TABLE OF CONTENT

SR.N TOPIC PAGE

O NO
1 EXECUTIVE SUMMARY
2
INTRODUCTION
3 HISTORY
4
DEFINITION AND CONCEPTS
5 UNIVERSAL BANKING MODEL
6 ADVANTAGES & LIMITATIONS
7 UNIVERSAL BANKING IN INDIA
8 KHAN COMMITTEE ON UNIVERSAL BANKING &
FIS
9 NEED OF UNIVERSAL BANKING IN INDIA
10 UNIVERSAL BANKING: SOLUTION TO FIS
PROBLEMS
11 APPROACH TO UNIVERSAL BANKING
12 RBI GUIDELINES
13
UNIVERSAL BANKING - CURRENT POSITION IN
INDIA
14
SWOT
16 THE FUTURE TREND OF UNIVERSAL BANKING
IN DIFFERENT COUNTRIES
17
ISSUES & CHALLENGES IN UNIVERSAL
BANKING
18 UNIVERSAL BANKING: AN OVERVIEW
19
COMMENTS/VIEWS OF EXPERTS
20 CASE STUDY
21. CONCLUSION
22. BIBLIOGRAPHY

1
 Executive Summary

The latest mantra is Universal Banking, which is combination of Commercial &

Investment Banking. The concept is most relevant in the United Kingdom and
the United States, Barclays Bank, Chase Manhattan and Citicorp are some of the
examples of it. Where historically there was a distinction drawn between
pure investment banks and commercial banks. In the US, this was a result of
the Glass-Steagall Act of 1933. In both countries, however, the regulatory barrier
to the combination of investment banks and commercial banks has largely been
removed, and a number of universal banks have emerged in both jurisdictions.
However, at least up until the global financial crisis of 2008, there remained a
number of large, pure investment banks. In other countries, the concept is less
relevant as there is not regulatory distinction between investment banks and
commercial banks. Thus, banks of a very large size tend to operate as universal
banks, while smaller firms specialised as commercial banks or as investment
banks. This is especially true of countries with a European Continental banking
tradition. Notable examples of such universal banks include Deutsche
Bank of Germany, and UBS and Credit Suisse of Switzerland.
Universal banking is the solution to FIs problems. A universal bank participates in
many kinds of banking activities and is both a Commercial bank and an Investment
bank.

The merger of ICICI and ICICI bank is probably the largest merger seen in
corporate India Industry, which has redefine banking in the highly competitive era
of globalization and liberalization. Post merger, the new entity- ICICI Bank is the
first Universal Bank in India and the second largest commercial bank in the

2
country after SBI. Financial Institutions & Insurance Companies are now merging
ahead to capture new business areas and leading towards Universal Banking.

The banking sector deregulation that took place in India during the early 1990s
posed a threat to the survival of Development Financial Institutions (DFIs). They
were cut off from the concessional funding extended by the government and were
exposed to intense competition from local and foreign banks. Over a period of
time, Industrial Credit and Investment Corporation of India Ltd. (ICICI), which
was set up as a DFI in 1955, underwent significant changes to meet these
challenges. To exploit the synergies brought by universal banking, it went in for
mergers and acquisitions and finally reverse merged with its subsidiary ICICI
Bank.

The mid-eighties marked the beginning of the shift to a buyers` market in the
banking space, and Bank of Baroda, was among the first to grasp this pressing
imperative. The bank orchestrated its business strategies around the centrality of
the customer. It diversified rapidly into the areas of merchant banking, housing
finance, credit cards and mutual funds. The strategy also entailed the sustained
development of a string of segment - specific branches entrenching operations in
profitable markets, the world over. The drive was to revamp overseas operations
and intensify structural changes across geographies to provide services across
segments with focus on the Indian Diaspora. The bank sought to take to market a
vast array of international banking and services catering to the needs of exporters
and importers in India and abroad.

UBA is the first successful merger transaction in the history of the Nigerian
banking sector and was born out of a desire to lead the sector to a new era of global
relevance by championing the creation of the Nigerian consumer finance market

3
and leading a private/public sector partnership aimed at accelerating the economic
development of Nigeria. 
The Nigeria banking industry is going through so tremendous flux. The Central
Bank’s mandate of a minimum N25 billion capitalization by December 2005
resulted in the Nigerian market witnessing consolidation activity on a large scale.
Though the UBA-STB merger was consummated during the ongoing consolidation
era, it was a strategic move by the bank to become a large regional player, with an
increased reach and synergies in terms of larger customer base and complementary
product portfolio.

