Universal banking

Universal banking is a system of banking where banks are allowed to provide a variety of
services to their customers. In universal banking, banks are not limited to just loans,
checking and savings accounts, and other similar activities, but are allowed to offer
investment services as well.

 In practice the term ‘universal banks’ refers to those banks that offer a wide range of
financial services, beyond commercial banking and investment banking, insurance etc.
Universal banking is a combination of commercial banking, investment banking and various
other activities including insurance. This is most common in European countries. 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".

Universal Banking is a superstore for financial products under one roof. Corporate can get
loans and avail of other handy services, while can deposit and borrow. It includes not only
services related to savings and loans but also investments. For example, in Germany
commercial banks accept time deposits, lend money, underwrite corporate stocks, and act
as investment advisors to large corporations. In Germany, there has never been any
separation between commercial banks and investment banks, as there is in the United
States.

THE CONCEPT OF UNIVERSAL BANKING

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

By the mid-1990s, all the restrictions on project financing were removed and banks were
allowed to undertake several in-house activities. Reforms in the insurance sector in the late
1990s, and opening up of this field to private and foreign players also resulted in permitting
banks to undertake the sale of insurance products. At present, only an 'arm's length
relationship between a bank and an insurance entity has been allowed by the regulatory
authority, i.e. IRDA (Insurance Regulatory and 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 the Narsimham Committee (1998)
and later the Khan Committee (1998) reports recommending consolidation of the banking
industry through mergers and integration of financial activities.
RBI states that the emerging scenario in the Indian banking system points to the likelihood
of the provision of multifarious financial services under one roof. This will present
opportunities to banks to explore territories in the field of credit/debit cards, mortgage
financing, infrastructure lending, asset securitization, leasing and factoring. At the same
time it will throw challenges in the form of increased competition and place strain on the
profit margins of banks”
The evolving scenario in the Indian banking system points to the emergence of universal
banking. The traditional working capital financing is no longer the banks major lending area
while FIs are no longer dominant in term lending. The motive of universal banking is to
fulfill all the financial needs of the customer under one roof. The leaders in the financial
sector will be aiming to become a one-stop financial shop.

