STUDY ON UNIVERSAL BANKING PRODUCT

INTRODUCTION
The commercial banks in India had been performing the traditional banking services of accepting deposits and distributing short term loans and working capital finance to individuals, industry, and trade and agriculture along with providing some ancillary services. But due to the implementation of financial sector reforms and in the globalization era banks are provided with multifarious products and services for their customers less than one roof. The Universal Banking is one of the latest functional forms of banking. Its aim is to get ma imum profit by way of earning from interest! fees based income and commission received through various diversified financial services. Universal Banking refers to those banks which offer a wide range of financial services in addition to traditional banking of accepting deposits and providing loans and advances. The additional services covered are mutual fund, insurance, leasing, advisory services and a number of investment products available under universal banking. It seeks to provide the entire gamut of financial products under one roof and reflects the global convergence between commercial banks, investment banks and insurance companies. This is an attempt by banks to fulfill the lifelong needs of the customers by following the cradle"to"grave concept. The principle of #Universal Banking# is a desirable goal for all the countries and some progress has already been made by permitting banks to diversify into investments and long"term financing and the $%Is to lend for working capital etc. &owever, banks have certain special characteristics and working culture and as such any dilution of 'BI(s prudential and supervisory norms for conduct of banking business would be inadvisable at this stage. %urther, any conglomerate, in which a bank is partner, should be sub)ect to a consolidated approach to supervision and regulations imposed by 'eserve Bank of India

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OBJECTIVE OF THE STUDY

The core ob)ective of this study is to e plore potential of multipurpose financial institutions * universal banking in respect to Indian market and their future in long run in deregulated an intensified competition among banks and form of non banking financial intermediaries. In addition, will analyze the strength, weakness, opportunity and threat of Universal Banking +UB, i

RESEARCH METHODOLOGY
The study is carried out to make -ualitative and comprehensive evaluation of emerging and most preferred Universal Banking +UB, concept in India. %or the purpose descriptive research design +observational method . case" study method, has been adopted which is based on the secondary data and the secondary sources of data were the various websites, published annual reports and literatures of the banking companies, 'BI annual report, I/% annual . periodical reports and academic )ournals.

Universal Banking Meaning

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Universal banking is a combination of 0ommercial banking, Investment banking, $evelopment banking, Insurance and many other financial activities. It is a place where all financial products are available under one roof. 1o, a universal bank is a bank which offers commercial bank functions plus other functions such as /erchant Banking, /utual %unds, %actoring, 0redit cards, &ousing %inance, 2uto loans, 'etail loans, Insurance, etc Universal banking is done by very large banks. These banks provide a lot of finance to many companies. 1o, they take part in the 0orporate 3overnance +management, of these companies. These banks have a large network of branches all over the country and all over the world. They provide many different financial services to their clients. ln India, two reports in 4556 mentioned the concept of universal banking. They are, the 7arasimham 0ommittee 'eport and the 1.&. 8han 0ommittee 'eport. Both these reports advised to consolidate +bring together, the banking industry through mergers and integration of financial activities. That is, they advised a combination of all banking and financial activities. That is, they suggested a Universal banking. In 9:::, I0I0I asked permission from 'BI to become a universal bank. 'BI wants some big domestic financial institutions to become universal banks. Universal Banking is a multi"purpose and multi"functional financial supermarket +a company offering a wide range of financial services e.g. stock, insurance and real"estate brokerage, providing both banking and financial services through a single window.

De!ini"i#n #! Universal Banking;

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2s per the <orld 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 !orporate "overnance 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 . 0orporate 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. &owever in practice the term (universal banking( refers to those banks that offer a wide range of financial services, beyond the commercial banking functions like /utual %unds, /erchant Banking, %actoring, 0redit 0ards, 'etail loans, &ousing %inance, 2uto loans, Investment banking, Insurance etc. This is most common in =uropean countries. %or e ample, in 3ermany commercial banks accept time deposits, lend money, underwrite corporate stocks, and act as investment advisors to large corporations. In 3ermany, there has never been any separation between commercial banks and investment banks, as there is in the United 1tates.

THE CONCE$T OF UNIVERSAL BAN%ING

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The entry of banks into the realm of financial services was followed very soon after the introduction of liberalization in the economy. 1ince the early 455:s structural changes of profound magnitude have been witnessed in global banking systems. >arge scale mergers, amalgamations and ac-uisitions 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 ma imize economies of scale and scope by building the production of financial services organization called Universal Banking. By the mid"455:s, all the restrictions on pro)ect financing were removed and banks were allowed to undertake several in"house activities. 'eforms in the insurance sector in the late 455:s, and opening up of this field to private and foreign players also resulted in permitting banks to undertake the sale of insurance products. 2t present, only an (arm(s length relationship between a bank and an insurance entity has been allowed by the regulatory authority, i.e. I'$2 +Insurance 'egulatory and $evelopment 2uthority,. The phenomenon of Universal Banking as a distinct concept, as different from 7arrow Banking came to the forefront in the Indian conte t with the 7arsimham 0ommittee +4556, and later the 8han 0ommittee +4556, reports recommending consolidation of the banking industry through mergers and integration of financial activities.