For the better understanding of my project, I prepared a hypothesis. It is ‘Universal

Banking-Next milestone for Banks in the coming years’. Relevance of this
Hypothesis helped me in the conduct of the project & also gave me a better chance
to understand the topic.

4
 INTRODUCTION TO UNIVERSAL BANKING

Since the early 1990s, structural and functional changes of profound magnitude
came to be witnessed in global banking systems. Large-scale mergers,
amalgamations and acquisitions among 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 'bundling' the production of financial services. This heralded the advent
of a new financial service organization, i.e. Universal Banking, bridging the gap
between banking and financial-service-providing institutions. Universal Banks
entertain, in addition to normal banking functions, other services that are
traditionally non-banking in character such as investment-financing, insurance,
mortgage-financing, securitization, etc. Parallel, in contrast to this phenomenon,
non-banking companies too entered upon banking business. Universal banking
usually takes one of the three forms i.e. in-house, through separately capitalized
subsidiaries, or through a holding company structure. Three well-known countries
in which these structures prevail are Sweden and Germany, the UK and the US.

5
 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, hire-
purchase 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.

6
 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.

7
In the UK, a broad range of financial activities is allowed to be conducted through
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.

8
UNIVERSAL BANKING MODEL

7% 9%

6%

37%
27%
57% 59%

TREASURY
WEALTH MANAGEMENT. WEALTH MANAGEMENT.
RETAIL CORPORATE
CORPORATE RETAIL

THREE KEY BUSINESS AREAS

RETAIL BANKING: consumer loans, credit cards(top 33 US issuer),
mortgages, internet banking, ample range of deposits.

CORPORATE BANKING: a full range of products and financial services for

SMEs and corporates.

WEALTH MANAGEMENT: advise and taylored products to individual

customers, retirement plans and private banking. US$ 8Bn in AUM

9
 ADVANTAGES AND LIMITATIONS OF UNIVERSAL
BANKING

 ADVANTAGES

1. Greater economic efficiency

The main argument in favour of universal banking is that it results in greater
economic efficiency in the form of lower cost, higher output and better products.
This logic stems from the reason that when sector participants are free to choose
the size and product-mix of their operations, they are likely to configure their
activities in a manner that would optimize the use of their resources and
circumstances.

2. Economies of scale
It means lower average costs, which arise when larger volume of operations
are performed for a given level of overhead on investment. Economies of scope
arise in multi-product firms because costs of offering various activities by different
units are greater than the costs when they are offered together. Economies of scale
and scope have been given as the rationale for combining the activities. A larger
size and range of operations allow better utilisation of resources/inputs.

3. 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

10
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.

 LIMITATIONS

1. Failure Risk System

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

2. Risk of increase in Monopoly power

Historically, an important reason for limiting combinations of activities
has been the fear that such institutions, by virtue of their sheer size, would gain
monopoly power in the market, which can have significant undesirable
consequences for economic efficiency [Borio and Filosa, 1994]. Two kinds of
concentration should be distinguished, viz., the dominance of universal banks over
non-financial companies and concentration in the market for financial services.
The critics of universal banks blame universal banking for fostering cartels and
enhancing the power of large non-banking firms.

11
3. Bureaucratic and inflexible
Some critics have also observed that universal banks tend to be
bureaucratic an inflexible and hence they tend to work primarily with large
established customers and ignore or discourage smaller and newly established
businesses. Universal banks could use such practices as limit pricing or predatory
pricing to prevent smaller specialized banks from serving the market. This
argument mainly stems from the economies of scale and scope.

12
 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

13
 the transition path and strategy for smooth conversion into an universal bank
over a specified time frame.

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

14
 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.

 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
15
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 It

Suggested

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

16
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.

 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 affordable
costs.

17
 NEED OF UNIVERSAL BANKING IN INDIA

 The phenomenon of universal banking—as different from narrow banking is

suddenly in the news. With the second Narasimham 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.

 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.

 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.

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

 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.

18
 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.

 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.

 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.

 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.

 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).

 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.

19
 UNIVERSAL BANKING: SOLUTION TO FIs 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
20
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.

21
 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, Narasimham Committee's recommendation that, ultimately there
should be only banks and Restructured NBFCs can be operationalised.

22
 RBI GUIDELINES FOR EXISTING BANKS/FIs FOR
CONVERSION INTO UNIVERSL 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

23
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
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
24
 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 licence 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 east 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

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

25
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 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.

26
  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.

