The Universal Banking Bigger is Better

Meaning: It is a multipurpose and multi-functional financial supermarket providing both 'Banking and Financial Services' through a single window. As per the World Bank ! In "niversal Banking large banks operate e#tensive network of branches provide man$ different services hold several claims on firms %including e&uit$ and debt' and participate directl$ in the (orporate )overnance of firms that rel$ on the banks for funding or as insurance underwriters.! In a nutshell a "niversal Banking is a superstore for financial products under one roof. (orporates can get loans and avail of other hand$ services while individuals can bank and borrow. It includes not onl$ services related to savings and loans but also investment. *owever in practice the term '"niversal Banking' refers to those banks that offer wide range of financial services be$ond the commercial banking functions like +utual Funds +erchant Banking Factoring Insurance (redit (ards ,etail loans *ousing Finance Auto -oans etc. Empirical Background of Universal Banking: .he entr$ of banks into the realm of financial services was followed ver$ soon after -iberali/ation in the econom$. Since the earl$ 0112s structural changes of profound magnitude came to be witnessed in global banking s$stems. -arge scale mergers amalgamations and ac&uisitions among the banks and financial institutions resulted in the growth in si/e and competitive strengths of the merged entities. .here thus emerged new financial conglomerates that could ma#imi/e 3conomies of Scale and Scope b$ building the production of financial services organi/ation called "niversal Banking. B$ the mid 0112s all the restrictions on 4ro5ect Financing were removed and banks were allowed to undertake several activities in house. ,eforms in the insurance sector in the late 0112s and opening up of this field to private and foreign pla$ers also resulted in permitting banks to undertake sale of Insurance products. At present onl$ an 'arms length' relationship between a bank and insurance entit$ has been allowed b$ the regulator$ authorit$ i.e.-I,6A %Insurance ,egulator$ 7 6evelopment Authorit$'. .he phenomenon of "niversal Banking as a distinct concept as different from 8arrow Banking came to the forefront in the Indian conte#t with II 8arsimham (ommittee %0119' and later the :han (ommittee %0119' reports recommending consolidation of the banking industr$ through mergers and integration of financial activities. The need behind the Advent of Universal Banking -iberali/ation and the banking reforms have given new avenues to 6evelopment Finance Institutions %6FIs' to meet the broader market. .he$ can avail the options to involve in deposit banking and short term lending as well. 6FIs were set up with the ob5ective of taking care of the investment needs of industries. .he$ have build up e#pertise in +erchant Banking and 4ro5ect 3valuation. So saddled with obligations to fund long gestation pro5ects the 6FIs have been burdened with serious mismatches between their assets and liabilities of the balance sheet. In this conte#t the 8arsimham (ommittee II had suggested 6FIs should convert into banks or 8on-Banking Finance (ompanies. (onverting of these 6FIs into "niversal Banks will grant them read$ access

to cheap retail deposits and increase the coverage of the advances to include short term working capital loans to corporates with greater operational fle#ibilit$. At that time 6FIs were in the need to ac&uire a lot of mass in their volume of operations to solve the problem of total asset base and net worth. So the emergence of "niversal Banking was the solution for the problem of banking sector. A solution of Universal Banking coupled with SW T .he solution of "niversal Banking was having man$ factors to deal with which further categori/ed under Strengths Weaknesses ;pportunities and .hreats. Strengths: * Economies f Scale

.he main advantage of "niversal Banking is that it results in greater economic efficienc$ in the form of lower cost higher output and better products. <arious ,eserve Banks (ommittees and reports in favor of "niversal Banking is that it enables banks to e#ploit economies of scale and scope. It means a bank can reduce average costs and thereb$ improve spreads if it e#pands its scale of operations and diversif$ing activities. * !rofitable "iversions B$ diversif$ing the activities the bank can use its e#isting e#pertise in one t$pe of financial service in providing other t$pes. So it entails less cost in performing all the functions b$ one entit$ instead of separate bodies. * #esource Utili$ation A bank possesses the information on the risk characteristics of the clients which it can use to pursue other activities with the same client. A data collection about the market trends risk and returns associated with portfolios of +utual Funds diversifiable and non diversifiable risk anal$sis etc are useful for other clients and information seekers. Automaticall$ a bank will get the benefit of being involved in ,esearch. * Eas% marketing on the foundation a of Brand name A bank has an e#isting network of branches which can act as shops for selling products like Insurance +utual Fund without much efforts on marketing as the branch will act here as a parent compan$ or source. In this wa$ a bank can reach the remotest client without having to take recourse ton an agent. * ne stop shopping

.he 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. * &nvestor friendl% activities Another manifestation of "niversal Banking is bank holding stakes in a firm. A bank's e&uit$ holding in a borrower firm acts as a signal for other investors on to the health of the firm since the lending bank is in a better position to monitor the firm's activities.