UTILITY OF UNIVERSAL BAN%ING

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Universal banking concept due to its effective features, efficient economic services, high output, lower cost and better products and offerings has gained stupendous success and became popular all over the world in short period of time. In global scenario financial institution have freedom to choose the size and products mi and offering of its operations and activities to optimize the use of their available resources. Its large size and range of operations provide economy of scale and greater scope for better utilization of resources. Universal banking en)oys advantage of avoiding wasteful marketing duplication, cost less marketing research, concentrated customer feedback and development. In addition, large scales of operational activities enable the institution to optimally utilize the modern information technologies which make it more effective and competitive. In comparison to specialized financial institutions UBs are sufficiently e-uipped to undertake verities of business according to demand by shifting the surplus resources within the organization without substantial cost. It single window offering of financial products and services also consolidate its relation with customers which ultimately result growth in business as customer prefers to do business with universal banks because they gets services at one place.

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A&van"ages #! 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. /any 0ommittees and reports by 'eserve Bank of India are in favor of Universal banking as it enables banks to e ploit economies of scale and scope. Profitable Diversions. By diversifying the activities, the bank can use its e isting e pertise in one type of financial service in providing other types. 1o, it entails less cost in performing all the functions by one entity instead of separate bodies. Resource Utilization. 2 bank possesses the information on the risk characteristics of the clients, which can be used to pursue other activities with the same clients. 2 data collection about the market trends, risk and returns associated with portfolios of /utual %unds, diversifiable and non diversifiable risk analysis, etc, is useful for other clients and information seekers. 2utomatically, a bank will get the benefit of being involved in the researching Easy Marketing on the Foundation of a rand !ame. 2 bank(s e isting branches can act as shops of selling for selling financial products like Insurance, /utual %unds 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. "ne#sto$ sho$$ing. 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. %nvestor Friendly &ctivities# 2nother manifestation of Universal Banking is bank holding stakes in a form ; a bank(s e-uity holding in a borrower firm, acts as a signal for other investor on to the health of the firm since the lending bank is in a better position to monitor the firm(s activities.

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Inves"#rs' Tr(s" ; Universal banks hold stakes +e-uity shares, of many companies. These companies can easily get other investors to invest in their business. This is because other investors have full confidence and faith in the Universal banks. They know that the Universal banks will closely watch all the activities of the companies in which they hold a stake.

Disa&van"ages #! Universal Banking

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'rey &rea of Universal ank. The path of universal banking for $%Is is strewn with

obstacles. The biggest one is overcoming the differences in regulatory re-uirement for a bank and $%I. Unlike banks, $%Is are not re-uired to keep a portion of their deposits as cash reserves. !o E($ertise in )ong term lending. In the case of traditional pro)ect finance, an area where $%Is tread carefully, becoming a bank may not make a big difference to a $%I. ?ro)ect finance and Infrastructure finance are generally long" gestation pro)ects and would re-uire $%Is to borrow long" term. Therefore, the transformation into a bank may not be of great assistance in lending long"term. !P& Problem Remained %ntact. The most serious problem that the $%Is have had to encounter is bad loans or 7on"?erforming 2ssets +7?2s,. %or the $%Is and Universal Banking or installation of cutting"edge"technology in operations are unlikely to improve the situation concerning 7?2s Di!!eren" R(les an& Reg(la"i#ns ; Universal banking offers all financial products and services under one roof. &owever, all these products and services have to follow different rules and regulations. This creates many problems. %or e.g. /utual %unds, Insurance, &ome >oans, etc. have to follow different sets of rules and regulations, but they are provided by the same bank. E!!e)" #! !ail(re #n Banking S*s"e+ ; Universal banking is done by very large banks. If these huge banks fail, then it will have a very big and bad effect on the banking system and the confidence of the public. %or e.g. 'ecently, >ehman Brothers a very large universal bank failed. It had very bad effects in the U12, =urope and even in India. M#n#,#l* ; Universal banks are very large. 1o, they can easily get monopoly power in the market. This will have many harmful effects on the other banks and the public. This is also harmful to economic development of the country. C#n!li)" #! In"eres" ; 0ombining commercial and investment banking can result in conflict of interest. That is, 0ommercial banking versus Investment banking. 1ome

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banks may give more importance to one type of banking and give less importance to the other type of banking. &owever, this does not make commercial sense

