UNIVERSITY OF MUMBAI

RAYAT SHIKSHAN SANSTHAS

KARMAVEER BHAURAO PATIL COLLEGE

VASHI, NAVI MUMBAI -400703

PROJECT REPORT ON

UNIVERSAL BANKING

SUBMITED BY

SWATI D. SANKPAL

PROJECT GUIDE

ARCHANA SALUNKHE

IN PARTIAL FULFILLMENT FOR THE COURSE OF

BACHELOR OF COMMERCE

(BANKING & INSURANCE)

T.Y.B.B.I (SEMESTER V)

ACADEMIC YEAR

2017-2018

1
 ACKNOWLEDGEMENT

I, SWATI DONDIBHA SANKPAL would take this opportunity to thank the University
of Mumbai for providing me an opportunity to study on a project on banking. This has
been a huge learning experience for me.

With great pleasure I take this opportunity to acknowledge people who have made this
project work possible.

First of all I would sincerely like to express my gratitude towards my project guide
ARCHANA SALUNKHE for having shown so much flexibility, guidance as well as
supporting me in all possible ways whenever I need help. I am thankful for the
motivation provided by my project guide throughout and helped me to understand the
topic in a very effective and easy manner.

I would like to thank Principal Dr.V.S.Shivankar and Head of the Department

ARCHANA SALUNKHE of the BBI (BANKING & INSURANCE) for his/her
indirect support throughout.

I would also like to thank, other teaching faculties of the college, my colleagues, library
staff and other people for providing their help as per requirement to complete this project.

I acknowledge my indebtedness and express my great appreciation to all people behind

this work.

2
 DECLARATION

I SWATI DONDIBHA SANKPAL student of KARMAVEER BHAURAO PATIL

COLLEGE, VASHI studying in T.Y.B.Com (Banking & Insurance) in Semester V. Hereby
declare that I have completed this project on UNIVERSAL BANKING. And has not been
submitted to any other university or institute for the award of any degree, diploma etc. The
information is submitted by me is true and original to the best of my knowledge.

Date: - ..

(Name & Sign of student)

Place: Vashi, Navi Mumbai.

3
 RAYAT SHIKSHAN SANSTHAS

KARMAVEER BHAURAO PATIL, COLLEGE

VASHI, NAVI MUMBAI 400703.

CERTIFICATE

This is to certify that SWATI DONDIBHA SANKPAL student of B.B.I Semester V has
completed her/his project on UNIVERSAL BANKING and has submitted a satisfactory
report under the guidance of ARCHANA SALUNKHE in the partial fulfilment of BBI course
of University of Mumbai in the academic year 2017-2018

.. ..

Project Guide Co-ordinator Principal

University Examiner

4
 INDEX

CHAPTER SUB TOPIC NAME PAGE

NO. TOPIC NO.

INTRODUCTION TO THE STUDY

CHAPTER 1.1 Introduction
1 1.2 Objective of the study
1.3 Research methodology

UNIVERSAL BANKING IN INDIA

CHAPTER 2.1 Introduction
2 2.2 Meaning
2.3 Empirical Background of Universal Banking
2.4 The Need Behind the Advent of Universal Banking
2.5 Issue & Challenges in Universal Banking

PRODUCTS & SERVICES OFFERED BY UNIVERAL

BANKING
CHAPTER
3 Products & Services
3.1
Common Banking Product available
3.2
Universal Banking Services
3.3
Universal Banking Coupled With SWOT
3.4

COOITTEE REPORTS, GUIDELINES & ITS IMPACT

CHAPTER 4.1 Khan Committee on Universal Banking
4 4.2 Need of U.B in India as per Committee
4.3 Narasimhan Committee
4.4 RBI Guidelines for Existing banks/FIs for conversion into U.B
4.5 Impact of Universal Banking

CHAPTER CONCLUSION
5 Bibliography

5
 CHAPTER 1
INTRODUCTION
TO THE STUDY

6
1.1Introduction:

The banking scenario in India has been changing at fast pace from being just the
borrowers and lenders traditionally, the focus has shifted to more differentiated and
customized product/service provider from regulation to liberalization in the year 1991, from
planned economy to market. The Indian banking has come a long way from being a sleepy
business institution to a highly proactive and dynamic entity. This transformation has been
largely brought about by the large dose of liberalization and economic reforms that allowed
banks to explore new business opportunities rather than generating revenues from
conventional streams (i.e. borrowing and lending).

The competition heated up with the entry of private and foreign banks deregulation
and globalization resulted in increased competition that refined the traditional way of doing
business. They have realized the importance of a customer centric approach, brand building
and IT enabled solutions. Banking today has transformed into a technology intensive and
customer friendly model with a focus on convenience. The companies have redoubled their
efforts to woo the customers and establish themselves firmly in the market. It is no longer an
option for a company to provide good customer service, it is expected.

