By:- Group 7

Presented to

Prof. Prem Sibbal

A system of banking where banks are allowed to
provide a variety of services to their customers (world
wide).
Banks are not limited to just loans, checking
and savings accounts, and other similar activities, but
are allowed to offer investment services as well which
helps to grow protocol between the nations. 

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Universal Banking includes not only services
related to savings and loans but also investments.
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.

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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".

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The entry of banks into the realm of financial services
was followed very soon after the introduction of
liberalization in the economy
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.

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 Economies of scale from lower operational costs, i.e., larger
scale can avoid the wasteful duplication of marketing,
research and development and information gathering efforts.
 By offering a broader set of financial products than what a
specialized bank provides, 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.
 Flexibility in adapting to the fast changing environment.
 Better and innovative products.
 Reduction of risk by diversification.
 Access to international financial markets.
 Higher output due to specialization.

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 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.
 Universal bankers may be tempted to take excessive risks. In such
cases, the government would be forced to step in to save the bank.
 Vulnerable to high risks due to investment banking activities coupled
with focus on commercial banking activities.
 By virtue of their sheer size, universal banks may gain monopoly
power in the market, which can have significant undesirable
consequences for economic efficiency.
 Universal banks may tend to work primarily with large established
customers and ignore or discourage smaller and newly established
businesses.
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 Universal banks could use such practices as limit pricing or predatory
pricing to prevent smaller specialized banks from serving the market.
 Combining commercial and investment banking gives rise to conflict
of interests, as universal banks may not objectively advise their
clients on optimal means of financing or they may have an interest in
securities because of underwriting activities.
 Unsound loans may be made in order to shore up the price of
securities or the financial position of companies in which a bank had
invested its own assets.
 A commercial bank’s financial interest in the ownership, price, or
distribution of securities inevitably may tempt bank officials to press
their banking customers into investing in securities which the bank
itself was under pressure to sell because of its own pecuniary stake in
the transaction.

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Strengths:-
Economies of Scale:-
 It results in greater economic efficiency in the form of lower
cost, higher output and better products.
Resource Utilization:-
 A bank possesses the information on the risk characteristics of
the clients, which can be used to pursue other activities with
the same clients. A data collection about the market trends,
risk and returns associated with portfolios of Mutual Funds,
diversifiable and non diversifiable risk analysis, etc, is useful for
other clients and information seekers.

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 Easy Marketing on the Foundation of a Brand Name:-
 A bank's existing branches can act as shops of selling for selling
financial products like Insurance, Mutual Funds without spending much
efforts on marketing, as the branch will act here as a parent company or
source. In this way, a bank can reach the client even in the remotest
area without having to take resource to an agent.
 One-stop shopping:-
 The idea of 'one-stop shopping' saves a lot of transaction costs and
increases the speed of economic activities. It is beneficial for the bank
as well as its customers.
 Investor Friendly Activities:-
 Another manifestation of Universal Banking is bank holding stakes in a form : a
bank's equity holding in a borrower firm, acts as a signal for other investor on to
the health of the firm since the lending bank is in a better position to monitor the
firm's activities.

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 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.

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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.

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Big Empires:-
 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.
 Example - The strength of economies of scale may turn into the
degradation of qualities of bank products, due to overexpansion.


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To increase efficiency and productivity:-
 The focus will be on profits rather than on the size of balance sheet. Fee
based incomes will be more attractive than mobilizing deposits, which lead to
lower cost funds. To face the increased competition, banks will need to
improve their efficiency and productivity, which will lead to new products and
better services.
To get more exposure in the global market:-
 In terms of total asset base and net worth the Indian banks have a very long
road to travel when compared to top 10 banks in the world. As the asset base
and 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.
 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, will help in enhancing overall
profitability.
,

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To eradicate the Financial Apartheid:-
 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.
 97% of the people engaged in businesses such as fruits and vegetables
vendors, laundry services, provision stores, petty shops and tea stalls do not
depend the banking system for funds 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.
The Need of Universal Banking:-
 To make pace with the present need of corporate. 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.

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 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 liberalisation and deregulation of
financial sector, there has been blurring of distinction
between the commercial banking and investment banking.
 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.

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 Universal banks have long played a leading role in
Germany, Switzerland, and other Continental European
countries.
 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 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

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 The limits of bank convergence

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 The limits of bank convergence

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 The limits of bank convergence

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 The limits of bank convergence

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 The limits of bank convergence

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