GLOBAL VIE- REGARDING UNIVERSAL BAN%ING

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In respect of growing economic liberalization, globalization, financial deregulation and digitalization, competitiveness has increased in almost every sector of the economy including financial sector. %inancial institutions in order to protect and consolidate their presence and market share, to ensure future growth, to arrest performance deterioration, to avail the advantage of emerging opportunities, to retain the e isting customers and to attract new customers are offering wide array of customized products and services in convenient atmosphere at economical rate under one roof since the beginning of 9:th century. $ue to 3lass" 1teagall 2ct, 45@@ it became impossible for the organization to have combined financial activities. The 2ct prohibited banks for combining investment and commercial banking activities due to serious conflict of interests of commercial and investment banking which ultimately slowed the growth of such banks and financial institutions. But banks in the U12 started adopting the system in the late 455: and 0itigroup the financial giant took the lead in this regard under the e isting 3lass" 1teagall 2ct. Universal banking in =urope is traditional and principal financial institutions in these countries offer entire range of banking services. 0ontinental =uropean banks are normally engaged in depositing, real estate and other related lending, foreign e change, trading and underwriting. UB in %rance, 3ermany and 1witzerland played instrumental role in maintaining the safety of financial system and also ?rotected 0entral bank against the e cessive demands as the lender of last resort due to their long presence, practices, e perience and e pertise. In countries like 2ustralia, 2ustria, %inland, %rance 3ermany, &ong 8ong, $enmark, 1weden and ?oland banks are permitted to undertake in"house commercial banking and investment banking business. But countries like U.8, Brazil, /e ico, Aapan, 0anada, 8orea, 7ew Bealand, 7orway, 7etherland, and Thailand have adopted conglomerate route by setting subsidiaries to perform diversified business activities. 2ccept Aapan and 8orea banks in these countries can also promote insurance business through their established subsidiaries. The 2nglo" 1a on countries and Aapan later adopted 0ontinental =uropean 1ystem of UB. In 0hina depositing and lending was the central business activity but big and ambitious commercial lenders are now opting non banking financial business territories of trust companies and e-uity funds and in coming time UB will become the new hallmark of 0hinese financial market. 1wiss banking system works as UB system, all the banks provides all kind of banking services like credit * lending business, assets management and investment financial analysis.
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Source$ %he &nduring 'arriage of Investment and !ommercial Banking (ug )*th (+,)+

EMERGENCE OF UNIVERSAL BAN%ING IN INDIA

2fter adoption of liberalization, privatization and globalization India government adopted new economic policy in order to become competitive and world class global market. Thus, under pressures of international financial liberalization policy correction were made and
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financial reforms were introduced and ado domestic and global marketplaces which was herculean task. 2s Indian commercial banks were mostly government owned and follows British banking norms and operates in protected economy. In highly administrated regime discretion of management was limited due to which risk parameters in general were hazy and not -uantifiable. %urther, astonishing and stupendous growth of banks and banking operations during post nationalization period created operational inefficiency and irregularities which resulted losses of control over widely spread branches and lead rise in operational cost, accumulation of degraded -uality of assets, decline in profitability, high monitoring arrears and reconciliation. $ue to all these inefficiency competitive effectiveness of banks was at low ebb. 0ustomer care and services was mirage and they were most dissatisfied relative of administrative banks. $uring the period Indian financial strength, operational efficiency and effectiveness were not up to international standard and thus it became obvious for policy"makers to introduced intermediaries in order to bring Indian financial market at par with international standard. ted to match the pace of growth, to consolidate and improve their competitive position in both To cater the need of growing demand of long term resources at concessional terms Indian financial institutions comprising $evelopment %inancial Institutions +$%Is, and 'efinancing Institution came into e istence and short term business were catered by commercial banks in general. In present highly volatile and competitive domestic . global market, ruled by finicky customers and fre-uently changing demands has made operation of specialized institutions very difficult. $ue to continuous growth in 7?2s, drastically declining profitability and dearth of avenues for the financial institutions in the wake of declining market sentiments it became impossible for them to make change in their operation according to the demand without incurring substantial risks of future. Thus, in respect to e-uate global standard of financial product and services, to improve customer services, to minimize the gap, to improve the performance of both categories of financial institutions, to make them self reliant, to strengthen the banking system and improving their performance parameter and profitability, the 'BI, has set a vision and policy. To fulfill the vision and the gap under these prevailing circumstances ac-uisition of a universal banking +UB, structure was considered an effective and strategic mechanism. %urther, danger of administrated banks survival speeded the processes. It has been considered by the policy makers that emergence of universal banks will accelerate economic growth as it assists in strengthening the alliance between corporate and banks. It
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has also been considered that a movement into universality is likely to promote consolidation in a healthy manner and hence should be encouraged for the betterment of overall economical growth. In order to adopt universal banking as an alternative to administrated Indian banking the problem of rationalizing and harmonizing the relative roles of these e isting institutions needed to be strategically defined by the government and 'BI which is an uphill task and re-uired perspicacious investigation for better future into +a, how $%I will raise long term resources at reasonable cost in competitive market +b, can short term resources through traditional banking route help the $%Is +c, is conversion of $%Is into universal banking due to e isting problem and growing competition faced by them +d, how $%Is will fulfill legal re-uirement of entry conditions which are applicable to the banks in case of conversion into universal banking +e, minimum and ma imum transition time period and approach +f, $%Is if converted then what would be the appropriate regulatory regime for universal banks +g, what kind of product and services $%Is and commercial banks will provide after converting into universal bank +h, up to what e tent $%Is and commercial banks are capable to carry on universal banking activities in open competition. To achieve holistic vision and to evolve an effective, efficient, resilient, and vibrant, customer oriented financial system ac-uisition of a #universal banking by converting $%Is and commercial banks has been endorsed by the policy makers and for the purpose 'eserve Banks of India constituted working committee under 1hri 7arsimaham and later constituted working group on $ecember 6, 455C under the chairmanship of 1hri 1.&. 8han to look into the issue and bring more clarity in the respective roles, structure and operation of $%Is and commercial banks for greater harmonization of facilities and obligation and recommend changes to strengthen the organization, human resources, risk management practice and other relevant issues in the wake of capital account convertibility. 2fter e tensive analyses of the Indian financial market and e isting market players under all circumstances and futuristic probabilities recommendation were made and later final policy been drafted and implemented. Both the committee recommended for the betterment that the approach to adopt universal banking should be made keeping domestic and global market! e perience and re-uirement! there should be only two categories of financial institutions in term of institutional structure of the capital market viz., banks and non banking financial
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intermediaries +7B%0s,, in long run depending upon the choice $%Is will have to convert itself into universal banks or 7B%0s, in the prevailing institutional infrastructure $%Is will be en)oying the special niche until the long term debt market improved in term of li-uidity and depth, the $%Is under the privilege of freedom can remain $%Is and -uestion of their transformation into bank will be time bond and should be transformed within specified period of time of five years after detailed e amination by the 'BI on case to case basis, permission to set up fully owned subsidiary could also be considered by 'BI if in case $%I chose to promote banking services by itself through a wholly owned subsidiary route, $%I would be categorized as a 7B%0 if it failed to ac-uire a banking license within stipulated period of time, banks and $%I can go for positive and lucrative mergers. 'ecognizing the overlapping and undue interference of regulation and regulatory body the 8han committee suggested that to ensure uniformity in regulatory treatment distinct and effective regulations should be established to supervise and coordinate the activities of the multiple regulation. In the year 9::: the issue of universal banking +UB, resurfaced when I0I0I discussed with 'BI about the time frame and possible option for transforming itself into a universal bank. 'BI also later spelt out to ?arliamentary 1tanding 0ommittee on %inance and its proposed policy for UB in which it allowed domestic financial institutions to become universal bank case by case. %urther, 'BI asked interested %Is to convert itself into a universal bank and for the discussion and consideration submit their plan for transition. The submitted plan should be prepared to fully conform to all prudential, regulatory and supervisory norms which are applicable to banks over the proposed period.