Weaknesses: * 're% area of Universal Bank .he path of "niversal Banking for 6FIs is strewn with obstacles. .he biggest one is overcoming the differences in regulator$ re&uirements for a bank and 6FI. "nlike banks 6FIs are not re&uired to keep a portion of their deposits as cash reserves. * (o e)pertise in long term lending In the case of traditional pro5ect finance an area where 6FIs tread carefull$ becoming a bank ma$ not make a big difference. 4ro5ect finance and Infrastructure Finance are generall$ long gestation pro5ects and would re&uire 6FIs to borrow long term. .herefore the transformation into a bank ma$ not be of great assistance in lending long-term. * (!A problem remained intact .he most serious problem of 6FIs have had to encounter is bad loans or 8on 4erforming Assets %84A'. For the 6FIs and "niversal Banking or installation of cutting-edge-technolog$ in operations are unlikel$ to improve the situation concerning 84As. +ost of the 84As came out of loans to commodit$ sectors such as steel chemicals te#tiles etc. the improper use of 6FI funds b$ pro5ect promoters a sharp change in operating environment and poor appraisals b$ 6FIs combined to destro$ the viabilit$ of some pro5ects. So instead of improving the situation "niversal Banking ma$ worsen the situation due to the e#pansion in activities banks will fail to make thorough stud$ of the actual need of the part$ concerned the prospect of the business in which it is engaged its track record the &ualit$ of the management etc. I(I(I suffered the least in this section but the I6BI has got worst hit of 84As considering the negative developments at 6abhol 4ower (ompan$ %64(' Threats: * Big Empires "niversal Banking is an outcome of the mergers and ac&uisitions in the banking sector. .he Finance +inistr$ is also empathetic towards it. But there will be big empires which ma$ put the econom$ in a problem. "niversal Banks will be the largest banks b$ their asset base income level and profitabilit$ there is a danger of '4rice 6istortion'. It might take place b$ manipulating interests of the bank for the self interest motive instead of social interest. .here is a threat to the overall &ualit$ of the products of the bank because of the possibilit$ of turning all the strengths of the "niversal Banking into weaknesses. %e.g. - the strength of economies of scale ma$ turn into the degradation of &ualities of bank products due to over e#pansion. If the banks are not prudent enough deposit rates could shoot up and thus affect profits. .o increase profits &uickl$ banks ma$ go in for riskier business which could lead to a full in asset &ualit$. 6isintermediation and securiti/ation could further affect the business of banks.

pportunities: * To increase efficienc% and productivit% -iberali/ation offers opportunities to banks. 8ow the focus will be on profits rather than on the si/e of balance sheet. Fee based incomes will be more attractive than mobili/ing deposits which lead to lower cost funds. .o face the increased competition banks will need to improve their efficienc$ and productivit$ which will lead to new products and better services. * To get more e)posure in the global market In terms of total asset base and net worth the Indian banks have a ver$ long road to travel when compared to top 02 banks in the world. %SBI is the onl$ Indian bank to appear in the top 022 banks list of 'Fortune =22' based on sales profits assets and market value. It also ranks II in the list of Forbes >222 among all Indian companies' as the asset base sans capital of most of the top 02 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 022 segment in the world the Indian banks need to ac&uire a lot of mass in their volume of operations. 4ure routine banking operations alone cannot take the Indian banks into the league of the .op 022 banks in the world. *ere is the real need of universal banking as the wide range of financial services in addition to the (ommercial banking functions like +utual Funds +erchant banking Factoring Insurance credit cards retail personal loans etc. will help in enhancing overall profitabilit$. * To eradicate the *+inancial Apartheid* A recent stud$ on the informal sector conducted b$ Scientific ,esearch Association for 3conomics %S,A' a (hennai based association has found out that '.hough having a large number of branch network in rural areas and urban areas the lowest strata of the societ$ is still out of the purview of banking services. Because the small businesses in the cit$ ?@A of that goes to mone$ lenders for funds. Another B.=A goes to pawn brokers etc. .he respondents were businesses engaged in activities such as fruits and vegetables vendors laundr$ services provision stores pett$ shops and tea stalls. 1CA of them do not depend the banking s$stem for funds. 8ot because the$ do not want credit from banking sources but because banks do not want to lend these entrepreneurs. It is a situation of Financial Apartheid in the informal sector. It means with the help of retail and personal banking services "niversal Banking can reach this stratum easil$. The (eed of Universal Banking .o make pace with the present need of corporates. 8ow a da$ there is a large market of )eneral Insurance and 4ro5ect Financing. As onl$ a bank is not able to fund it properl$ due to insufficient asset base and net worth. So to overcome this the$ form a consortium of lenders for funding the )reenfield and Brownfield pro5ects. %In the month Dune a consortium of >2 lenders led b$ SBI has committed a 0@ $ear pro5ect finance term loan for a special purpose compan$ promoted B4(- which is starting a )reenfield pro5ect in +adh$a 4radesh' .he point of consideration here is the consortium partner E Bank of Baroda Bank of +aharashtra (entral Bank of India -I( Indian ;verseas Bank. +ost of the partners

are nationali/ed banks. It means there is a need of developing a strong domestic financial s$stem to cater the need of the corporate sector. It is possible if banks have strong capitalFasset base. It fortifies the importance of "niversal Banking. Along with that the ongoing clamor of +ergers and Ac&uisitions in the corporate sector this needs financial assistance as well as consulting. +ore financial institutional investors entering in India and several Doint <entures are being started between domestic companies and global firms. A number of issues ma$ crop up between from the signing up of the sale purchase document and the deal actuall$ coming up. 8ear about @A could be getting aborted %e.g.-the failure of Det Airwa$s and Air Sahara is one of that. So the corporates are in need of takers to insure the associated transactions of +ergers and Ac&uisitions' 8ow International insurers are offering cover in India against the loss arising out of +ergers and Ac&uisitions and Breakups. %3.g.-*owden India leading International brokers which has introduced transactional insurance of + 7 A is now finding takers for their insurance cover' Indian banking with the help of "niversal Banking has technolog$ edge and better business models compared to pre-liberali/ations era toda$ the$ are able to attract and gain more volumes simpl$ because the$ meet their customers' re&uirements better than an$one else. If the newer and foreign pla$ers can do that then wh$ can't bigger 6FIs tr$ their hands on itG