Reforms are continuing as part of the overall structural reforms aimed at improving
the productivity and efficiency of the economy. The sector is set to witness the emergence of
financial supermarkets in the form of universal banks providing a suite of services from retail
to corporate banking and industrial lending to investment banking. The financial services
market has become a battle ground with the marketers with the latest and the most
sophisticated weapons.

The Indian banking industry is currently in a transition phase. On the one hand, the
public sector banks, which are the mainstay of the Indian banking system, are in the process
of consolidating their position by capitalizing on the strength of their huge networks and
customer bases. On the other, the private sector banks are venturing into a whole new game
of mergers and acquisitions to expand their bases. The use of technology has placed Indian
banks at par with their global peers. It has also changed the way banking is done in India.
Anywhere banking and Anytime banking have become a reality. The financial sector now

7
operates in a more competitive environment than before and intermediates relatively large
volume of international financial flows.

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.

1.2Objectives of the Study:

1. To study the concept of universal banking.

2. To study on issue of challenges in universal banking.
3. To study on product and services of universal banking.
4. To study the impact of universal banking.

1.3Research Methodology:

Research methodology is the systematically study the research problem. In it, we study
the various steps which are generally adopted by a researcher in studying the research problem.
The data shall be collected from organization under the study from the secondary sources of data.

Secondary sources data:

The secondary data will be collected from various published or unpublished

sources, namely-

1. Internet
2. Newspaper
3. Magazines
4. Libraries of different universities
5. Annual report of bank.

8
 CHAPTER 2
Universal Banking
In India

9
2.1 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 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 Narsimham 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
a 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.

2.2Meaning:

The financial and banking sector as it existed in the pre-reform days was highly
regulated over-administered and subject to discretionary control and direction. In this sense,
financial sector reforms were designed to infuse, in the words of the terms of reference of the
Narsimham Committee, greater competitive vitality in the system. In the financial system,
the players can be broadly classified into the following groups: public sector banks, private
sector banks, foreign banks, co-operative banks, all- India financial institutions and non-

10
banks. A common element in all Development Financing Institution (DFIs) is that they
focus on investment rather than on conventional commercial banking operations, i.e., on
deposit taking and short-term credit. On the other hand, the commercial banks continue to
concentrate on their traditional business of accepting deposits and advancing loans. With
encouragement and sometimes pressure, they have broaden their activities to include term
credit and a broad range of non-banking finance, including leasing, venture capital, housing
and household finance, mutual fund management, credit-card sponsorship, etc. The term
'Universal Banking' in general refers to the combination of commercial banking and
investment banking. The concept of universal banking is spreading fast among various types
of banks.

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
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. Corporates can get loans and avail of other handy services, while
individuals can bank and borrow. It includes not only services related to savings and loans
but also investment. However in practice the term 'Universal Banking' refers to those banks
that offer wide range of financial services beyond the commercial banking functions like
Mutual Funds, Merchant Banking, Factoring, Insurance, Credit Cards, Retail loans,
Housing Finance, Auto Loans, etc.

However, Universal Banking does not mean that every institution conducts every type
of business with every type of customer. In the spectrum of banking, specialized banking is
on the one end and the Universal Banking on the other.

11
2.3 Empirical Background of Universal Banking:

The entry of banks into the realm of financial services was followed very soon after
Liberalization in the economy. Since the early 1990s, structural changes of profound
magnitude came to be witnessed in global banking systems. Large scale mergers,
amalgamations and acquisitions among the 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 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 activities in house. Reforms in the insuran ce sector in the
late 1990s, and opening up of this field to private and foreign players also resulted in
permitting banks to undertake sale of Insurance products. At present, only an 'arms length'
relationship between a bank and insurance entity has been allowed by the regulatory
authority, i.e.-IRDA (Insurance Regulatory & 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 II Narsimham Comm ittee
(1998) and later the Khan Committee (1998) reports recommending consolidation of the
banking industry through mergers and integration of financial activities.

2.4 The need behind the Advent of Universal Banking:

Liberalization and the banking reforms have given new avenues to Development
Finance Institutions (DFIs) to meet the broader market. They can avail the options to involve
in deposit banking and short term lending as well. DFIs were set up with the objective of
taking care of the investment needs of industries. They have built up expertise in Merchant
Banking and Project Evaluation.

So, saddled with obligations to fund long gestation projects, the DFIs have been burdened
with serious mismatches between their assets and liabilities of the balance sheet. In this
context, the Narsimham Committee II had suggested DFIs should convert into banks or Non -

12
Banking Finance Companies. Converting of these DFIs into Universal Banks will grant them
ready access to cheap retail deposits and increase the coverage of the advances to include
short term working capital loans to Corporates with greater operational flexibility. At that
time DFIs were in the need to acquire a lot of mass in their volume of operations to solve the
problem of total asset base and net worth. So, the emergence of Universal Banking was the
solution for the problem of the banking sector.