Universal Banking in In&ia

The woes of the public sector banks in India till date relate to handling volumes, in the areas of transactions or staff complement or branch offices. ?ost nationalization, mass banking sans commercial or professional goals, indiscreet branch e pansion, lack of networking, wide gaps*inefficiency at the levels of control apart from environmental impacts, had contributed to their present status. The financial institutions in the past were only for Dlong term( both on the assets and liabilities sides while commercial banks catered to the Dshort
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term( businesses in India. There was a marked demarcation, though not a D0hinese wall( between these two institutions. <ith the advent of market economy, the gap is getting closed day by day through the concept of Duniversal banking(. Though it was is in the air for sometime but the rising 7?2s and dearth of avenues for resources for the financial institutions and commercial banks in the wake of falling market sentiments in the recent past had accelerated this process. 8eeping this in mind, 'BI appointed a working group on 6th $ec. 455C under the chairmanship of 1hri 1.&. 8han with the purpose of bringing about more clarity on the role of commercial banks and $%Is in India. In addition to this, the report of the committee on banking sector reforms had ma)or bearing on the issues covered by 8han 0ommittee. The suggestions of these committees have brought about a massive change in the banking system in India. The 8han working group suggested that $evelopment %inancial Institutions +$%Is, should convert ultimately into either commercial banks or non" banking financial companies. It holds the view after considering various factors in this changed scenario that $%Is should be allowed to become banks at the earliest. 'BI released a ($iscussion ?aper( in Aanuary 4555 for wider public debate. The feedback on this discussion paper indicated that though universal banking is desirable from the point of view of efficiency of resource use, yet cautious approach should be adopted in moving towards such a system by banks and $%Is in India. The ma)or areas which re-uire the attention of the policy makers are the status of financial sector reforms, the state of preparedness of the concerned institutions, the evolution of the regulatory regime and above all a viable transition path for the financial institutions planning of moving in the direction of universal banking. 0ommercial banks en)oy long term relationship with their customers as compared to other financial institutions. 1BI and some other ?ublic 1ector Banks have also started to adopt the conversion path leading to Universal Banking. These banks have hired the services of e perts also by outsourcing some services to outside agencies. 7ew ?rivate 1ector Banks especially I0I0I Bank >td., 8otak /ahindra Bank >td., &$%0 Bank >td. and $evelopment 0redit Bank >td. have made strategic alliances with several foreign companies for selling the insurance products both in life as well and are moving very fast towards Universal Banking. The 'BI also spelt out to the ?arliamentary 1tanding 0ommittee on %inance, its proposed policyto enable domestic financial institutions to become universal banks. DFIs in ra)e "# )#nver" ".e+selves in"# (niversal /anks are0

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Industrial 0redit and Investment 0orporation of India +I0I0I,. Industrial $evelopment Bank of India +I$BI,. = port and Import Bank of India +=EI/ Bank,. Industrial %inance 0orporation of India +I%0I,. Industrial Investment Bank of India +IIBI,.

