sector lending:

On conversion of an FI to a universal bank, the obligation for lending to "priority sector" up to a

prescribed percentage of their 'net bank credit' would also become applicable to it .

Prudential norms:

After conversion of an FI in to a bank, the extant prudential norms of RBI for the all-India financial
institutions would no longer be applicable but the norms as applicable to banks would be attracted and
will need to be fully complied with.

41
3.5 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. This consolidation has produced financial conglomerates
that are expected to maximize economies of scale and scope by ‘bundling‘ the production of financial
services. 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
setup 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 Narsimham 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.

42
 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
undercapitalization, 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.

43
3.6 UNIVERSAL BANKING-PROS AND CONS

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

Advantages of Universal 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 exploit 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:

44
 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.

Disadvantages of Universal Banking

 Grey Area of Universal Bank:

The path of universal banking for DFIs is strewn with obstacles. The biggest one is overcoming the
differences in regulatory requirement for a bank and DFI. Unlike banks, DFIs are not required to keep
a portion of their deposits as cash reserves.

 No Expertise in Long term lending. In the case of traditional project:

finance, an area where DFIs tread carefully, becoming a bank may not make a big difference to a
DFI. Project finance and Infrastructure finance are generally long- gestation projects and would
require DFIs to borrow longterm. Therefore, the transformation into a bank may not be of great
assistance in lending long-term.

 NPA Problem Remained Intact:

The most serious problem that the DFIs have had to encounter is bad loans or Non-Performing
Assets (NPAs). For the DFIs and Universal Banking or installation of cutting-edge-technology in
operations are unlikely to improve the situation concerning NPAs.

45
 CHAPTER 4

DATA ANALYSIS

Q.1 Do you know about the bank?

YES NO
90% 10%

Q.2 Do you know about universal banking?

YES NO
41% 59%

Q3. Do you know about the universal banking product?

YES NO
35% 65%

Q4 Do you know about trade finance?

YES NO
30% 70%

Q5. Do you know about common banking product?

YES NO
90% 10%

Q6. Do you know about electronic fund transfer?

YES NO
45% 55%

Q7. Do you know about universal banking service?

YES NO
30% 70%

Q8. Do you know about the approach of universal banking?

YES NO
25% 75%75 75%

46
Q9. Do you know about the RBI guidelines for universal banking?

YES NO
10% 90%

Q10. Do you know about the impact of universal banking?

YES NO
15% 85%

Q11. Do you know about the types of universal banking?

YES NO
25% 75%

Q12. Do you know about the current position of the universal banking in INDIA?

YES NO
13% 87%

Q13. Do you know about ICICI bank?

YES NO
95% 5%

Q14. Do you know about the challenges of universal banking?

YES NO
5% 95%

Q15. Do you know about the future trend of universal banking?

YES NO
17% 83%

Q16. Are you satisfied with the product of universal banking?

YES NO
81% 19%

47
Q17. Which bank provide universal banking services?

ICICI 51%
AXIS 20%
HDFC 29%

Q18. How many people aware about universal banking?

YES NO
41% 59%

Q19. How many people now a days go for such baking?

YES NO
51% 49%

Q20. Why people go for universal banking?

FINANCEAL SERVICES DEMAT SERVICES

79% 21%

Q21. How many are satisfied by universal banking services?

YES NO
71% 29%

Q22. What universal banking service people normally prefer?

RETAIL BANKING WHOLE SALE BANKING

61% 39%

Q23. Why people prefer wholesale banking?

INTERNATIONAL TRADE FINANCE ATM SERVICE

SERVICE
80% 20%

Q24. Why people prefer retail banking?