Universal Banking In India

In the early nineties the forces of globalization were unleashed on the hitherto protected Indian
environment. The financial sector was crying out for reform. Public sector banks which had a
useful role to play earlier on now faced deteriorating performance. For these and certain other
reasons private banking was sought to be encouraged in line with the Narasimham Committee's
recommendations. 
It would be pertinent to recapitulate the prevailing conditions in the banking industry in the early
Nineties: the nationalized sector had outlived its utility; in fact they became burdened with
unwelcome legacies; customer service had become a casualty; need for computerization,
including networking among the vast branch network was felt. Private banking in that context
was viewed a brand new approach, to bypass the structural and other shortcomings of the
public sector. A few of the new ones that were promoted by the institutions such as the IDBI and
ICICI did establish themselves, though in varying degrees, surviving the market upheavals of
the 1990.That was possible apart from other factors due to the highly professional approach
some of them adopted: it helped them stay clear of the pitfalls of nationalized banking. Yet in
less than a decade after the advent of these new generation banks, some of the successful
ones, are being forced to change organizationally and in every other way. Who benefits after
this restructuring is something that has to be asked. 
It is essential to assimilate history of banking as well as the role of the financial institutions till
recently. The branch banking concept with which we are familiar and practiced since inception is
basically on certain `protected' fundamentals. The insulated economy till the Nineties provided
comforts to public sector banks, in areas of liquidity management while in an administered
interest regime, discretion of managements was limited and consequently, the risk parameters
in these spheres were hazy and not quantifiable. The share of private sector banks which is
distinctly known as old private sector banks' established before 1994, was thus not substantial
while operations of foreign banks were also restricted. Staff orientation especially at the branch
level is a key ingredient for success and neither the older private banks nor the nationalized
banks were successful in that respect. 
The woes of the public sector banks till date relate to handling volumes, be it in the area of
transactions or staff complement or branch offices. Post nationalization, mass banking sans
commercial or professional goals, indiscreet branch expansion, lack of networking, wide
gaps/inefficiency at the levels of control apart from environmental impacts, contributed to their
present status. 
Turning to recent merger announcement between the ICICI and its more recently promoted
banking subsidiary the following become relevant. One of the main motivations has been the
need to access a low cost retail deposit base. Public sector banks, by way of contrast never had
to face such a constraint. 
Today, in a market driven economy, to face the competition, one factor is the size and hence,
mergers are advocated. Talking of the PSBs it is relevant to note that except for a build up of
savings accounts (as low cost deposits), the advantage of vast branch network is yet to be
exploited by them while on the other hand, and most of the complaints, irregularities, and
mounting arrears in reconciliation are attributable to such branch expansion. 
At the same time, this has enabled a few of the smart foreign/new private sector banks to enrich
themselves by offering cash management products, utilizing the same branch network! All these
pose a question to the recent merger of Bank of Madura - will the ICICI Bank decide to shed
unwanted, un remunerative branches? Pertinently for all banks the RBI has already provided an
exit route but there have been no takers among the public sector banks, for obvious reasons. 
Pertinent again is to note that another set of banks, namely, foreign banks prospered during all
these difficult days. Even today, these banks do not have branch network to speak of but in
terms of volume, profitability they are far ahead of the public sector banks. Only a couple of new
private sector banks have posed any challenge to them in the recent years. 
Converting into commercial banks 
Hitherto the business of the financial institutions has been confined to only `credit' with
attendant forex business (with limitations). Apart from the proportion of existing NPAs in their
balance sheets the FIs have to reckon with other important variables while moving towards
commercial banking. Looking at the existing size of the financial institutions as compared to the
bank with which merger is intended, the relatively short gestation period available to the bank to
establish itself amidst the turbulent market/competition, the scenario is quite challenging. One
might well ask what is the input from a financial institution, in a merger, to a relatively less asset
based bank. FIs have had a crucial role in the years following Independence: in the then
prevalent conditions, financial institutions built up infrastructure contributed to a better industrial
climate. The expertise in these fields may be sub served or enlarged appropriately. However is
such expertise relevant for say small, retail loans-which are promising avenues for the banks of
today? Are we looking at another type of mismatch? 
Further, it is a matter of introspection in general: in what may be termed as `conventional' or
`prudent' banking, (RBI itself had raised it in one of its circulars to banks way back in 1974) in
the context of variation in profits (for whatever reasons), the net profit is to be determined within
prudent levels, that is, in years where large increase in profits accrue, it was considered prudent
to allocate larger amounts to `inner reserves' which were consciously not disclosed in those
years. Accordingly, dividend payouts were also contained to take care of a lean period. The RBI
is empowered even now by legislation on this aspect. However, in the recent past
corporate/banks vie with each other to declare higher dividend payouts. What is worse
``creative accounting' carries this process further. For instance, a prudent banker may opt for
`written down value' method for depreciating fixed assets while some banks (including some of
the new private sector banks) opt for the straight line method whereby, profits are more with
less depreciation charged to the profit and loss account. Ironically they have been preaching to
their borrowers those salutary goals. 

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 an 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.
The Narsimham Committee II suggested that 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 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. Major areas
requiring attention are the status of financial sector reforms, the state of preparedness of the concerned
institutions, the evolution of the regulatory regime and above all a viable transition path for institutions
which are desirous of moving in the direction of universal banking.