-.a" Universal Banking )an res(l" !#r In&ia

<ith universal banking, banks will offer a wide range of financial services, beyond solely commercial banking or investment banking. In India, banks have traditionally been prime lenders for working capital loans and $%Is financed term loans. 7ow, with $%Is told to move towards universal banking, banks have been allowed to diversify into investments and

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long"term financing, and $%Is will lend for working capital. The concept of Universal Banking will have the following effects on Indian =conomy ; 1a23 S"ar"ing "r#(/le 0 The road to Universal Banking is proving far from smooth in India. Fne ma)or impediment for %Is is the fact that they have past liabilities on which reserve re-uirements "" 1>', 0'' and priority sector advances "" have not been met. /eeting this re-uirement in its current form and level would re-uire %Is to raise huge resources from the capital market, which could give rise to li-uidity concerns. It has been suggested that reserve re-uirements apply only to the incremental liabilities, but this may not be a prudent move when the huge backlog of liabilities is not covered. The most plausible solution would be to adhere to the reserve re-uirements over a period of time to be specified by the %I. In fact, 'BI has mentioned that $%Is would need to prepare a transition path in order to fully comply with the regulatory re-uirement of a bank and such re-uests will be considered on Gcase by case basis. The position of some financial institutions moving towards universal banking is mentioned below

Servi)es #n #!!er Ins(ran)e MF Banking Mer).an" /anking Br#king

ICICI Hes Hes Hes Hes Hes

IDBI 7o Hes Hes Hes Hes

SBI Hes Hes Hes Hes Hes

HDFC Hes Hes Hes 7o Hes

LIC Hes Hes Hes 7o 7o

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Re"ail Finan)e H#(sing Cre&i"4&e/i" )ar&s Hes Hes 7o 7o Hes Hes Hes Hes Hes 7o

1S#(r)e 0 &a"a )#lle)"e& !r#+ ,(/lis.e& re,#r"s #! RBI2

/oving to universal banking may also create some pressure on the asset and liability side of balance sheets. Fn the liability side "" sources of funds +at least for banks, "" there will be increasing competition from investment alternatives such as /%s where schemes with similar li-uidity but a better return are available. Fn the asset side "" deployment of funds "" the growth of capital markets, new players and efficient investment banking have enabled corporate to raise funds directly from the market. 1/2 T.e en"r* #! ne5 /ankers 0 The shift from specialized to universal banks is not restricted to %Is only and 1BI and >I0 also can be considered universal banks. 1BI deals with /%s and investment banking, and its insurance initiative with 0ardiff 12 brings it closer to the universal bank ob)ective. 2nd >I0(s move to ac-uire a stake in 0orporation Bank makes it a serious candidate. I0I0I, which will have to raise something like 's 9:,::: crores for reserve compliance, has decided to )oin the few universal banks in India.

ICICI 5ill /ene!i" ICICI CAR 162 Ne" N$As 162 4I.J K.9 ICICI Bank 44.KC 9.45

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C#s" #! !(n&s 162 ROA 162 S,rea& 162 44.C4 :.C5 4.6@ C.CC :.69 9.::

1S#(r)e 0 &a"a )#lle)"e& !r#+ ,(/lis.e& re,#r"s #! RBI2

$RESENT STATUS OF UNIVERSALBAN%ING IN INDIA

8eeping the recommendations of 7arsimaham committee and of 8han working group +8<3,, 'BI facilitated $%Is and commercial banks through legislative amendments to undertake the diversified financial activities. To avail the opportunity and to dominate the market position, number of banks set up subsidiaries for merchant banking, mutual fund and leasing along with commencing factoring and securitization. Thus ?1Bs assumed the character of UB during the post reform period and 1BI, 2llahabad Bank, ?an)ab 7ational Bank, Bank of Broda, Uninion bank of India, Friental Bank of 0ommerce became pioneer
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under different categories. 2mong private sector banks during the initial period, the I0I0I bank, $evelopment 0redit bank >td., &$%0 bank >td., 8otak /ahendra bank have adopted aggressive approach toward universal banking and they transformed themselves from term lending into virtual universal bank in respect to provide corporate and retail financial services like lending activities, life and general insurance, personal fiancL, investment banking, private e-uity, international banking, mortgages, consumer credit, retail credit, credit cards etc. %or the purpose they entered into strategic alliance with several foreign giant insurance companies and banks to sell their products. I0I0I and I$BI adopted merger route to convert themselves into universal banks. Bank, ?an)ab 7ational Bank, Bank of Broda, Uninion bank of India, Friental Bank of 0ommerce became pioneer under different categories. 2mong private sector banks during the initial period, the I0I0I bank, $evelopment 0redit bank >td., &$%0 bank >td., 8otak /ahendra bank have adopted aggressive approach toward universal banking and they transformed themselves from term lending into virtual universal bank in respect to provide corporate and retail financial services like lending activities, life and general insurance, personal fiancL, investment banking, private e-uity, international banking, mortgages, consumer credit, retail credit, credit cards etc. %or the purpose they entered into strategic alliance with several foreign giant insurance companies and banks to sell their products. I0I0I and I$BI adopted merger route to convert themselves into universal banks.

