INDIAN INSTITUTE OF PLANNING & MANAGEMENT,

MUMBAI

INDIAN FINANCIAL SYSTEM

REPORT ON

UNIVERSAL
BANKING
Submitted by:

RITU SHAH
Batch-Fall Winter- 09/11
Section: F2
Roll No. 23
 ACKNOWLEDGEMENT
Firstly I would like to thank our INDIAN FINANCIAL SYSTEM faculty
MR.S. KRISHNAMOORTY for giving me guidance, motivation and
sharing friendly rapport, which helped me to make this project to the best of
my ability.

During the research of this project I gained a lot in terms of concept clarity
and understanding of the subject. This is with great pleasure that I take this
opportunity to work on our project of UNIVERSAL BANKING which has
not only allowed me to know the basic fundamentals but has also laid down
for me a platform to understand the application end of the subject.

2
 INDEX

1. AIMS AND OBJECTIVES:

2. DEFINITION OF UNIVERSAL BANKING
3. THE CONCEPT OF UNIVERSAL BANKING
4. UNIVERSAL BANKING – AN UNDERSTANDING
5. A SOLUTION OF UNIVERSAL BANKING COUPLED WITH SWOT
6. THE NEED OF UNIVERSAL BANKING
7. UNIVERSAL BANKING IN INDIA
8. SALIENT OPERATIONAL AND REGULATORY ISSUES OF RBI TO BE
ADDRESSED BY THE FIs FOR CONVERSION INTO A UNIVERSAL BANK
9. AN APPROACH TO UNIVERSAL BANKING
10. THE FUTURE TREND OF UNIVERSAL BANKING IN DIFFERENT
COUNTRIES.
11. CONCLUSION
12. LEARNINGS
13. BIBLIOGRAPHY

3
 AIMS AND OBJECTIVES:

My prime objective regarding this project was to understand about UNIVERSAL

BANKING and steps taken through which it achieved success in Indian Banks.

SUB-OBJECTIVE:

 To study in-depth the concept of universal banking, as its environment today is

changing fast. The changing customer demographics demands to create a
differentiated application based on scalable technology, improved service and
banking convenience.
 To understand about the various opportunities ahead in our country for universal
banking. As the market today gives banks a challenge to provide multiple and
innovative contemporary services to the customer through a consolidated window.
 To understand about the various technology driven distribution channels through
which retail products are delivered to the customer as so to ensure that the bank’s
customer gets “Uniformity and Consistency” of service delivery across time and
at every touch point across all channels.
 To understand the pros and cons of the universal banking and the future of it,
whether Is Universal Banking Suited to India’s Needs"
 To know the salient operational and regulatory issues of RBI to be addressed by
the FIs for conversion into a universal bank.

4
DEFINITION OF UNIVERSAL BANKING

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.

As per the World Bank, "In Universal Banking, large banks operate extensive network of
branches, provide many different services, hold several claims on firms(including equity
and debt) and participate directly in the Corporate Governance of firms that rely on the
banks for funding or as insurance underwriters".

In a nutshell, a Universal Banking is a superstore for financial products under one roof.
Corporate can get loans and avail of other handy services, while can deposit and borrow.
It includes not only services related to savings and loans but also investments.

However in practice the term 'universal banking' refers to those banks that offer a wide
range of financial services, beyond the commercial banking functions like Mutual Funds,
Merchant Banking, Factoring, Credit Cards, Retail loans, Housing Finance, Auto loans,
Investment banking, Insurance etc. This is most common in European countries.

For example, in Germany commercial banks accept time deposits, lend money,
underwrite corporate stocks, and act as investment advisors to large corporations. In
Germany, there has never been any separation between commercial banks and investment
banks, as there is in the United States.