SAVING ACCOUNT ZERO BALANCE SERVICE

90% 10%

48
Q25. Do you know about the diversification of universal banking?

YES NO
15% 85%

49
 CHAPTER 5

5.1 BANKING SECTOR DIVERSIFICATION AND RISE OF UNIVERSAL

BANKING

In recent years, it has been seen that commercial banks are no longer restricted to providing
traditional services of ‘accepting deposits and making advances’, but are engaged in diverse kinds of
banking and financial business like insurance, mutual funds, investment banking, housing finance,
factoring etc. Such banking entities which are offering various services under one-roof are referred to
as Universal banks. In fact, Universal banks are financial conglomerates, which function as part of
financial supermarkets (Gurusamy, 2009).

The concept of Universal banking is of recent origin in India and came to fore-front after the financial
sector reforms. However, at the global level, Universal banks have been operating for quite some time
in Germany, Austria and Switzerland. Universal banking has its origin in Germany where it
originated in 1850s, while it existed in the US prior to 1920s.

In India, financial sector reforms which started in early 1990s have uprooted many of the outdated
regulatory fences within which banks were required to operate (Rajadhyaksha, 2004). The first step in
this respect was deregulation and opening up of the banking sector to private and foreign players.
Licenses were granted to many foreign and new generation private sector banks. The All India
Development Financial Institutions (DFIs) like the ICICI, IDBI etc. jumped into the fray of core
commercial banking. Public sector banks were allowed to divest the controlling stakes of the
Government by encouraging them to come up with Initial Public Offers (IPOs) and Public-Private
Partnership (PPP) started elbowing out the predominantly State ruled organisational structures
(Darshan, 2006).

With the organisation structural changes and increase in the number of players, competition,
which was a non-entity in the Indian Banking context after 1969, set in. Competition in the banking
sector reduced the profit-share of banks and forced individual banks to identify avenues to earn profit
through diversified activities – which do not fall under the purview of core banking. Competition also

50
made banks to be more customer-centric and focus on customer satisfaction and retention. In view of
these, a variety of banking and financial services are being offered by the banks to meet customers’
needs more effectively. Simultaneously, during this period i.e., 1990s, there was another silent
revolution in the country – the advent of Information Technology. Information Technology enabled
Services (ITeS) have facilitated banks to bring in a visible change in their service delivery process –
making it less time consuming, less cumbersome, and more customer friendly. Thus, with increased
competition in the banking sector and all these developments have forced banks to formulate business
strategies with focus on customer needs and their satisfaction. This eventually led to the emergence of
a new breed of organisations named Universal Banks – offering a variety of banking and financial
products under an umbrella brand.

The Indian Situation and Diversification of Banking Business

Independent India follows a mixed economic system, where there is wide latitude for government
participation (Cherunilam, 1994). The Government, since 1950s, had been regulating the economic
activities of the country to ensure balanced economic development through Five-year plans. The
objective of planned economic development is such that social orientation of banking was considered
a must i.e., banks have to move into rural and far flung areas so as to ensure balanced economic
growth and equitable distribution of wealth among the population. Accordingly as a part of this
obligation of social banking, the domestic banks moved into rural areas and interior locations despite
inadequate infrastructure and communication facilities. In this process of meeting social obligations
as per government policies, the margins of banks on loans and advances narrowed down and their
profitability badly affected. The banking system had such a low level of profitability and it appeared
that in their effort of transfusion of money to treat financial anaemia of the economy, the banking
system might itself become seriously sick (Suneja, 1994). It became clear that the viability of the
banking system was under a grave threat of an increasingly competitive business environment and
that if the system was to continue to serve the social objectives, bank should be allowed to come out
with new products to become commercially viable units, apart from taking various other steps to
improve their productivity and profitability. In view of all these developments, the Government felt
the necessity of economic liberalisation followed by financial reforms. Financial reforms have given
banks enough freedom to start diversifying their activities into ancillary business or para banking
apart from core banking activities.

Simultaneously, the foreign banks having operational presence in India were also caught up with the
idea of diversification and product innovation to enhance their profitability and increase their market
share. In view of innovative marketing strategies adopted by foreign banks and also due to increased
competition in the domestic market, Indian commercial banks too came forward with aggressive

51
marketing strategies, with focus into product innovation and diversification into ancillary business
areas.