27
 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

28
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.

29
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

30
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.

31
 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.

32
 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)

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

33
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.

34
 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.

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.

35
 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

36
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.

37
 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.

38
 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.

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.

39
 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.
40
 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 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.
41
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.

42
 UNIVERSAL BANKING: AN OVERVIEW

Universal Banking includes not only services related to savings and loans but
also investments. However 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. If specialized banking is the other. This is most co in European
countries.
Scenario in India has also changed after the Narasimham Committee(1998)
and the Khan Committee (1998) reports recommended consolidation of the
banking industry through mergers, and integration of financial activities. Today,
the shining example is ICICI Bank, second largest bank (in India) in terms of the
size of assets, which has consolidated all the services after the merger of ICICI Ltd
with ICICI Bank. There are rumors of merger of IDBI with IDBI Bank. With the
launch of retail banking, Kotak Mahindra has also embarked on the path of
Universal banking.

43
 COMMENTS/VIEWS OF EXPERTS

 GEORGE BENSTON-THE PROFESSOR OF FINANCE AND

ECONOMICS IS A VISITING FACULTY AT UNIVERSITY OF LONDON
HAS EXAMINED CERTAIN FUNDAMENTAL ISSUES IN DETAIL IN HIS
STUDIES, WHICH ARE STATED BELOW: -

 Universal bank raises the risk of financial instability

Universal Banks tend to grow so large that failure of one can cause economic
distress and that narrow, specialized banks may be better. However, the lessons
from savings and loans societies scandal do not support this. In fact, neither theory
nor experience seems to validate the assumption that limitations on banking – like
the separation of commercial and investment banking – either were or more likely
to be effective in reducing risk-taking. Incidentally, most of the activities in which
universal banks deal are no more risky than the ordinary commercial bank
activities. A study of the combined effect of commercial and investment banking
on risk reveals that while the returns would be considerably higher, the risks would
only be strictly higher. The residual risks regarding a depository institution should
be addressed by high capital adequacy, replacing the economic capital before it
falls below zero etc., (as against book capital)

 Universal Banks deploy capital as efficiently as the stock market

While there is some merit in this, the evidence in support is quite weak. It has
been observed that the Universal banks have certain advantages in restructuring
firms. The transaction costs of takeovers and mergers are high in stock market
system and night well is lower with a universal bank.

44
 Universal Banks Create Unhealthy A Concentrate Of Power
In fact, we have seen in many countries, such a risk prevails in specialized
institutions, particularly when they are government sponsored. Indeed, public
choice theory suggests that UB serve diverse interest, they find it difficult to
combine as a political coalition-even this is difficult when the number of members
in coalition is large.

45
 Case Study

Bank Profile
United Bank for Africa PLC (UBA) is the product of a merger of two of
Nigeria’s top five banks, UBA and Standard Trust Bank Plc (STB). Today,
consolidated UBA is largest financial services institution in sub- Saharan Africa
(excluding South Africa) with a balance sheet size in excess of 400 billion naira
(approx. US$ 3 bn), and over two million active customer accounts. With over 400
retail distribution outlets across Nigeria, UBA also has a presence in New York,
Grand Cayman Island and aspires to expand within Sub-Saharan Africa.

Key Business Drivers

UBA is the first successful merger transaction in the history of the Nigerian
banking sector and was born out of a desire to lead the sector to a new era of global
relevance by championing the creation of the Nigerian consumer finance market
and leading a private/public sector partnership aimed at accelerating the economic
development of Nigeria. 
The Nigeria banking industry is going through so tremendous flux. The Central
Bank’s mandate of a minimum N25 billion capitalization by December 2005
resulted in the Nigerian market witnessing consolidation activity on a large scale.
Though the UBA-STB merger was consummated during the ongoing consolidation
era, it was a strategic move by the bank to become a large regional player, with an
increased reach and synergies in terms of larger customer base and complementary
product portfolio.

46
Solution Overview
In its determination to continue to leverage on a robust IT infrastructure
designed to achieve excellent service delivery to its teeming clientele, UBA opted
for Finacle universal banking solution, comprising core banking, corporate e-
banking, alerts, CRM and treasury solutions from Infosys in October 2005. The
relationship between Finacle and UBA dates back to 5 years ago when STB
changed from its existing Globus system to Finacle. Finacle core banking solution
helped power STB’s rapid growth at the turn of the millennium and its emergence
as one of Nigeria’s leading new generation banks. In addition STB is credited to
have spearheaded the deployment of ATM's and internet banking in the Nigeria
market riding on Finacle.