THE ROAD AHEAD TO INDIA

Universal banking is no longer seems attractive. The financial economist advocated the modern concept of UB which offer the benefit of diversification, and enable banks to offer a full range of services to their clients are now having second thoughts. 7ow the global e perience in regard to UB is varying. It has e istence in different from in different part of the world. In some countries it prohibited commercial banks from selling insurance products, investment banking activities, taking e-uity position in borrowing firms etc. The sole idea was to mitigate risky behavior by restricting 0B to their traditional activity of accepting
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deposits and lending. /arket research in respect to UB impact has revealed different conse-uences depending upon nations economical circumstances and customer perception. In emerging economy like India some commercial economist argue that approach of adoption UB is very slow and some suggest for steady approach. 1ome -uestion that, should India can have UB if yes then from when. 1ome say that when UB are failing in developed economy, can they survive in emerging economy. But apart from all emerging thoughts, in India it still hold high esteem and customers are preferring one stop supplier for all financial products and activities, like deposit, term loans, insurance banking etc. It save transaction and other related costs and comparatively increases the speed of economic activity in general. Through effective, protected, consumer prone and futuristic regulation universal banking can be promoted with the e pectation that it will ultimately benefit the entire market participant, including them and will be able to compete in free market. %Is must be addressed about the salient operational and regulatory issues of 'BI of conversion into a universal bank. %or better control regulatory body and policy makers have to )ustify the distinction between maturity and duration. It is important because $%Is are ma)or supplier of term finance which are of longer duration and carry low interest rate with clearly defined maturity period that could be between @ years to C years and banks provide short term finance with variably high interest rate and generally do not have definite maturity dates. It will be wise for India to transform $%Is into commercial banks in phased manner as its transition path contains several operational and regulatory issues.

STRENGTHS 7-EA%NESSES 7O$$ORTUNITIES AND THREATS 1S-OT2 OF UNIVERSAL BAN%ING STRENGTHS0

E)#n#+ies #! S)ale0 the biggest advantage of universal banking is greater economic efficiency which enables them to e ploit economies of scale by improving spread, higher output with better and diversified product range and low operating cost.

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Diversi#n #! S(r,l(s0 Through diversification of activities bank can use its overall potential e pertise optimally in providing different kind of services and can reduce cost by performing all functions by one entity rather than under separate bodies. O,"i+all* U"ili8a"i#n #! Res#(r)es0 Banks operating different function under one roof is advantageous. It can collect information like market trends, risk and return analysis of clients portfolios etc and this information can be further used to pursue other activities in order to generate additional business with clients through minimum efforts. A&van"age #! Bran& Na+e in Marke"ing0 Bank with established brand have wide network of its branches which become active point for promoting products like insurance, /utual funds etc. as branch will act as a parent company or source and will help bank to reach remotest area without any e ternal support. One $#in" S.#,,ing0 The idea of one shopping point helps customers as well as banks in saving transaction and other related costs and improvises the economic activities to a great e tent which ultimately advantageous to all participants. $r# Inves"#rs Envir#n+en" an& A)"ivi"ies0 2dopting universal banking will lead to diversification of business activities which is ultimately related to customers and thus re-uired investors friendly environment. 2part from this basic, another manifestation of UB is banks holding stakes in firms. Its e-uity holding in borrower firms indicate health of the firm to others investors and being a lending bank it have an advantage to monitor the firms activities.

-EA%NESSES0
Reg(la"#r* O/s"a)les0 The road of UB is not smooth but has many regulatory obstacles which are the real hurdles and will hamper its growth. The different regulatory re-uirement of Banks and $%Is, distinction between maturity and duration, their conversion period, funds can be kept as cash reserves by %$Is etc., needed careful e amination.

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C#+,le9 l#ng "er+ Len&ing0 0onverting into Universal Banking will diversify and increase business opportunity but pro)ect which have long gestation period like pro)ect and infrastructure finance re-uired long term borrowing which re-uires permission, market standing, e pertise to generate and control long run funds.

N$A a ,er,e"(al $r#/le+0 The most serious problem to all banking and financial institution is controlling the bad loans or non performing assets +7?2,. 3enerally most of the 7?2s come out of commodity sector loans and advances, such as te tile, steel and chemicals etc. Using technology cannot solve the problem but it re-uired proper appraisal and overall analyses by $%Is and banks before and after lending and proper use of funds and efficient working capital control by the fund users. Universal banking will add fuel in 7?2 growth due to its e pansion and diversification in activities without skilled and efficient manpower.

O$$ORTUNITIES 0
I+,r#vise $r#!i)ien)* an& ,r#&()"ivi"*0 >iberalization and globalization has led banks to cross the political boundary and become universal. The main focus will be ultimate profit rather than size of balance sheet. To increase the profit margin banks will prefer more of fee based opportunities than mobilizing deposits which will also save cost and paying interest on deposit. Being part of free economy and to survive with surplus banks have to improve their

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efficiency and productivity, which will ultimately results in new financial products and services. Gl#/al $resen)e an& Marke"0 in comparison to global giant financial institution Indian banks are far behind in terms of total asset and net worth. 1tate bank of India is the only bank which has managed place in the top 4:: banks list of G%ortune K:: based on market value, assets, sales and profit. It has also managed II rank in G%orbes 9::: list of all Indian companies. /ost of the top 4: banks in the world have much larger asset based and capital than entire Indian banking sector. To compare and to secure better position in top 4:: banks in the world Indian banks has to multiply their operation volume many fold. Traditional banking operation cannot make any difference to enhance overall profitability universal banking with wide range of financial services clubbed with commercial banking functions like factoring, mutual fund! credit cards, retail, personal loans, merchant banking etc. became essential Eli+ina"i#n #! Finan)ial Ine:(ali"* an& A,ar".ei&0 'evelation of a study conducted by 0hennai based association, 1cientific 'esearch 2ssociation for =conomics +1'2, that irrespective of large number of branch network e istence in rural and urban areas, still society lowest base like fruits and vegetable vendors, laundry services, provision stores, petty shop and tea stalls etc., are unable to avail advantage of banking services. They become victim of money lenders, pawn brokers etc. This is due to banks policy which is prone toward big entrepreneurs and do not want to lend entrepreneurs of small strata. This discrimination can be easily controlled with the help universal banking retail and personal banking services.