Another striking reason which made Indian banks to opt for diversification is the development of
Capital Market. In fact, during early 1980s India witnessed an explosive growth of financial markets.
According to Rajadhyaksha (2004), these developments in the Indian Financial sector allowed
Companies and sometimes even customers to bypass banks and get money directly from those who
save it – a process called disintermediation. This has also forced banks to enter new business in order
to retain their precious customers through diversification and product innovation. In view of all these
developments in India, banks were allowed to undertake para banking activities since 1983 (Ajit,
1997) through subsidiaries (such as leasing, merchant banking, mutual funds, capital markets
activities, factoring, housing finance, etc) and in-house in fields such as money market mutual funds,
credit cards, etc. Further, technology also played a crucial role in product innovation as well as in
diversification in the banking sector. In fact, Information Technology (I.T) has paved the way to
speed up the process of banking operations and it can be said that the introduction of I.T in banking
activities has made the transition path easier for commercial banks in the direction of Universal
banking.

Thus, in response to national and international economic environment, there have been many
significant changes in the economy of our country as well as in the banking sector. Therefore, the
major factors behind changes in the activities of commercial banks are deregulation resulting in
increased competition and innovation; disintermediation and its counterpart ‘securitisation’; and
unprecedented technological advances and use of sophisticated communication in business operations
resulting in globalisation of financial markets (Suneja, 1994). Apart from all these factors, the motive
for which banks started entering into para banking activities include the need for a profit centre,
diversification of earnings, maximisation of economies of scale, the desire to have leading market
positions in all financial services, etc. (Ajit, 1997).

52
5.2 ACTIVIES OF UNIVERSAL BANK

Presently, all the banking organisations are marching towards Universal banking and as such the
distinction in the operations of Commercial banks, Development Financial Institutions and Non
Banking Financial Companies (NBFC) is gradually blurring. The motive of these entities behind their
transition towards Universal banks is to earn as much as profit by way of interest, fee-based income
and commission through various diversified activities (Bhaskar, 2005). In this process, Universal
banking adapts, adopts and achieves the basic objectives of business through technology. Universal
Banks are characterised by the presence in the breadth and depth of different segments of the
financial market particularly debt market (Gurusamy, 2009). Banks in India are present in the
following areas of the universal banking activity –

1. Credit market

2. Consumer finance market

3. Savings market

4. Money market

5. Capital market

6. Forex market

7. Commodities market

8. International banking

9. Advisory service market (merchant banking)

10. Investment banking

11. Insurance market

12. Factoring

13. Credit, Debit and Smart cards

14. Pension market

15. Project financing

16. Venture capital

53
17. On-line share broking

18. Internet banking

19. Telephone banking

20. Mobile banking

21. Securitisation

In India, most of the commercial banks are rendering almost all the activities mention 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, do not enjoy the same status.

54
5.3 Types of Universal Bank

There are four different types of Universal Banks in the world. They are as follows:

1. Fully Integrated Universal Banks:

Fully integrated Universal banks are those banks which function as a single institutional entity
offering a complete range of banking and financial products and service.

2. Partly Integrated Financial Conglomerates:

It is an institutional set-up where the bank offers a range of services, with some of the services such
as mortgage banking, leasing, and insurance being provided through wholly owned or partially
owned subsidiaries.

3. Bank Subsidiary Structure:

These are the banks that offer functions such as investment banking and insurance in addition to
focussing on regular commercial banking functions.

4. Bank Holding Company Structure:

Bank holding company structure is an institutional set-up where banking and financial products are
offered through a financial holding company that owns both banking and non banking subsidiaries
that are legally separate.

The concept of Universal banking is based on two models. One is the German Model, in which banks
carry comprehensive banking activities including commercial banking as well as other services such
as securities and insurance. The other is the British Model. According to this model, universal banks
by way of financial conglomerates offer full range of financial service in accordance with change of
financial environment, pursuing diversification in securities and investment.