5
THE CONCEPT OF UNIVERSAL BANKING

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

By the mid-1990s, all the restrictions on project financing were removed and banks were
allowed to undertake several in-house activities. Reforms in the insurance sector in the
late 1990s, and opening up of this field to private and foreign players also resulted in
permitting banks to undertake the sale of insurance products. At present, only an 'arm's
length relationship between a bank and an insurance entity has been allowed by the
regulatory authority, i.e. IRDA (Insurance Regulatory and Development Authority).

The phenomenon of Universal Banking as a distinct concept, as different from Narrow

Banking came to the forefront in the Indian context with the Narsimham Committee
(1998) and later the Khan Committee (1998) reports recommending consolidation of the
banking industry through mergers and integration of financial activities.

UNIVERSAL BANKING – AN UNDERSTANDING

6
Universal banking is a combination of commercial banking, investment banking and
various other activities, including insurance. It seeks to provide the entire gamut of
financial products under one roof and reflects the global convergence between
commercial banks, investment banking and insurance companies. The convergence is an
attempt by banks to fulfill the lifelong needs of the customer by following the cradle-to-
grave concept. Commercial banks have a long-term relationship with their customers
when compared to other financial intermediaries.
Universal banking has its own merits and demerits. The main advantage is that it results
in economy efficiency, lower cost and higher output. But there is a fear that because of
their sheer size they might gain a monopoly, which is undesirable for the economy. Also
there can be conflict of interest because of the combination of all types of financial
activities.
In universal banking, entities leverage on a large branch network and offer a wide range
of services, under a single brand name. The concept has been prevalent in developed
countries like France, Germany and the US but is still in the nascent stage in India.

7
A SOLUTION OF UNIVERSAL BANKING COUPLED WITH SWOT

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

Strengths:

* Economies Of Scale

The main advantage of Universal Banking is that it results in greater economic efficiency
in the form of lower cost, higher output and better products. Various Reserve Banks
Committees and reports in favor of Universal Banking, is that it enables banks to exploit
economies of scale and scope. It means a bank can reduce average costs and thereby
improve spreads if it expands its scale of operations and diversifying activities.

* Profitable Diversions

By diversifying the activities, the bank can use its existing expertise in one type of
financial service in providing other types. So, it entails less cost in performing all the
functions by one entity instead of separate bodies.

* Resource Utilization

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

* Easy marketing on the foundation a of Brand name

A bank has an existing network of branches, which can act as shops for selling products
like Insurance, Mutual Fund without much efforts on marketing, as the branch will act

8
here as a parent company or source. In this way a bank can reach the remotest client
without having to take recourse ton an agent.

* One stop shopping

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

* Investor friendly activities

Another manifestation of Universal Banking is bank holding stakes in a firm. A bank's

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

Weaknesses:

* Grey area of Universal Bank

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

* No expertise in long term lending

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

* NPA problem remained intact

The most serious problem of DFIs have had to encounter is bad loans or Non Performing
Assets (NPA). For the DFIs and Universal Banking or installation of cutting-edge-
technology in operations are unlikely to improve the situation concerning NPAs. Most of
the NPAs came out of loans to commodity sectors, such as steel, chemicals, textiles, etc.

9
the improper use of DFI funds by project promoters, a sharp change in operating
environment and poor appraisals by DFIs combined to destroy the viability of some
projects. So, instead of improving the situation Universal Banking may worsen the
situation, due to the expansion in activities banks will fail to make thorough study of the
actual need of the party concerned, the prospect of the business, in which it is engaged,
its track record, the quality of the management, etc.

ICICI suffered the least in this section, but the IDBI has got worst hit of NPAs,
considering the negative developments at Dabhol Power Company (DPC)

Threats:

* Big Empires

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

Opportunities:

* To increase efficiency and productivity Liberalization offers opportunities to banks.

Now, the focus will be on profits rather than on the size of balance sheet. Fee based
incomes will be more attractive than mobilizing deposits, which lead to lower cost funds.

10
To face the increased competition, banks will need to improve their efficiency and
productivity, which will lead to new products and better services.