THREATS 0
%ing #! Finan)ial Ring0 Universal banking is presentation of banking system in modified and different form. It is legitimate marriage of $evelopment %inancial Institutions +$%Is, and commercial banks which in relation transformed into universal banking. /ergers and ac-uisitions play
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important role in establishing universal banks which is possible only with financial soundness. The biggest problem will be their size which will put the economy in a problem Mlarger the banks, the greater the effects of their failure on the system. 1ize wise universal banks will be the largest banks! their assets base, their income level and profitability make them financial empire which ultimately leads to monopoly and price distortion by manipulating interests of the bank for profit motive instead of social motive. <ith sound financial status universal banks will develop holding in other banks and indirectly will control financial business which will ultimately convert universal banks strength into weakness. $ue to their diversified e pansion the economy of scale will become degradation of products -uality. If UB did not managed its business prudently then deposit rates could shoot up and thus impact their margin of profits. To increase profit margin bank will switch toward riskier business which will affect assets -uality and ultimately result in disintermediation and securitization of banks business

Salien" O,era"i#nal an& Reg(la"#r* Iss(es !#r FIs "# C#nver" in"# a Universal Bank
Mini+(+ Reserve Re:(ire+en"s0 In order to convert into universal banking it is mandatory under 1ection I9 of 'BI 2ct, 45@I, and 1ection 9I of the banking regulation 2ct, 45I5, respectively for %Is to comply with the cash reserve ratio and statuary li-uidity ratio re-uirements. $er+issi/le O,era"i#nal A)"ivi"ies0
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2ll the activities which are not permissible for a bank under 1ection J+4, of the B. '. 2ct, 45I5, have to be stopped or divested by the %Is +if undertaken, after its conversion into universal bank. Dis,#sal #! N$A as ,er A)"0 2fter converting into universal bank all the immovable property ac-uired by the %Is is re-uired to be disposed of within given period of time +of C years, from the date of ac-uisition in term of 1ection 5 of the B.' 2ct. C#+,#si"i#n #! E9,er" ; <(ali!ie& B#ar&0 2fter conversion into a universal bank it will become necessary for some %Is to change the composition of the board of directors in order to ensure the compliance with the provisions of the 1ection 4: +2, of the B.' 2ct, which re-uires that at least K4N directors must have e pert knowledge and e perience. $r#.i/i"i#n #! Fl#a"ing C.arges #n Asse"s0 Banking companies are not permitted to create any floating charges on the undertaking or on any property of the company until and unless it is certified by the 'BI as re-uired under the 1ection 4I+2, of the B.' 2ct. Thus any floating charges over its assets after its conversion into a universal bank if created by %Is would re-uire ratification by the 'BI under the 1ection of 4I+2, of the B.' act

%in& #! S(/si&iaries0 1ection 45 of the 2ct permits a bank to have subsidiaries as permitted under the 1ection J+4, of B.'. 2ct. Thus, if any e isting subsidiaries of %Is are indulged in any activity which are not permitted under the 2ct, then it would become necessary for the %Is to delink itself from such subsidiaries or activities if want to convert itself into universal bank. S"a"(ar* Inves"+en" Li+i"0

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In order to secure compliance %Is have to divest e cess holdings of e-uity investment held by it in accordance to the provisions of 1ection 45+9, of the B.' 2ct, which prohibits a banks to hold e cess to the limits of @: percent of the paid up share capital of that company or @: percent of its own paid up share capital and reserves, whichever is less on its conversion into a universal bank. C##r&ina"e& Len&ing0 1ection 9: of the B.' 2ct prohibits grant of loans and advances by a bank on securities of its own shares or grants of loans or advances on behalf of any of its directors or to any firm in which its director or manager or employee or guarantor is interested. The compliance with these provisions would be mandatory after conversion of an %I to a universal bank. S"a"(ar* Li)ensing0 To carry any banking business in India after converting into universal bank, it is mandatory of %Is to obtain a banking license from 'BI under 1ection 99 of the B.'. 2ct. O/liga"#r* Bran). Ne"5#rk0 2n %I, after converting into a universal bank would have to comply with the e tant branch licensing policy of 'BI under which it is mandatory for a new bank to allot at least 9K percent of their total number of branches in rural and semi urban areas.