Structure followed in India

In India, the financial services sector has been witnessing a growth in the emergence of financial
conglomerates. With increased competition in the financial sector, the banking as well as non
banking entities have felt the need to opt for diversification of their business line. In the process of
offering both banking and financial products, they started to experiment with organisational
structures hitherto unfamiliar in India.

55
However, it has been seen that in India, the Holding Company structure is being commonly followed.
Internationally there are mainly two holding company models for bank related conglomerates viz.,
Bank Holding Company Model and Financial Holding Company Model.

(a) Bank Holding Company Model:

Bank Holding Companies (BHCs) are companies that own or control one or more banks. In USA
these are regulated by the Federal Reserve. These companies were first introduced in Bank Holding
Company Act of 1956. These companies can make only limited investments in the non-banking
companies.

(b) Financial Holding Company Model:

Financial Holding Companies (FHCs) are companies that own or control one or more banks or non-
bank financial companies. In USA, FHCs were created by the GrammLeach-Bliley Act (GLBA) as a
way to expand the financial services activities of BHCs. GLBA permits banks, securities firms and
insurance companies to affiliate with each other through the FHC structure. FHCs can engage in
activities other than banking as long as they are financial in nature. The most important of these are
securities underwriting and dealing, insurance underwriting, insurance agency activities and
merchant banking. The requirement to have bank in the financial group is pre-requisite for qualifying
as an FHC in USA. In India, as per Reserve Bank of India, there are major motivations for banks/
financial institutions to opt for BHCs/ FHCs.

(a) First, in terms of existing instructions of RBI, a bank’s aggregate investment in the financial
services companies including subsidiaries is limited to 20% of the paid up capital and reserves of the
bank. 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. Once the subsidiaries are separated from the
banks, the growth of the subsidiaries/associates would not be constrained on account of capital.

(b) Secondly, in the context of public sector banks, the Government holding through a BHC/FHC
will not be possible in the existing statutes. However, if statutes are amended to count for effective
holding then, the most important advantage in shifting to BHC/FHC model would be that the capital
requirements of banks' subsidiaries would be de-linked from the banks’ capital.

(c) Thirdly, since the non-banking entities within the banking group would be directly owned by the
BHC, the contagion and reputation risk on account of affiliates for the bank is perceived to be less
severe as compared to the organisational structure where a bank is directly into the non banking
business.

56
Thus, it is anticipated that due to the above motivational factors, financial entities offering
diversified products would opt for Holding Company structure. In a banking or financial group, a
holding company can be the parent of the group or an intermediate holding company. A multi-
layered financial conglomerate may also have a few tiers of intermediate holding companies apart
from the holding company at the top.

57
5.4 UNIVERSAL BANKING: SOLUTION TO FLs PROBLEMS

The financial institutions (FIs) such as ICICI, IDBI are reported to be exploring possibilities of
conversion into universal banks as a solution for their problems. This follows the recommendation of the
S.H.Khan Working Group. The FIS come into existence, in pursuance of the earlier policy of the State
arranging funds for institutions set up for providing long-term finance. In the earlier period, FIS had
access to the Long Term Operation Fund (LTO) set up the RBI out of its surpluses. With the initiation of
reforms in 1996,the RBI discontinued the LTO.The term lending institutions, which had depended on
LTO funds were left without funds. Added to this were the series of adverse developments in the
industrial sector in India, partly as a result of opening up the economy. Many corporate become sick, as
they were unprepared for strong competitive environment. Thus the FIs had also indulged in a liberal
splurge of debt financing, in the optimistic expectation that liberalization would mean an improvement in
prospects for industries. Thereafter FIs faced by a surge of NPAs.