* To get more exposure in the global market In terms of total asset base and net worth the
Indian banks have a very long road to travel when compared to top 10 banks in the world.
(SBI is the only Indian bank to appear in the top 100 banks list of 'Fortune 500' based on
sales, profits, assets and market value. It also ranks II in the list of Forbes 2000 among all
Indian companies) as the asset base sans capital of most of the top 10 banks in the world
are much more than the asset base and capital of the entire Indian banking sector. In order
to enter at least the top 100 segment in the world, the Indian banks need to acquire a lot
of mass in their volume of operations. Pure routine banking operations alone cannot take
the Indian banks into the league of the Top 100 banks in the world. Here is the real need
of universal banking, as the wide range of financial services in addition to the
Commercial banking functions like Mutual Funds, Merchant banking, Factoring,
Insurance, credit cards, retail, personal loans, etc. will help in enhancing overall
profitability.

* To eradicate the 'Financial Apartheid' A recent study on the informal sector conducted
by Scientific Research Association for Economics (SRA), a Chennai based association,
has found out that, 'Though having a large number of branch network in rural areas and
urban areas, the lowest strata of the society is still out of the purview of banking services.
Because the small businesses in the city, 34% of that goes to money lenders for funds.
Another 6.5% goes to pawn brokers, etc. The respondents were businesses engaged in
activities such as fruits and vegetables vendors, laundry services, provision stores, petty
shops and tea stalls. 97% of them do not depend the banking system for funds. Not
because they do not want credit from banking sources, but because banks do not want to
lend these entrepreneurs. It is a situation of Financial Apartheid in the informal sector. It
means with the help of retail and personal banking services Universal Banking can reach
this stratum easily.

11
THE NEED OF UNIVERSAL BANKING

To make pace with the present need of corporates. Now a day, there is a large market of
General Insurance and Project Financing. As only a bank is not able to fund it properly,
due to insufficient asset base and net worth. So, to overcome this, they form a consortium
of lenders, for funding the Greenfield and Brownfield projects. (In the month June a
consortium of 20 lenders led by SBI has committed a 14 year project finance term loan
for a special purpose company promoted BPCL, which is starting a Greenfield project in
Madhya Pradesh) The point of consideration here is the consortium partner – Bank of
Baroda, Bank of Maharashtra, Central Bank of India, LIC, Indian Overseas Bank. Most
of the partners are nationalized banks.

It means there is a need of developing a strong domestic financial system to cater

the need of the corporate sector. It is possible if banks have strong capital/asset base. It
fortifies the importance of Universal Banking. Along with that, the ongoing clamor of
Mergers and Acquisitions in the corporate sector, this needs financial assistance as well
as consulting.

More financial institutional investors entering in India and several Joint Ventures are
being started between domestic companies and global firms. A number of issues may
crop up between from the signing up of the sale purchase document and the deal actually
coming up. Near about 4% could be getting aborted (e.g.-the failure of Jet Airways and
Air Sahara is one of that. So, the corporates are in need of takers to insure the associated
transactions of Mergers and Acquisitions) Now International insurers are offering cover
in India against the loss arising out of Mergers and Acquisitions and Breakups. (E.g.-
Howden India leading International brokers, which has introduced transactional insurance
of M & A, is now finding takers for their insurance cover) Indian banking, with the help
of Universal Banking has technology edge and better business models, compared to pre-
liberalizations era, today they are able to attract and gain more volumes simply because
they meet their customers' requirements better than anyone else. If the newer and foreign
players can do that, then why can't bigger DFIs try their hands on it?