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 explit economies of scale and scope.
 Profitable Diversions. By diversifying the activities, the bank can use its existing
expertise in one type of financial service in providing other types. So, it entails less
cost in performing all the functions by one entity instead of separate bodies.
 Resource Utilization. A bank possesses the information on the risk characteristics
of the clients, which can be used to pursue other activities with the same clients. A
data collection about the market trends, risk and returns associated with portfolios of
Mutual Funds, diversifiable and non diversifiable risk analysis, etc, is useful for other
clients and information seekers. Automatically, a bank will get the benefit of being
involved in the researching
  Easy Marketing on the Foundation of a Brand Name. A bank's existing branches
can act as shops of selling for selling financial products like Insurance, Mutual Funds
without spending much efforts on marketing, as the branch will act here as a parent
company or source. In this way, a bank can reach the client even in the remotest
area without having to take resource to an agent.
 One-stop shopping. The idea of 'one-stop shopping' saves a lot of transaction costs
and increases the speed of economic activities. It is beneficial for the bank as well as
its customers.
 Investor Friendly Activities. Another manifestation of Universal Banking is bank
holding stakes in a form : a bank's equity holding in a borrower firm, acts as a signal
for other investor on to the health of the firm since the lending bank is in a better
position to monitor the firm's activities.

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 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 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.

RBI Norms 

According to the norms specified by the RBI all universal banks have to fulfill the priority sector
lending norms. This is the main hurdle by the FIs, as satisfying this norm will directly hit their
bottom line. 

FIs deciding to convert themselves into universal banks would have to formulate strategies that
would ensure a smooth transition. The policies formulated must be in compliance with the
prudential norms that apply to such universal banks. 
Some of the issues addressed in the transition path relate to compliance with Cash Reserve
Ratio and Statutory Liquidity Ratio requirements, disposal of non-banking assets, composition of
the board, prohibition on floating charge of assets, restrictions on investments, connected
lending and banking license. 
The S.H. Khan Committee set up by the Reserve Bank of India to harmonise the roles of
development finance institutions (DFIs) and banks has come up with the concept of universal
banking, which allows them to compete with one another in all areas of business. 
In its interim report, submitted to RBI Governor Bimal Jalan, the committee argued that
distinctions between commercial and investment banking have become increasingly blurred with
banks providing both working capital and term loans to corporates and DFIs competing with
commercial banks for deposits (although they cannot accept short-term deposits). Therefore,
the committee argues, DFIs should be given banking licences eventually and until then they
should be allowed to establish 100 per cent banking subsidiaries while they continue to play
their present role. 
"Size, expertise and reach are now deemed crucial to sustained viability and future survival in
the financial sector," the report says, and recommends that managements and shareholders of
banks and DFIs be allowed to explore the possibility of gainful mergers not only of banks but
also of banks and DFIs. "However, such restructuring and consolidation... should be led by
viability and profitability considerations alone," it says. 
The Khan panel believes that the synergies unleashed by such consolidation will help Indian
institutions compete in the international financial market. Interestingly, the panel suggests that
since DFIs in India are increasingly operating on commercial as opposed to developmental
considerations, the Government/RBI should provide appropriate levels of financial support if
they are to assume any developmental obligations.
DFIs were set up with the objective of taking care of the investment needs of industries. They
have, over time, built up expertise in merchant banking and project evaluation. Yet they have
also backed bad investments and, as a result, become equity holders in defaulting enterprises
through conversion of loans into equity. Despite DFIs holding huge chunks of equity, their
directors on company boards have looked the other way when companies mismanaged their
affairs and incurred losses. Instances of DFI nominees on company boards being unaware of
violations of law by the company managements are not unheard of. ITC's violations of the
Foreign Exchange Regulation Act are a case in point. 
Nevertheless, DFIs have developed core competence in investment banking. They take a lot of
risks to prop up industries. They finance industries such as infrastructure industries, which have
long gestation periods and have contributed significantly to the country's industrialisation
process. Instead of asking DFIs to improve their asset portfolio by exiting from the boards of
companies which they finance and asking them to concentrate on their core competence, the
Khan Committee has recommended a free-for-all where banks and DFIs will compete with one
another for deposits and loan accounts. 
The panel recommended that the regulatory discrepancies between foreign and local entities
must be smoothened and that the regulatory burden must be determined solely by systemic
efficiency and risk-management concerns. The panel also suggested the establishment of a
super regulator to supervise and coordinate the activities of the multiple regulators in the
financial system. 
The panel called for a revamp of the 1993 Act on recovery of debts, legal reforms, a reduction in
the cash resereve ratio (CRR) to international levels and the abolition of statutory liquidity ratio
(SLR) and the statutory minimum of advances to certain sectors. It has called for modifications
in the definition of priority sector by excluding all infrastructure loans from the net bank credit for
the priority sector. It has suggested the creation of an alternative mechanism to finance the
priority sector. 