The problem of easier access to resources has been one of the driver‘s behind the suggestion to
make FIs universal banks. As UBs, FIs will it is expected, be able to access deposits from a wider
depositor base. UB is term usually used to cover category of institutions which do various banking
businesses including investment banking, securities trading, besides payment and settlement functions
and also insurance. The emphasis of the Khan Working Group on UB is however more in the direction of
converting the FIs to commercial banks.

The RBI has rightly adopted a cautious approach to this problem and its solution. The conversion
of FIs to commercial banks is not by itself a panacea. Conversion also implies that the banks will have to
be subject to the statutory requirement such as SLR and CRR.RBI may give some relaxation in statutory
requirement in case of new entrant FIs/Ubs. One more way is to asset reconstruction device to sell NPAs
of the FIs and to generate funds. Asset Reconstruction Committees (ARCs) where recommended for
commercial banks by the M.S.Verma Committee. Is balance sheets are heavily burdened with
accumulated NPAs; therefore first they will have to sale these impaired assets through reconstruction cos.
Conversion to UB is not a remedy for this fundamental problem. One suggestion is that FIs to be merged
with commercial banks. But current level of NPAs of FIs will put additional burden.

Therefore solution UB in the sense of converting the FIs to commercial banks may be neither
adequate nor free from further trouble

58
5.5 UNIVERSAL BANKING-CURRENT POSITION IN INDIA

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

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

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

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

59
 CHPTER 6

6.1 Introduction To ICICI Bank

The Industrial Credit and Investment Corporation of India limited (ICICI) was formed in 1955 at the
initiative of the World Bank, the government of India and representatives of Indian industry. The
principal objective was to create a development financial institution for providing medium-term and long-
term project financing to Indian businesses. Until the late 1980s, ICICI primarily focused its activities on
project finance, providing long-term funds to a variety of industrial projects. ICICI typically obtained
funds for these activities through a variety of government-sponsored and government-assisted programs
designed to facilitate industrial development in India. Today ICICI is one of the largest financial
institutions in India. It provides a wide range of products and services aimed at fulfilling the banking and
financial needs of India's corporate and retail sectors.

ICICI Bank was originally promoted in 1994 by ICICI Limited, an Indian financial institution, and was
its wholly-owned subsidiary. ICICI's shareholding in ICICI Bank was reduced to 46% through a public
offering of shares in India in fiscal 1998, an equity offering in the form of ADRs listed on the NYSE in
fiscal 2000, ICICI Bank's acquisition of Bank of Madura Limited in an all-stock amalgamation in fiscal
2001, and secondary market sales by ICICI to institutional investors in fiscal 2001 and fiscal 2002. In the
1990s, ICICI transformed its business from a development financial institution offering only project
finance to a diversified financial services group offering a wide variety

of products and services, both directly and through a number of subsidiaries and affiliates like ICICI
Bank.

60
6.2 Merger Of ICICI & ICICI Bank

The merger is a culmination of a dream, which began five years ago. This process was initiated in
1996. The time when SCICI merged with ICICI, in 199798 ICICI acquired ITC classic and Anagram
finance by way of acquisition, in 2000, ICICI bank gobbled up Bank of Madura. Reverse merger of
ICICI‘s MD & CEO K.V. Kamath started articulating on it in 1996. At first, it seemed impossibility
latter, it looked imperative.

On 25the of October India‘s first true-blue universal bank was born, as ICICI reverse merged into
its sibling ICICI Bank to create a Rs. 95,000 crores asset base monolith, only second after SBI that has
the asset base of 3,16,000 crores. HDFC Bank is left at third place with asset size of Rs. 19000 crores.
Earlier the reverse merger looked like a bailout strategy for Non Performing Assets (NPA) ridden ICICI,
but later the merger seemed justified because of possibility of numerous benefits through size and diverse
portfolio of products of two entities. Swap ration for merger is decided to be two shares of ICICI for one
share of ICICI Bank. Merged entity became fully operational from 31st March, 2002. ICICI requires this
five-month to meet all regulatory requirements.