12
UNIVERSAL BANKING IN INDIA

In India Development financial institutions (DFIs) and refinancing institutions (RFIs)

were meeting specific sect oral needs and also providing long-term resources at
concessional terms, while the commercial banks in general, by and large, confined
themselves to the core banking functions of accepting deposits and providing working
capital finance to industry, trade and agriculture. Consequent to the liberalization and
deregulation of financial sector, there has been blurring of distinction between the
commercial banking and investment banking. Reserve Bank of India constituted on
December 8, 1997, a Working Group under the Chairmanship of Shri. S. H. Khan to
bring about greater clarity in the respective roles of banks and financial institutions for
greater harmonization of facilities and obligations. Also report of the Committee on
Banking Sector Reforms or Narasimham Committee (NC) has major bearing on the
issues considered by the Khan Working Group. The issue of universal banking resurfaced
in Year 2000, when ICICI gave a presentation to RBI to discuss the time frame and
possible options for transforming itself into an universal bank. Reserve Bank of India also
spelt out to Parliamentary Standing Committee on Finance, its proposed policy for
universal banking, including a case-by-case approach towards allowing domestic
financial institutions to become universal banks. Now RBI has asked FIs, which are
interested to convert itself into a universal bank, to submit their plans for transition to a
universal bank for consideration and further discussions. FIs need to formulate a road
map for the transition path and strategy for smooth conversion into a universal bank over
a specified time frame. The plan should specifically provide for full compliance with
prudential norms as applicable to banks over the proposed period.

13
SALIENT OPERATIONAL AND REGULATORY ISSUES OF RBI TO BE
ADDRESSED BY THE FIS FOR CONVERSION INTO A UNIVERSAL BANK

a) Reserve requirements. Compliance with the cash reserve ratio and statutory liquidity
ratio requirements (under Section 42 of RBI Act, 1934, and Section 24 of the Banking
Regulation Act, 1949, respectively) would be mandatory for an FI after its conversion
into a universal bank.
b) Permissible activities. Any activity of an FI currently undertaken but not permissible
for a bank under Section 6(1) of the B. R. Act, 1949, may have to be stopped or divested
after its conversion into a universal bank..
c) Disposal of non-banking assets. Any immovable property, howsoever acquired by an
FI, would, after its conversion into a universal bank, be required to be disposed of within
the maximum period of 7 years from the date of acquisition, in terms of Section 9 of the
B. R. Act.
d) Composition of the Board. Changing the composition of the Board of Directors might
become necessary for some of the FIs after their conversion into a universal bank, to
ensure compliance with the provisions of Section 10(A) of the B. R. Act, which requires
at least 51% of the total number of directors to have special knowledge and experience.
e) Prohibition on floating charge of assets. The floating charge, if created by an FI, over
its assets, would require, after its conversion into a universal bank, ratification by the
Reserve Bank of India under Section 14(A) of the B. R. Act, since a banking company is
not allowed to create a floating charge on the undertaking or any property of the company
unless duly certified by RBI as required under the Section.
f) Nature of subsidiaries. If any of the existing subsidiaries of an FI is engaged in an
activity not permitted under Section 6(1) of the B R Act , then on conversion of the FI
into a universal bank, delinking of such subsidiary / activity from the operations of the
universal bank would become necessary since Section 19 of the Act permits a bank to
have subsidiaries only for one or more of the activities permitted under Section 6(1) of B.
R. Act.
g) Restriction on investments. An FI with equity investment in companies in excess of
30 per cent of the paid up share capital of that company or 30 per cent of its own paid-up