2.5 ISSUES & CHALLENGES IN UNIVERSAL BANKING:

1. 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.

13
2. Issues of concern for Universal Banking:

1. Deployment of capital:

If a bank were to own a full range of classes of both the firms 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 banks
commercial and investment banking roles. For example there may be possible conflict between
the investment bankers promotional role and commercial bankers obligation to provide
disinterested advice. Or where a Universal Banks 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.

Limitations Of Universal Banking:

An important reason for limiting combinations of activities has been the fear that such
institutions, by virtue of the sheer size, would gain monopoly power in the market, which can
have significant undesirable consequences for economic efficiency. Universal banking
results in greater economic efficiency in the form of lower cost, higher output and better
product mix, on the other side if one universal bank collapses it leads to systematic financial
risk. The bank may start new activity for which expertise is not available, which may even
results in failure of the banks. Under the universal banking system the organizational

14
structures are big and become overly bureaucratic, which may create problems in attracting
top quality employees. The system of providing all services under one roof may prevent the
universal bank from developing the highly specialized expertise needed to compete in
todays financial market.

Combining commercial and investment banking give rise to conflict of interest 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. Conflict of interest
was one of the major reasons for introduction of Glass-Steagall Act. Three well-defined evils
were found to flow from the combinations of investment and commercial banking as detailed
below:

Banks were deploying their own assets in the securities with consequent risk to
commercial and saving deposits.
Unsound loans were made in other to shore up the price of securities or the financial
position of the companies in which a bank had invested its own assets.
A commercial banks financial interest in the ownership, price or distribution of
securities inevitably tempted bank officials to press their banking customers to invest
insecurities which the bank itself was under pressure to sell because of its own
pecuniary stake in the transaction.
It is agreed that universal banks are more difficult to regulate because their ties to the
business world are more complex. In the case of specialized institutions,
government/supervisory agencies could effectively monitor them because their
functions are limited.

Recent Trends In Universal Banking:

Financial reforms were central to Indias economic liberalization program initiated in the
early 1990s. After more than a decade of reforms since 1991, Indias financial sector including
markets, institutions and products has changed, in some respects, beyond recognition. Capital
markets are deeper, more liquid and much more open. While the banking sector continues to

15
dominate the financial system and remains overwhelmingly government-owned, competition has
increased. Private entry has also been progressively allowed into mutual funds and, more
recently, insurance. These reforms have led to financial integration at two levels. At level one,
the trends towards universal banking and mergers between financial institutions have led to
integration between different segments of the domestic financial system. Traditional frontiers
between banking, capital markets and insurance have become less distinct. At another level,
Indias financial system has become much more integrated with the global financial system.

The effect of the recommendations of the Khan Working Group and Narasimhan
Committee 11 reports regarding harmonization of role of banks and DFIs were seen when
major banking organizations like ICICI, SBI, IDBI etc started proposing plans for taking the
coveted status of a universal bank. ICICI merged with ICICI bank in 2001. Many public sector
banks set up subsidiaries for providing various financial services. Deregulation opened up new
opportunities for banks to increase revenues by diversifying into investment banking, insurance,
credit cards, depository services, mortgage financing, securitization, etc. Interest rates have been
deregulated over a period of time, branch-licensing procedures have been liberalized and
Statutory Liquidity Ratio (SLR) and Cash Reserve Ration (CRR) have been reduced. The entry
barriers for foreign banks and new private sector banks have been lowered as part of the medium
term strategy to improve the financial and operational health of the banking system by
introducing an element of competition into it. There has been a paradigm shift in Indian banking
with the absorption of the latest technology and the need to meet the clients expectations in a
customized manner. The regulatory system today is far more conscious and better equipped,
institutionally and legally, to demand and enforce necessary disclosures and compliance with
laid norms for protection of the users of the system as well as the credibility and efficacy of the
system itself. Corporate governance in banks and financial institutions assumed great importance
in India.

The benefits of a liberalized financial system are well-known. At the same time, a series
of financial crises- in East Asia in 1997, Turkey in 2000 and, more recently, in Argentina- have
alerted policy makers and regulators to the potential fragility of financial intermediaries in a
deregulated environment. These crises resulted from the interaction of a variety of mutually

16
reinforcing macroeconomic, structural, and political events. Whatever the trigger, the weaker the
financial system, the greater have been the fireworks of collapse and the depth and duration of
post-crisis distress. So if there is one lesson above all others from the recent financial crises, it is
importance of a sound and well-regulated financial sector. This means better disclosure, better
supervisory norms and their proper enforcement. And it means having a financial regulatory
structure that makes the regulator properly accountable, and ensures that regulators are properly
equipped to anticipate problems in complex and integrated financial systems detect fragilities,
take prompt corrective action to deal with distressed institutions, and minimize opportunities for
regulatory arbitrage by financial intermediaries.