Asse"s in In&ia0 Under the section 9K of the B.'. 2ct an %I after its conversion into a universal bank mandatorily re-uire to ensure that at the close of its business on the last %riday of every -uarter its total assets

Ann(al Re,#r"s an& i"s S"a"(ar* F#r+a"0

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%I after converting into universal bank have to publish its balance sheet and profit and loss held in India are not less than CK percent of its total demand and time liabilities in India account in the format as set out in Third 1chedule, as prescribed for banking companies under 1ection 95 and 1ection @: of the B.' 2ct. C.ie! E9e)("ive O!!i)ers an& ".eir Managerial Re+(nera"i#n; 2ppointment and remuneration of 0hief = ecutives Ffficers have to be done according to the 'BI guidelines. In case of conversion into universal bank it re-uires review and approval of 'BI in terms of 1ection @K B of the B.' 2ct. Through this 1ections 'BI fi remuneration of the 0hairman and /anaging $irector of a Bank considering the profitability, net 7?2s and other financial parameters. This 1ection clearly dictates that prior approval of 'BI is must for appointment of 0hairmen and /anaging $irector. De,#si" Ins(ran)e; It is statuary obligation on an %I, to comply with the re-uirement of compulsory deposit insurance from $I030 +as applicable to the bank, up to a ma imum of 's. 4 lakh per account on its conversion into a universal bank. A(".#ri8e& Dealer=s an& Re:(ire& Li)ense; 1ome %Is to undertake transactions necessary for or incidental to their prescribed functions have to take or hold restricted 2$ license from 'BI, = change 0ontrol $epartment. Fn their conversion into a universal bank they become eligible for full fledged authorized dealer license and would also attract the full rigor of the = change 0ontrol 'egulations 2pplicable to the banks +sub-ect to amendments time to time, including prohibition on raising resources through e ternal commercial borrowings. Len&ing "# $ri#ri"* Se)"#r; 2fter converting into Universal banking it will become applicable on %Is to fulfill the obligation of lending to the priority sector up to the prescribed percentage of their net bank credit.

$r(&en"ial N#r+s;
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The 'BI prudential norms applicable to all the financial institutions in India would be no longer be applicable on %I after their conversion into Universal Banking but the norms which are applicable to banks would become applicable on %I and it will be fully complied with.

CONCLUSION %inance and society are two side of a survival coin. Under the growing commercialization, universalization and globalization numerous financial products and services have emerged and developed perpetual relation in all sphere of life. <ith fast moving economies and growing economic appetite it became paramount for banks to adopt matching pace in order to fulfill the global social and economical needs. It has been found that in many developed economies universal banking have proved their importance and responded efficiently to the customer demand and played vital role in economic development and served as an importance source of e ternal fiancL for enterprises. Indian financial sector is orthodo and very much influenced by the British rules and is relatively banking oriented and are been the primary supplier of financial services. But now banking scenario in India has changed due to
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globalization and strategy of universal banking became dominant practice. To meet the economical obligation in changing and diversifying universal financial gala y, the Indian banking industry adopted the philosophy of Gbig size fits well and thus financial conglomerates through mergers and strategic ac-uisitions among bank and non banks have emerged and implicitly conveys the futuristic fact. In this paper, an attempt has been made to e plore potential of multipurpose financial institutions * universal banking in respect to Indian market and their future in long run in deregulated an intensified competition among banks and form of non banking financial intermediaries and in addition, have analyzed the strength, weakness, opportunity and threat of Universal Banking +UB, in Indian conte t. The study found that universalisation contributes to efficiency save cost but not significantly. The study found that universally very few universal banks have investment banking arms with enough strength to stand on their own. 2fter financial crises the investment banking arms of large size international commercial banks dominated the key market such as bonds, currencies and commodities due to decline in pure wholesale banks. It is found that private universal banks have higher efficiency and productivity in urban area due to providing large number of diversified services and financial products under one roof but have limited penetration in semi urban and remote area and paying high cost which has adversely effected their growth. 1ocial sector banks on other hand have better penetration and advantage of geographical spread but with high cost and 7?2 which impacted its margin and growth. It is found that private, foreign and public sector banks have conflict of interest. ?rivate and foreign banks have profit motive and public sector banks have social motives and thus have distinct approach and conse-uences. It is found that most of the universal banks with subscale investment banking arms will not be in position to find buyers nor they will be in position to wind down their business without incurring losses due to the contract in which they have entered that produce risk to the banks such as swaps or other derivatives which can last 9: years or more. 1uch positions and situations are not easily managed and their creators are forced to maintain hedging or managing the risks. It is also found that at a time of winding down the business it is harder to attract and retain investors and employees. 1uch kinds of problems suggest regulators ought to look for more subtle interventions than simply carving banks up. %urther regulators have to specify how big investment banks can be compared with commercial banks.
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2part from all regulatory shortcomings and odds, Indian financial market have untapped potential and have space for all competitive banks to grow. Indian banking sector day by day becoming more competitive, efficient and innovative in comparison to multinational giants. The study concludes with the fact that concept of supermarkets * multipurpose financial institutions * universal banking is progressive and competitive. UBs have played, are playing and could play a significant role in nations economic and social development and their competition will be advantageous to the end users. %uture of such banks in long run deregulated and in intensified competition is e pected to be safe. .

BIBLIOGRA$HY

www.google.com

www.wikipedia.com

www.bloomberg.com www.indiainfoline.com

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