14
share capital and reserves, whichever is less, on its conversion into a universal bank,
would need to divest such excess holdings to secure compliance with the provisions of
Section 19(2) of the B. R. Act, which prohibits a bank from holding shares in a company
in excess of these limits.
h) Connected lending . Section 20 of the B. R. Act prohibits grant of loans and advances
by a bank on security of its own shares or grant of loans or advances on behalf of any of
its directors or to any firm in which its director/manager or employee or guarantor is
interested. The compliance with these provisions would be mandatory after conversion
of an FI to a universal bank.
i) Licensing. An FI converting into a universal bank would be required to obtain a
banking licence from RBI under Section 22 of the B. R. Act, for carrying on banking
business in India, after complying with the applicable conditions.
j) Branch network An FI, after its conversion into a bank, would also be required to
comply with extant branch licensing policy of RBI under which the new banks are
required to allot at least 25 per cent of their total number of branches in semi-urban and
rural areas.
k) Assets in India. An FI after its conversion into a universal bank, will be required to
ensure that at the close of business on the last Friday of every quarter, its total assets held
in India are not less than 75 per cent of its total demand and time liabilities in India, as
required of a bank under Section 25 of the B R Act.
l) Format of annual reports. After converting into a universal bank, an FI will be
required to publish its annual balance sheet and profit and loss account in the forms set
out in the Third Schedule to the B R Act, as prescribed for a banking company under
Section 29 and Section 30 of the B. R. Act.
m) Managerial remuneration of the Chief Executive Officers. On conversion into a
universal bank, the appointment and remuneration of the existing Chief Executive
Officers may have to be reviewed with the approval of RBI in terms of the provisions of
Section 35 B of the B. R. Act. The Section stipulates fixation of remuneration of the
Chairman and Managing Director of a bank by Reserve Bank of India taking into account
the profitability, net NPAs and other financial parameters. Under the Section, prior

15
approval of RBI would also be required for appointment of Chairman and Managing
Director.
n) Deposit insurance . An FI, on conversion into a universal bank, would also be
required to comply with the requirement of compulsory deposit insurance from DICGC
up to a maximum of Rs.1 lakh per account, as applicable to the banks.
o) Authorized Dealer's License. Some of the FIs at present hold restricted AD licence
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 authorised dealer licence
and would also attract the full rigour of the Exchange Control Regulations applicable to
the banks at present, including prohibition on raising resources through external
commercial borrowings.
p) Priority sector lending. On conversion of an FI to a universal bank, the obligation for
lending to "priority sector" up to a prescribed percentage of their 'net bank credit' would
also become applicable to it.
q) Prudential norms. After conversion of an FI in to a bank, the extant prudential norms
of RBI for the all-India financial institutions would no longer be applicable but the norms
as applicable to banks would be attracted and will need to be fully complied with.

16
AN 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. Major areas requiring attention are
the status of financial sector reforms, the state of preparedness of the concerned
institutions, the evolution of the regulatory regime and above all a viable transition path
for institutions which are desirous of moving in the direction of universal banking. It is
proposed to adopt the following broad approach for considering proposals in this area:

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. Further, any conglomerate, in which a
bank is present, should be subject to a consolidated approach to supervision and
regulation.

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.

17
The regulatory framework of RBI in respect of DFIs would need to be strengthened if
they are given greater access to short-term resources for meeting their 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.

18
THE FUTURE TREND OF UNIVERSAL BANKING IN DIFFERENT
COUNTRIES.

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

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

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

Second, although universal banks have expanded their sphere of influence, the smaller
specialized institutions have not disappeared. In both Germany and Switzerland, they are

19
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. What universal banking can do for you Banking will never be the
same again. With official committees recommending a move towards universal banking,
DFIs, led by ICICI, are getting set to storm the banking arena.

THE DOMESTIC banking sector is going through some interesting times -- not
just economically, but on the policy front as well. And the major policy shift was
heralded by the Narasimham committee's recommendation that development finance
institutions (DFIs) ultimately convert into either commercial banks or non-banking
finance companies. This, in a way, spelt the beginning of the end of specialised services
from DFIs, and the introduction of universal banks. With universal banking, banks will
offer a wide range of financial services, beyond solely commercial banking or investment
banking. The main advantage of universal banking is that it results in greater economic
efficiency and enables asset diversification, not only in the nature of ventures financed
but also in the age profile of assets. Additionally, it offers reasonable protection from
economic cycles. For FIs, moving towards universal banking will mean the ability to
raise short-term, low-cost funds. In India, banks have traditionally been prime lenders for
working capital loans and DFIs financed term loans. Now, with DFIs told to move
towards universal banking, banks have been allowed to diversify into investments and
long term financing, and DFIs will lend for working capital. Starting trouble. In spite of
the Narasimham committee's recommendations -- later endorsed by the Khan working