Indias financial system has shown a great deal of resilience. India appears to be sheltered
from crisis triggered by an external macroeconomic shock of the type suffered by the East Asian
countries, because Indias exchange rate regime is flexible, foreign exchange reserves are high,
the capital account is not yet fully convertible, and banks and their customers have limited
foreign exchange exposures. It should also be noted that, in recent years, India has gone a
considerable way in improving financial sector regulations. Prudential norms have been
tightened, bank capital bolstered, and the supervisory systems strengthened. But important
weaknesses remain, and need to be addressed. Stock market scams, the UTI story and problems
with cooperative banks, underline the importance of enhancing supervision and governance.
Moreover, as the financial sector becomes more open, the challenge facing Indias regulators
will become ever greater.

Future of universal banking in India:

In view of changes in economic and national environment in India leading to liberalization

and deregulation, integration of Indian financial markets, entry of new players both domestic
and overseas in the market disintermediation , high degree of product innovation and
effacing of operating boundaries among suppliers of financial products and services, and
growing customers preferences for wide variety of efficient products under one shop,
existing development financial institutions are left with no choice but to assume the role of
universal banking and not remain confined to engaging in terms of leading and participating

17
inequity. This will help them to enhance effectiveness and improve their competitiveness on
sustainable basis.

In their new avatar, DFIs will be providing working capital finance to big corporate
groups as DFIs have their own creamy layer of clients with whom their business transactions
are quite voluminous. The adjustment process for DFIs to finance working capital
requirements will also be much smoother because the DFIs are well equipped with the
requisite human and technical expertise in project financing activities. Services the time is
ripe that commercial banks gives a deep thinking on the issue of switching over the German
,model of universal banking from the Financial Conglomerate model of UK/USA. If
commercial banks start practicing German model of universal banking, it will get more
success as one distinct advantages for these banks is their impressive and robust branch
network, literally spread over the entire country, which the DFIs do not have. Commercial
banks should also make a foray into the insurance business as these banks can use their
distribution networks to sell all types of insurance, particularly life insurance, to their
traditional customers. Many banks are providing insurance in European countries as this has
resulted in good growth in their non-fund based business. There is also a need for
commercial banks to synergies the operations of their various subsidiaries. Commercial
banks, their subsidiaries and associated should work in a cohesive manner. A system of cross
selling and marketing the products of the subsidiaries, associated banks should be evolved
and foreign subsidiaries of commercial banks should canvass India related business/ NRI
business for various branches of these banks in India. Commercial banks, over the years,
have developed expertise in many areas like Asset-Liability Management, Risk Management
and Computerization etc. now these banks may develop their own packages to be sold to
other banks/co-operative banks/NBFCs etc. Universal banking system will come to stay in
India in the near future. There is, therefore, need to prepare ourselves right now.

Advantages of Universal Banking :

Economies of Scale: The main advantage of Universal Banking is that it results in greater
economic efficiency in the form of lower cost, higher output and better products. Many
Committees and reports by Reserve Bank of India are in favor of Universal banking as it enables

18
banks to exploit economies of scale and scope. 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 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. Automatically, a bank will get the benefit of being involved in the researching.

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.

Disadvantages of Universal Banking :

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 requirement 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 to a DFI. Project
finance and Infrastructure finance are generally long- gestation projects and would require DFIs

19
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 that the DFIs have had to
encounter is bad loans or Non-Performing Assets (NPAs). For the DFIs and Universal Banking
or installation of cutting-edge-technology in operations are unlikely to improve the situation
concerning NPAs.

20
CHAPTER 3
PRODUCTS &
SERVICES
OFFERED BY
UNIVERSAL
BANKING

21
3.1 Products and Services Offered By Universal Banks:

Broad Classification of Products in a Universal banking is different products in a

universal bank can be broadly classified into:

1. Retail Banking.
2. Trade Finance.
3. Treasury Operations.

Retail Banking and Trade finance operations are conducted at the branch level while the
wholesale banking operations, which cover treasury operations, are at the hand office or a
designated branch.

1. Retail Banking

Retail banking is typical mass-market banking where individual customers use local
branches of larger commercial banks. Services offered include: savings and checking
accounts, mortgages, personal loans, debit cards, credit cards, and so. Retail banking aims
to be the one-stop shop for as many financial services as possible on behalf of retail clients.
Some retail banks have even made a push into investment services such as wealth
management, brokerage accounts, private banking and retirement planning. While some of

22
these ancillary services are outsourced to third parties (often for regulatory reasons), they
often intertwine with core retail banking accounts like checking and savings to allow for
easier transfers and maintenance.