SALIENT OPERATIONAL AND REGULATORY ISSUES OF RBI TO BE ADDRESSED BY

THE FIs FOR CONVERSION INTO A UNIVERSAL BANK

a) Reserve requirements. Compliance with the cash reserve ratio and statutory liquidity
ratio requirements (under Section 42 of   RBI Act, 1934, and Section 24 of the Banking
Regulation Act, 1949, respectively) would be mandatory for an FI after its conversion into a
universal bank.
b) Permissible activities. Any activity of an FI currently undertaken but not permissible
for a bank under Section 6(1) of the B. R. Act, 1949, may have to be stopped or divested
after its conversion into a universal bank..

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

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

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

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

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

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

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

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

g) Restriction on investments. An FI with equity investment in companies in excess of 30

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

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

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

license from RBI under Section 22 of the B. R. Act, for carrying on banking business in
India, after complying with the applicable conditions.  

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

k) Assets in India. An FI after its conversion into a universal bank, will be required to
ensure that at the close of business on the last Friday of every quarter, its total assets held
in India are not less than 75 per cent of its total demand and time liabilities in India, as
required of a bank under Section 25 of the B R Act.
l) Format of annual reports. After converting into a universal bank, an FI will be required
to publish its annual balance sheet and profit and loss account in the forms set out in the
Third Schedule to the B R Act, as prescribed for a banking company under Section 29 and
Section 30 of the B. R. Act.   

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

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

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

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

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

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

lending to "priority sector" up to a prescribed percentage of their 'net bank credit' would
also become applicable to it.

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

of RBI for the all-India financial institutions would no longer be applicable but the norms as
applicable to banks would be attracted and will need to be fully complied with.  

THE FUTURE TREND OF UNIVERSAL BANKING IN DIFFERENT

COUNTRIES

Universal banks have long played a leading role in Germany, Switzerland,

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

In Germany and Switzerland the importance of universal banking has grown

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

First, universal banks no doubt will continue to play an important role. They

possess a number of advantages over specialized institutions. In particular,
they are able to exploit economies of scale and scope in banking. These
economies are especially important for banks operating on a global scale and
catering to customers with a need for highly sophisticated financial services.
As we saw in the preceding section, universal banks may also suffer from
various shortcomings. However, in an increasingly competitive environment,
these defects will likely carry far less weight than in the past.

Second, although universal banks have expanded their sphere of influence,

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

Third, universality of banking may be achieved in various ways. No single

type of universal banking system exists. The German and Swiss universal
banking systems differ substantially in this regard. In Germany, universality
has been strengthened without significantly increasing the market shares of
the big banks. Instead, the smaller institutions have acquired universality
through cooperation. It remains to be seen whether the cooperative
approach will survive in an environment of highly competitive and globalized
banking.
Universal Banking coupled with SWOT

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 ton an agent.

* One stop shopping

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

* 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.

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.

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 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.

References:

1) "Universal Banking by DFIs: Handy But no solution to NPAs"

     "Sanjiv Shankaran"                          "Business Line"
2) "Approach to Universal Banking"
    www.banknetindia.com
3) "Banking in the New Millennium"
    "M. Guruprasad"     (Asst. Prof in Economics)
4) "Universal Banking: the Road Ahead"
    Kamal Sehgal (IIFT)
    www. Indiainfoline.com
5) "A Financial Apartheid in informal sector: A Study"
    By Scientific Research Association for Economics, Chennai.
6) "Universal Banking – The Indian Perspective"
    Chaitnya Krishna V.
7) "Consolidation of Indian Banks – challenges"
    BNV Parthasarathi     "Professional Banker"
    (The ICFAI University Press)