20
group -- the road to universal banking is proving far from smooth. One major impediment
for FIs is the fact that they have past liabilities on which reserve requirements -- SLR,
CRR and priority sector advances -- have not been met. Meeting this requirement in its
current form and level would require FIs to raise huge resources from the capital market,
which could give rise to liquidity concerns. Now, depending on the fiscal and monetary
situation, RBI is slated to reduce the CRR requirement to a minimum of 3 per cent. It has
been suggested that reserve requirements 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 requirements over a period of time to
be specified by the FI. In fact, RBI has mentioned that DFIs would need to prepare a
transition path in order to fully comply with the regulatory requirement of a bank and
such requests will be considered on ‘case by case’ basis.

21
 CONCLUSION

THUS IT CAN BE CONCLUDED BY DISCUSSING A VIABILITY QUESTION:

“IS UNIVERSAL BANKING SUITED TO INDIA’S NEEDS"

Public financial institutions (FIs) should return to the culture of development banking and
long-term lending instead of adopting the model of ``universal banking' which is unsuited
to the needs of India, according to B.V.Athreya, Head of the Department of Economics,
Bharatidasan University.
Addressing the inaugural session of the sixth national conference of the All-India
Industrial Development Bank Employees' Association, the union of non-officer staff of
the IDBI, Prof. Athreya said the adoption of provisioning and other norms, evolved by
the Bank of International Settlements (BIS), Basle, and based on the demands of global
speculative finance capital by the Reserve Bank of India (RBI) was proving ruinous to
Indian banks and financial institutions.
The general secretary of the All India Bank Employees' Association (AIEBA),
Tarakeswar Chakraborti, alleged that foreign banks and several Indian banks had
embarked on plans to ``deunionise' the financial sector as a component of the economic
reform dictated by agencies such as the World Bank and the International Monetary Fund
(IMF).
As a result, outsourcing of personnel was being adopted, throwing out regular employees
from jobs and victimizing trade union leaders.
Declaring that one could ``hear the footsteps of fascism,' Mr. Chakraborty warned that
unless employees of financial institutions followed the example of their counterparts in
the commercial banking sector, they would not be able to resist anti-employee measures,
including ``officerisation' of personnel and retrograde recommendations expected from
the National Labour Commission.
The Editor of Frontline, N.Ram, said that even those sections of the media which had
played an exemplary role in exposing genocidal attacks and other anti-democratic
developments, had failed to inform readers clearly on the negative implications of the
economic reforms undertaken since 1991.

22
LEARNINGS
The topic has provided and added a great addition to my knowledge about the universal
banking in india.
Universal banking is growing with the key success.
Universal banking sector as a whole is facing a lot of competition ever since financial
sector reforms were started in the country. There is a need for constant innovation. This
requires product development and differentiation, micro-planning, marketing, prudent
pricing, customization, technological up gradation, home / electronic / mobile banking,
effective risk management and asset liability management techniques.
While universal banking offers phenomenal opportunities for growth, the challenges are
equally discouraging. How far is it able to lead growth of banking industry in future
would depend upon the capacity building of banks to meet the challenges and make use
of opportunities profitably.
However, the kind of technology used and the efficiency of operations would provide the
much needed competitive edge for success. The banking sector in India is representing
this and I do hope they would continue to succeed in this traded path.

23
BIBLIOGRAPHY

• www.en.wikipedia.org/wiki/Universal_bank
• www.universalbank.com/
• www.banknetindia.com/banking/ubfeature.htm: Universal Banking:
introduction, RBI rules and regulations, Universal Banking in India
• www.answers.com/topic/universal-banking: Universal Banking: definition
• www.investopedia.com/terms/u/universalbanking.asp Universal Banking:
definition
• www.cato.org/pubs/journal/cj13n2/cj13n2-8.pdf Universal Banking: Future
• 'The Universal Banking': introduction, concept, pros and cons. Journal of
Professional Banker

24