Services provided by Retail Banks:

1. Deposits
2. Loans, Cash Credit and Overdraft
3. Negotiating for Loans and advances
4. Remittances
5. Book-Keeping (maintaining all accounting records)
6. Receiving all kinds of bonds valuable for safe keeping

2. Trade Finance

Trade finance is related to international trade. While a seller (the exporter) can request the
purchaser (an importer) to prepay for goods shipped, the purchaser (importer) may wish to
reduce risk by requiring the seller to document the goods that have been shipped. Banks may
assist by providing various forms of support. For example, the importer's bank may provide a

23
letter of credit to the exporter (or the exporter's bank) providing for payment upon
presentation of certain documents, such as a bill of lading. The exporter's bank may make a
loan (by advancing funds) to the exporter on the basis of the export contract. Other forms of
trade finance can include trade credit insurance, export factoring, forfaiting and others. In
many countries, trade finance is often supported by quasi-government entities known as
export credit agencies that work with commercial banks and other financial institutions. In
short, trade finance means money lent to exporters or importers.

It includes the following services:

1. Issuing and confirming of letter of credit.

2. Drawing, accepting, discounting, buying, selling, collecting of bills of exchange,
3. promissory notes,
4. drafts,
5. Bill of lading and other securities.

3. Treasury Operations:

24
 Treasury management (or treasury operations) includes management of an enterprise's
holdings. It includes activities like trading in bonds, currencies, financial derivatives and also
encompasses the associated financial risk management. All banks have departments devoted
to treasury management, as do larger corporations Bank Treasuries may have the following
departments:

a. A Fixed Income or Money Market desk that is devoted to buying and selling interest
bearing securities.
b. A Foreign exchange or "FX" desk that buys and sells currencies.
c. A Capital Markets or Equities desk that deals in shares listed on the stock market.

In addition the Treasury function may also have a Proprietary Trading desk that
conducts trading activities for the bank's own account and capital, an Asset liability
management or ALM desk that manages the risk of interest rate mismatch and liquidity; and
a Transfer Pricing or Pooling function that prices liquidity for business lines (the liability and
asset sales teams) within the bank. Banks may or may not disclose the prices they charge for
Treasury Management products.

The operations include:

Buying and selling of bullion. Foreign exchange, Acquiring, holding, underwriting and
dealing in shares, debentures, etc. Purchasing and selling of bonds and securities on behalf of
constituents. The banks can also act as an agent of the Government or local authority. They
insure, guarantee, underwrite, participate in managing and carrying out issue of shares,
debentures, etc. Apart from the above-mentioned functions of the bank, the bank provides a
whole lot of other services like investment counseling for individuals, short -term funds
management and portfolio management for individuals and companies. It undertakes the
inward and outward remittances with reference to foreign exchange and collection of varied
types for the Government.

1. Cash Management:

Cash management is the corporate process of collecting and managing cash, as well as
using it for (short-term) investing. It is a key component of ensuring a company's financial

25
stability and solvency. Corporate treasurers or business managers are frequently responsible for
overall cash management and the related responsibilities to remain solvent.

2. Liquidity Management:

In finance, liquidity management takes one of two forms based on the definition
of liquidity. One type of liquidity refers to the ability to trade an asset, such as a stock or bond, at
its current price. The other definition of liquidity applies to large organizations, such as financial
institutions. Banks are often evaluated on their liquidity, or their ability to meet cash
and collateral obligations without incurring substantial losses. In either case, liquidity
management describes the effort of investors or managers to reduce liquidity risk exposure.

3. Financial Risk:

Financial risk is any of various types of risk associated with financing, including financial
transactions that include company loans in risk of default. Often it is understood to include
only downside risk, meaning the potential for financial loss and uncertainty about its extent.

A science has evolved around managing market and financial risk under the general title
of modern portfolio theory initiated by Dr. Harry Markowitz in 1952 with his article, "Portfolio
Selection". In modern portfolio theory, the variance (or standard deviation) of a portfolio is used
as the definition of risk.

Types of Financial Risk:

Asset-backed risk:

Risk that the changes in one or more assets that support an asset-backed security will
significantly impact the value of the supported security. Risks include interest rate, term
modification, and prepayment risk.

Credit risk:

Credit risk, also called default risk, is the risk associated with a borrower going
into default (not making payments as promised). Investor losses include
lost principal and interest, decreased cash flow, and increased collection costs. An investor can

26
also assume credit risk through direct or indirect use of leverage. For example, an investor may
purchase an investment using margin. Or an investment may directly or indirectly use or rely
on repo, forward commitment, or derivative instruments.