The other interesting aspect of reverse merger is its methodology. ICICI Bank has adopted the
“purchase method” of accounting principles (GAAP) for the merger, unique in India. ICICI‘s assets and
liabilities will be “fair values” for the purpose of incorporation in the accounts of ICICI Bank on the
appointed date. This accounting practice is opportunity for ICICI to bring down its level of NPA.

The new entity will have the capital adequacy ratio of 11.25 per cent with Tier I capital contributing
7.5 per cent and Tier II 3.75 per cent.

Merged entity will have following features: -

a) Strong retail franchise will be able to access low- cost savings bank and current account.

b) Funding cost will be reduced.

c) Leverage on its large capital base, products suite, extensive corporate and retail customer relationship,
technology enabled distribution system & vast talent pool.

d) Retail segment will be a key driver for growth.

e) Reduction in the cost to income ratio due to scale of operations will provide competitive age.

f) It will reduce the pressure on the capital adequacy front.

61
g) Long term of the merger would offset the temporary hiccups.

h) The benefits of leveraging and cross selling will set off the cost of carrying the reserves.

i) Creation of an asset reconstruction companies (ARC) to manage NPAs.

j) Merger has been completed without seeking concessions on the reserve requirements; this is an
important aspect of reverse merger.

62
6.3 ICICI Bank- One Year After Universal Banking

Conversion to Universal Bank by ICICI did not happen overnight. ICICI CEO Kamath's predecessor
Narayan Vaghul started the process of strategic diversification. Kamath hastened the process and in the
last 5 years pushed ICICI towards setting up a portfolio of subsidiaries and associated companies. With a
capital base of Rs.728 crores ICICI Bank was set up in 1994. With aggressive marketing and
infrastructure of 400 branches and over 600 ATM's the bank grew rapidly. The intent to become
international player was very clear when both ICICI and ICICI Bank got listed on the New York Stock
Exchange (NYSE). ICICI has also forayed into insurance. To become Universal Bank ICICI had
accelerated provisioning of Rs.813 crores in additional to the normal provisioning of Rs.276 crores to
bring down the NPA to the more acceptable 5.1 percent.

Impact of The Merger

The merger of ICICI and two of its subsidiaries with ICICI bank has combined two organizations with
complementary strengths and products & similar processes & operating architecture. The merger has
combined the large capital base of ICICI with the strong deposit raising capability of ICICI Bank, giving
ICICI bank approved ability to increase its market share in banking fees and commissions, while lowering
the overall cost of funding through access to lowercost retail deposits. ICICI Bank would now able to
leverage the strong corporate relationships that ICICI has built, seamlessly providing the whole range of
financial products and services to corporate clients. The merger has also resulted in the integration of
retail finance operations of ICICI, and its two merging

subsidiaries, and ICICI into one entity, creating an optimal structure for the retail business and allowing
full range of asset and liability products to be offered to all retail customers.

Challenges Faced On Account Of Merger

The merger itself posed many challenges i.e. of raising large incremental resources, deploying them
to meet regulatory norms, steering through statutory processes and obtaining regulatory and shareholders‘
approvals.

Present Goals and Targets of ICICI Bank

1. To leverage the strengths of the merged entity to deliver value to stakeholders.

2. To focus on maximizing economic value of assets through innovative solutions and aggressive
recovery actions.

63
3. To adopt global best practices to deliver financial solutions to their customers to convert India-linked
banking opportunities in the selected international markets.

4. To capitalize on new business opportunities, leverage their brand & distribution capability, proactively
adopt technology and develop human capital.