Reaping the Benefits

To power ahead in the dynamic post-consolidation banking landscape of Nigeria,
UBA requires a technology partnership that transcended a typical customer-vendor
relationship. From the STB experience, what emerged was the impeccable delivery
track record of the Infosys implementation team. Recall that the bank (STB)
completed a 65-branch roll out in quick time, less than 6 months, and a far cry
from the 18-24 month implementation cycles prevalent in the country then. UBA
also needs to capitalize on an integrated channel strategy that incorporated e-
banking and CRM, among others.
Finacle will be deployed at UBA in a phased manner. In the first phase, core
banking, treasury & e-banking solutions will be implemented. Finacle CRM
solution would be deployed in the subsequent phase. It is expected to be a multi-
country rollout, and the deployment extended to the US, UK & other countries
where UBA has a presence.

47
 Case Study

Bank Profile

Established in 1994, ICICI Bank is today the second largest bank in India and
among the top 150 in the world. In less than a decade, the bank has become a
universal bank offering a well diversified portfolio of financial services. It
currently has assets of over US$ 79 billion and a market capitalization of US$ 9
billion and services over 14 million customers through a network of about 950
branches, 3300 ATM's and a 3200 seat call center (as of 2007). The hallmark of
this exponential growth is ICICI Bank’s unwavering focus on technology.

Key Business Drivers

ICICI Bank was set up when the process of deregulation and liberalization had just
begun in India and the Reserve Bank of India (India’s central bank) had paved the
way for private players in the banking sector, which at that time was dominated by
state-owned and foreign banks. Serving the majority of the country’s populace,
state owned banks had a large branch network, with minimal or no automation and
little focus on service. Foreign banks, on the other hand, deployed high-end
technology, had innovative product offerings, but had a very small branch network
that serviced only corporate's and individuals with high net-worth. Sensing an
untapped opportunity, ICICI Bank decided to target India’s burgeoning middle
class and corporate's by offering a high level of customer service and efficiency
that rivaled the foreign banks, on a much larger scale, at a lower cost. A crucial
aspect of this strategy was the emphasis on technology. ICICI Bank positioned
itself as technology-savvy customer friendly bank.
48
  To support its technology focused strategy, ICICI Bank needed a robust
technology platform that would help it achieve its business goals. After an intense
evaluation of several global vendors, ICICI Bank identified Infosys as its
technology partner and selected Finacle, the universal banking solution from
Infosys, as its core banking platform. An open systems approach and low TCO
(Total Cost of Ownership) were some of the key benefits Finacle offered the bank.
Unlike most banks of that era, ICICI Bank was automated from day one, when its
first branch opened in the city of Chennai. Some of the reasons cited by the bank
for its decision to select Finacle includes Finale’s future-proof technology, best-of-
breed retail and corporate banking features, scalable architecture and proven
implementation track record.

Solution Overview

One of the biggest challenges for Finacle was ensuring straight through
processing (STP) of most of the financial transactions. With the ICICI group
having several companies under its umbrella, Finacle needed to seamlessly
integrate with multiple applications such as credit cards, mutual funds, brokerage,
call center and data warehousing systems. Another key challenge was managing
transaction volumes. ICICI Bank underwent a phase of organic and inorganic
growth, first by acquiring Bank of Madura followed by a reverse merger of the
bank with its parent organization, ICICI Limited. The scalable and open systems
based architecture, enabled Finacle to successfully manage the resultant increase in
transaction levels from 400,000 transactions a day in 2000 to nearly 2.1 million by
2005 with an associated growth in peak volumes by 5.5 times. With Finacle, the
bank currently has the ability to process 0.27 million cheques per day and manage

49
7000 concurrent users.

 
Over the years, the strategic partnership between ICICI Bank and Infosys that
started in 1994 has grown stronger and the close collaboration has resulted in many
innovations. For instance, in 1997, it was the first bank in India to offer Internet
banking with Finacle’s e-banking solution and established itself as a leader in the
Internet and ecommerce space. The bank followed it up with offering several e-
Commerce services like Bill Payments, Funds Transfers and Corporate Banking
over the net. The internet is a critical element of ICICI Bank’s award winning
multi-channel strategy that is one of the main engines of growth for the bank.
Between 2000 and 2004, the bank has been able to successfully move over 70
percent of routine banking transactions from the branch to the other delivery

50
channels, thus increasing overall efficiency. Currently, only 25 percent of all
transactions take place through branches and 75 percent through other delivery
channels. This reduction in routine transactions through the branch has enabled
ICICI Bank to aggressively use its branch network as customer acquisition units.
On an average, ICICI Bank adds 300,000 customers a month, which is among the
highest in the world.