Foreign investment risk:

Risk of rapid and extreme changes in value due to: smaller markets;
differing accounting, reporting,or auditing standards; nationalization, expropriation or
confiscatory taxation; economic conflict; or political or diplomatic changes. Valuation, liquidity,
and regulatory issues may also add to foreign investment risk.

Liquidity risk:

This is the risk that a given security or asset cannot be traded quickly enough in the
market to prevent a loss (or make the required profit). There are two types of liquidity risk:

Asset liquidity - An asset cannot be sold due to lack of liquidity in the market - essentially a
sub-set of market risk. This can be accounted for by:
Widening bid-offer spread
Making explicit liquidity reserves
Lengthening holding period for VaR calculations
Funding liquidity - Risk that liabilities:
Cannot be met when they fall due
Can only be met at an uneconomic price
Can be name-specific or systemic
Market risk:

The four standard market risk factors are equity risk, interest rate risk, currency risk, and
commodity risk:

A. Equity risk is the risk that stock prices in general (not related to a particular company or
industry) or the implied volatility will change.
B. Interest rate risk is the risk that interest rates or the implied volatility will change.
C. Currency risk is the risk that foreign exchange rates or the implied volatility will change,
which affects, for example, the value of an asset held in that currency.
D. Commodity risk is the risk that commodity prices (e.g. corn, copper, crude oil) or implied
volatility will change.

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 4. Commodities Risk:

Commodity risk refers to the uncertainties of future market values and of the size of the
future income, caused by the fluctuation in the prices of commodities. These commodities may
be grains, metals, gas, electricity etc. A commodity enterprise needs to deal with the following
kinds of risks:

Price risk is arising out of adverse movements in the world prices, exchange rates, basis
between local and world prices. The related price area risk usually has a rather minor
impact.
Quantity or volume risk
Cost risk (Input price risk)
Political risk

5. Accounting Control:

Accounting control is the methods and procedures that are implemented by a firm to help
ensure the validity and accuracy of its own financial statements. The accounting controls do not
ensure compliance with laws and regulations, but rather are designed to help a company comply.

6. Risk Valuation:

Valuation risk is the financial risk that an asset is overvalued and is worth less than
expected when it matures or is sold. Factors contributing to valuation risk can include incomplete
data, market instability, financial modelling uncertainties and poor data analysis by the people
responsible for determining the value of the asset. This risk can be a concern for investors,
lenders, financial regulators and other people involved in the financial markets. Overvalued
assets can create losses for their owners and lead to reputational risks; potentially
impacting credit ratings, funding costs and the management structures of financial institutions.

Valuation risks concern each stage of the transaction processing and investment
management chain. From front office, to back office, distribution, asset management, private
wealth and advisory services. This is particularly true for assets that have low liquidity and are
not easily tradable in public exchanges. Moreover, issues associated with valuation risks go

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beyond the firm itself. With straight through processing and algorithmic trading, data and
valuations must remain synchronized among the participants of the trade processing chain. The
executing venue, prime brokers, custodian banks, fund administrators, transfer agents and audit
share files electronically and try to automate such processes, raising potential risks related to data
management and valuations.

7. Treasury Technology:

Treasury technology is any software that can assist an organization with their treasury
management functions. Some examples of treasury technology are treasury workstations, bank
websites, spread sheets, etc. The goal of implementing any treasury technology is to create a
more efficient and secure treasury department.

3.2 Common Banking Products Available:

Some of common available banking products which are in universal banks are explained
below:

3.2.1 Credit Card

3.2.2 Debit Card

3.2.3 A.T.M

3.2.4 E-Cheques

3.2.5 EFT

3.2.6 Tele Banking

3.2.7 Mobile Banking

3.2.8 Internet Banking

3.2.9 Demat

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3.2.1 Credit Card:

Credit Card is postpaid or pay later card that draws from a credit line-money
made available by the card issuer (bank) and gives one a grace period to pay. If the amount is
not paid full by the end of the period, one is charged interest. A credit card is nothing but a
very small card containing a means of identification, such as a signature and a small photo. It
authorizes the holder to change goods or services to his account, on which he is billed. The
bank receives the bills from the merchants and pays on behalf of the card holder. These bills
are assembled in the bank and the amount is paid to the bank by the card holder totally or by
installments. The bank charges the customer a small amount for these services. The card
holder need not have to carry money/cash with him when he travels or goes for purchasing.

Credit cards have found wide spread acceptance in the metros and big cities. Credit cards
are joining popularity for online payments. The major players in the Credit Card market are
the foreign banks and some big public sector banks like SBI and Bank of Baroda.