64
6.4 ISSUES & CHALLENGES IN UNIVERSAL BANKING

I. Challenges in Universal Banking:

There are certain challenges, which need to be effectively met by the universal banks. Such
challenges need to build effective supervisory infrastructure, volatility of prices in the stock market,
comprehending the nature and complexity of new financial instruments, complex financial structures,
determining the precise nature of risks associated with the use of particular financial structure and
transactions, increased risk resulting from asymmetrical information sharing between banks and
regulators among others. Moreover norms stipulated by RBI treat DFIs at par with the existing
commercial banks. Thus all Universal banks have to maintain the CRR and the SLR requirement on the
same lines as the commercial banks. Also they have to fulfill the priority sector lending norms applicable
to the commercial banks. These are the major hurdles as perceived by the institutions, as it is very
difficult to fulfill such norms without hurting the bottom-line. There are certain challenges, which need to
be effectively met by the universal banks. Such challenges include weak supervisory infrastructure,
volatility of prices in the stock market, comprehending the nature and complexity of new financial
instruments, complex financial structures, determining the precise nature of risks associated with the use
of particular financial structure and transactions, increased risk resulting from asymmetrical information
sharing between banks and regulators among others.

II. Issues of concern for Universal Banking:

1. Deployment of capital:

If a bank were to own a 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 bank will have greater authority
to intercede in the management of the firm as dividend and interest payment performance deteriorates.

2. Unhealthy concentration of power:

In many countries such a risk prevails in specialized institutions, particularly when they are
government sponsored. Indeed public choice theory suggests that because Universal Banks serve diverse
interest, they may find it difficult to combine as a political coalition – even this is difficult when number
of members in a coalition is large.

65
3. Impartial Investment Advice:

There is a lengthy list of problems, involving potential conflicts between the bank‘s commercial and
investment banking roles. For example there may be possible conflict between the investment banker‘s
promotional role and commercial banker‘s obligation to provide disinterested advice. Or where a
Universal Bank‘s securities department advises a bank customer to issue new securities to repay its bank
loans. But a specialized bank that wants an unprofitable loan repaid also can suggest that the customer
issues securities to do so.

CURRENT ISSUES:

UNIVERSAL BANKING- Rising Popularity

As competition intensifies banks are likely to morph into financial supermarkets. Leading the pack is
Universal banks, which offer a wide gamut of services targeted at a broader customer base. Their services
range from commercial banking and investment banking to insurance and mobile banking. The
popularity of universal banks has been on the rise. Few years ago, investment banks like JP Morgan,
Morgan Stanley, Lehman Brothers and Merrill Lynch were the leaders in managing G-3 currency bond
deals. But times have changed. Today, universal banks like Citigroup, Deutsche Bank and Barclays
Capital, are dominating the markets. By gobbling up smaller banks, these banks have transformed
themselves into universal banks in Asia. This has resulted in higher capital costs for companies in Asia.

1. Relationship Business:

Banking has always been a relationship business. Universal banking, focuses on fostering better
relationships with customers, which is used a retention tool. Universal banks can also give advantage of
lower fees to a customer who gets all his banking needs from the same bank, be it purchase of foreign
exchange, managing pension funds or underwriting bonds etc. By acting as lender and underwriter,
universal banks are in a better position to understand how a secondary stock offering or an acquisition
will affect critical ratios and covenants in loan agreements. And, since banks conduct due diligence before
making a loan, they can jump in quickly if a corporation wants to have a last-minute junk-bond offering.

In Asia, bankers do have relationship lending but their approach is based on loan tying. If the bank loses
money on its loans, it recoups its capital from other business driven out of the lending process. In
contrast, the universals decide, after carefully considering the returns on capital. As long as the required
return from the relationship transaction is in line with their projections, universals go in for loan tying. As
opposed to this, investment banks consider returns purely on cost basis. They are more interested in

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synchronizing the costs of a particular department with the fees charged in the deal. So, while universal
banks have the leverage to subsidize their fees with relationship loans investment banks stand deprived.