Share of Transactions Share of Transactions

Channels
March 2000 March 2004

Branches 94 % 25 %

ATM's 3 % 43 %

Internet &
2% 21 %
Mobile

Call Centers 1% 11 %

Reaping The Benefits

A powerful, scalable and flexible technology platform is essential for banks to

manage growth and compete successfully. And Finacle provides just the right
platform to ICICI Bank thus fueling its growth.
The bank has successfully leveraged the power of Finacle and has deployed the
solution in the areas of core banking, consumer e-banking, corporate e-banking and
CRM. With Finacle, ICICI Bank has also gained the flexibility to easily develop
new products targeted at specific segments such as ICICI Bank Young Stars- a

51
product targeting children, Women's Account addressing working women and
Bank at campus targeting students.
ICICI Bank is today recognized as a clear leader in the region and has won
numerous accolades worldwide for its technology-driven initiatives. In 2003, the
bank received the best multi-channel strategy award from The Banker magazine
and this year it was rated as the 2nd best retail bank in Asia by The Asian Banker
Journal. The bank has effectively used technology as a strategic differentiator, thus
not only redefining the rules of banking in India, but also showcasing how
technology can help in transforming a bank’s business.

52
 Conclusion

As a student of BBI, I had a great opportunity to do a project of “Universal

Banking” which was indeed a wonderful experience and has enhanced my
knowledge in banking sector.

This study on Universal Banking is important not only to an organization,

shareholders and banking sector but also to an Indian economy as a whole. Due to
globalization and liberalization our economy is opening its door for reforms. The
onset of universal banking will undoubtedly accelerate the pace of structural
change within the Indian banking system. The financial institutions as a segment
will essentially convert into banks. This can potentially impose a better corporate
control structure on the firms, they can be sources of long-term finance, and they
can contribute to real sector restructuring. Universal Banking is totally a new
concept in Indian Banking system and ICICI Bank is the first financial Institution
to go ahead with this concept.

Thus Universal banking, in fact, provides for a cafeteria approach or, if one were
to vary the metaphor, it would take on the role of a one-stop financial supermarket.

Industrial Credit and Investment Corporation of India Ltd. (ICICI), which was set
up as a DFI in 1955, underwent significant changes to meet the challenges that it
faced due to the banking deregulation act. To exploit the synergies brought by
universal banking, it went in for mergers and acquisitions and finally reverse
merged with its subsidiary ICICI Bank. ICICI Bank is today the second largest
bank in India and among the top 150 in the world. In less than a decade, the bank

53
has become a universal bank offering a well diversified portfolio of financial
services. It currently has assets of over US$ 79 billion and a market capitalization
of US$ 9 billion and services over 14 million customers through a network of
about 950 branches, 3300 ATM's and a 3200 seat call center (as of 2007). The
hallmark of this exponential growth is ICICI Bank’s unwavering focus on
technology.

United Bank for Africa PLC (UBA) is the product of a merger of two of
Nigeria’s top five banks, UBA and Standard Trust Bank Plc (STB). Today,
consolidated UBA is largest financial services institution in sub- Saharan Africa
(excluding South Africa) with a balance sheet size in excess of 400 billion naira
(approx. US$ 3 bn), and over two million active customer accounts. With over 400
retail distribution outlets across Nigeria, UBA also has a presence in New York,
Grand Cayman Island and aspires to expand within Sub-Saharan Africa. In its
determination to continue to leverage on a robust IT infrastructure designed to
achieve excellent service delivery to its teeming clientele, UBA opted for
universal banking solution, comprising core banking, corporate e-banking, alerts,
CRM and treasury solutions in October 2005.

54
 Bibliography

 BOOKS
 Harmonizing the Role and operations of development Financial Institutions
and banks-a discussion paper of R.B.I., Mumbai.
 “Universal Banking”- International comparisons & Theoretical
perspectives” by Jordi Canals.

 MAGAZINES
 Annual Report of ICICI bank

 Indian Institute Journal

 WEBSITES
 www.rbi.org.in

 www.icicibank.com

 www.banknetindia.com

 www.barclays.com

 www.indiatimes.com

 www.icfaipress.org

 www.financialexpress.com

 www.allahabadbank.com

 www.economictimes.com

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