30
3.2.2 Debit Cards:

A debit card (also known as a bank card or check card) is a plastic card that provides
an alternative payment method to cash when making purchases. Functionally, it can be called
an electronic check, as the funds are withdrawn directly from either the bank account or from
the remaining balance on the card. In some cases, the cards are designed exclusively for use
on the Internet, and so there is no physical card. In many countries the use of debit cards has
become so widespread that their volume of use has overtaken or entirely replaced the check
and, in some instances, cash transactions. Like credit cards, debit cards are used widely for
telephone and Internet purchases and, unlike credit cards, the funds are transferred
immediately from the bearer's bank account instead of having the bearer pay back the money
at a later date.

Debit cards may also allow for instant withdrawal of cash, acting as the ATM card for
withdrawing cash and as a check guarantee card. Merchants may also offer cash back
facilities to customers, where a customer can withdraw cash along with their purchase. Debit
Card holder need not carry a bulky checkbook or large sums of cash when he/she goes at for
shopping. This is a fast and easy way of payment one can get debit card facility as debit
cards use ones own money at the time of sale, so they are often easier than credit cards to
obtain.

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3.2.3 Automatic Teller Machine:

An automated teller machine (ATM), also known as an automated banking machine

(ABM) or Cash Machine and by several other names, is a computerized telecommunications
device that provides the clients of a financial institution with access to financial transa ctions
in a public space without the need for a cashier, human clerk or bank teller. On most modern
ATMs, the customer is identified by inserting a plastic ATM card with a magnetic stripe or a
plastic smart card with a chip that contains a unique card number and some security
information such as an expiration date or CVVC (CVV). Authentication is provided by the
customer entering a personal identification number (PIN). Using an ATM, customers can
access their bank accounts in order to make cash withdrawals, credit card cash advances, and
check their account balances as well as purchase prepaid cell phone credit. If the currency
being withdrawn from the ATM is different from that which the bank account is denominated
in (e.g.: Withdrawing Japanese Yen from a bank account containing US Dollars), the money
will be converted at a wholesale exchange rate. Thus, ATMs often provide the best possible
exchange rate for foreign travelers and are heavily used for this purpose as well.

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 ATMs are known by various other names including automatic banking machine (or
automated banking machine particularly in the United States) (ABM), automated transaction
machine, cash point (particularly in the United Kingdom), money machine, bank machine,
cash machine, hole-in-the-wall, auto teller (after the Bank of Scotland's usage), cash line
machine (after the Royal Bank of Scotland's usage), MAC Machine (in the Philadelphia
area), Bank mat (in various countries particularly in Europe and including Russia),
Multibanco (after a registered trade mark, in Portugal), Minibank in Norway, Geld Automaat
in Belgium and the Netherlands, and All Time Money in India.

Advantages of ATMs:

To the Customers:

1. ATMs provide 24 hrs. 7 days and 365 days a year service.

2. Service is quick and efficient
3. Privacy in transaction
4. Wider flexibility in place and time of withdrawals.
5. The transaction is completely secure you need to key in Personal Identification
Number (Unique number for every customer).
6. To Banks
7. Alternative to extend banking hours.
8. Crowding at bank counters considerably reduced.
9. Alternative to new branches and to reduce operating expenses.
10. Relieves bank employees to focus on more analytical and innovative work.
11. Increased market penetration.
12. ATMs can be installed anywhere like Airports, Railway Stations, Petrol Pumps, Big
Business arcades, markets, etc. Hence, it gives easy access to the customers, for
obtaining cash.

Disadvantage of ATMs:

1. Cannot be provided in rural areas: In a country like India, where banks are having
large number of rural and non-computerized branches, ATM services cannot be provided.

33
 2. Presence various constraints: Even if banks make some efforts to introduce ATM
services country side, various constraints like illiteracy, security concern, etc., may not
permit that.
3. Limitation of cash withdrawals: Again there is a limitation of cash withdrawals from
ATM. For example, many banks do not permit withdrawal of more than 25,000 at a time.
4. Cash deposit facility is not safe: Similarly cash deposit facility is restricted and not safe
as dropping of envelope with can in ATM is not advisable.
5. Possibility of misusing ATM card: ATM card, if misplaced, lost or stolen, may be
misused. There are number of such reported incidences now days.
6. Loss of personnel touch with the Banks: Last but not the least, customers lose personal
touch with their bankers.

The ATM services provided first by the foreign banks like Citibank, Grind lays bank
and now by many private and public sector banks in India like ICICI Bank, HDFC Bank,
SBI, UTI Bank etc. The ICICI has launched ATM Services to its customers in all the
Metropolitan Cities in India. By the end of 1990 Indian Private Banks and public sector
banks have come up with their own ATM Network in the form of SWADHAN. Over the
past year up to 44 banks in Mumbai, Vashi and Thane have become a part of SWADHAN
a system of shared payments networks, introduced by the Indian Bank Association (IBA).