2. Universals' practice in Asia:

Universals constantly look to lower their fees to grab a deal. They create special purpose entities,
which allow them to write off risky assets. These special purpose entities help universals create capital
against them. The proceeds from these kinds of activities enable them to charge lesser interest for
extended loans. Universals like HSBC and Standard Chartered have dominated the corporate market for
over three years. The capital markets have put the emphasis back on lending. Asia's loan volumes have
surpassed volumes of equity and equity-linked issuance in 2002, and corporate loan volume is much
higher than corporate bond issuance. This has helped universal banks make their presence in the market.

Citigroup, HSBC, Standard Chartered, ING, Bank of America and ABN AMRO make wide use of
special purpose entities for the simple reason that these entities will help them exploit a regulatory
loophole in their funding. These entities allow banks to transfer loans from the balance sheet into a
vehicle that transforms them into capital-generating assets. Since the special purpose entities remain in
the bank‘s possession, they offset loan costs at below-market rates. This strengthens the banking
relationship and also the risk tied to the underlying asset disappears.

3. Future of universal banks in Asia:

Universal institutions such as HSBC, Citigroup, Standard Chartered, ABN AMRO, BNP and Barclays
are increasingly dominating loan markets. The specialized investment banks don't have access to a
commercial bank's varied deposits to lend from. These banks tend concentrate at their returns on equity.
However, investment banks like UBS, which have massive balance sheets, have become very selective
about their lending in Asia. Even universal banks like Deutsche Bank are scaling down due to pressure in
its home. Universal banks tend to bond their relationship lending with successful companies. The
investment banks are under increasing pressure to lend money the way the universals do. A three-year
collapse of equity markets of Asia is making its impact on corporate capital structures. The regulatory
considerations also affect the functioning of the business.

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6.5 THE FUTURE TREND OF UNIVERSAL BANKING IN DIFFERENT
COUNTRIES

Universal banks have long played a leading role in Germany, Switzerland, and other Continental
European countries. The principal Financial institutions in these countries typically are universal banks
offering the entire array of banking services. Continental European banks are engaged in deposit, real
estate and other forms of lending, foreign exchange trading, as well as underwriting, securities trading,
and portfolio management. In the Anglo-Saxon countries and in Japan, by contrast, commercial and
investment banking tend to be separated. In recent years, though, most of these countries have lowered
the barriers between commercial and investment banking, but they have refrained from adopting the
Continental European system of universal banking. In the United States, in particular, the resistance to
softening the separation of banking activities, as enshrined in the Glass- Steagall Act, continues to be
stiff.

In Germany and Switzerland the importance of universal banking has grown since the end of World War
II. Will this trend continue so that universal banks could completely overwhelm the specialized
institutions in the future? Are the specialized banks doomed to disappear? This question cannot be
answered with a simple "yes" or "no". The German and Swiss experiences suggest that three factors will
determine future growth of universal banking.

First, universal banks no doubt will continue to play an important role. They possess a number of
advantages over specialized institutions. In particular, they areable to exploit economies of scale and
scope in banking. These economies are especially important for banks operating on a global scale and
catering to customers with a need for highly sophisticated financial services. As we saw in the preceding
section, universal banks may also suffer from various shortcomings. However, in an increasingly
competitive environment, these defects will likely carry far less weight than in the past.

Second, although universal banks have expanded their sphere of influence, the smaller specialized
institutions have not disappeared. In both Germany and Switzerland, they are successfully coexisting and
competing with the big banks. In Switzerland, for example, the specialized institutions are firmly
entrenched in such areas as real estate lending, securities trading, and portfolio management. The
continued strong performance of many specialized institutions suggests that universal banks do not enjoy
a comparative advantage in all areas of banking.

Third, universality of banking may be achieved in various ways. No single type of universal banking
system exists. The German and Swiss universal banking systems differ substantially in this regard. In
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Germany, universality has been strengthened without significantly increasing the market shares of the big
banks. Instead, the smaller institutions have acquired universality through cooperation. It remains to be
seen whether the cooperative approach will survive in an environment of highly competitive and
globalized banking.

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 CHAPTER 7

7.1 FINDING

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6.2 REFERENCE

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