34
3.2.4 E-Cheques:

E-cheques are a mode of electronic payments. E-cheques work the same way as paper
cheques and are a legally binding promise to pay. This technology was developed couple of
years ago by a consortium of Silicon Valley IT researchers and merchant bankers and since
then has been promoted by many of the financial bodies. E-cheques work the same way as
paper cheques and are a legally binding promise to pay. The payment system uses digitally
signed XML documents that provide mechanism to authenticate parties to a transaction. E-
cheques are defined using FSML (financial services markup language) which allows for
addition and deletion of document blocks, signing, co-signing, endorsing, etc.

Signatures are accompanied by bank-issued certificates which tie the signer's key to a
bank account. It seems that consumers would gain from having E-cheques available to make
payments for online purchases. The online merchants on the other hand could receive
payments instantly and since the customers bank will be involved in the transaction. It
would be impossible for E-cheques to bounce. Banks can do paperless, efficient transactions.

A typical electronic cheque transaction takes place in the following manner:

1. The customer accesses the merchant server and the merchant server presents its goods
to the customer.

35
 2. The consumer selects the goods and purchases them by sending an e-cheque to the
merchant.
3. The merchant validates the e-cheque with its bank for payment authorisation.
4. The merchant electronically forwards the e-cheque to its bank.
5. The merchants bank forwards the e-cheque to the clearing house for cashing.
6. The clearing house jointly works with the consumers bank clears the cheque and
transfers the money to the merchants banks.
7. The merchants bank updates the merchants account.
8. The consumers bank updates the consumers account with the withdrawal
information.
9. The e-chequing is a great boon to big corporate as well as small retailers. Most major
banks accept e-cheques. Thus this system offers secure means of collecting payments,
transferring value and managing cash flows.

3.2.5 Electronic Funds Transfer (EFT):

Many modern banks have computerized their cheque handling process with computer
networks and other electronic equipments. These banks are dispensing with the use of paper
cheques. The system called electronic fund transfer (EFT) automatically transfers money
from one account to another. This system facilitates speedier transfer of funds electronically

36
from any branch to any other branch. In this system the sender and the receiver of funds may
be located in different cities and may even bank with different banks. Funds transfer within
the same city is also permitted. The scheme has been in operation since February 7, 1996, in
India. The other important type of facility in the EFT system is automated clearing houses.
These are the computer centers that handle the bills meant for deposits and the bills meant
for payment. In big companies pay is not disbursed by issued cheques or issuing cash. The
payment office directs the computer to credit an employees account with the persons pay.

3.2.6 Telebanking:

Telebanking refers to banking on phone services customer can access information

about his/her account through a telephone call and by giving the coded Personal
Identification Number (PIN) to the bank. Telebanking is extensively user friendly and
effective in nature. To get a particular work done through the bank, the users may leave his
instructions in the form of message with bank. Facility to stop payment on request. One can
easily know about the cheque status. Telephone banking is a service provided by a bank or
other financial institution, that enables customers to perform a range of financial
transactions over the telephone, without the need to visit a bank branch or automated teller
machine. Telephone banking times are usually longer than branch opening times, and some

37
financial institutions offer the service on a 24-hour basis. However, some banks impose
restrictions on which accounts may be accessed through telephone banking and limits on the
amount that can be transacted. The types of financial transactions which a customer may transact
through telephone banking include obtaining account balances and list of latest
transactions, electronic bill payments, and funds transfers between a customer's or
another's accounts. Telephone banking cannot be used for cash or documents (such as cheques)
for which customers must visit an ATM or bank branch. From the bank's point of view,
telephone banking reduces the cost of handling transactions by reducing the need for customers
to visit a bank branch for non-cash withdrawal and deposit transactions. However, the use of
telephone banking services has been declining in favour of internet banking since the early
2000s.

1. Information on the current interest rates.

2. Information with regard to foreign exchange rates.
3. Request for a DD or pay order.
4. D-Mat Account related services.
5. And other similar services.

3.2.7 Mobile Banking:

A new revolution in the realm of e-banking is the emergence of mobile banking. On-
line banking is now moving to the mobile world, giving everybody with a mobile phone

38
access to real-time banking services, regardless of their location. But there is much more to
mobile banking from just on-line banking. It provides a new way to pick up information and
interact with the banks to carry out the relevant banking business. The potential of mobile
banking is limitless and is expected to be a big success. Booking and paying for travel and
even tickets is also expected to be a growth area.

According to this system, customer can access account details on mobile using the
Short Messaging System (SMS) technology where select data is pushed to the mobile device.
The wireless application protocol (WAP) technology, which will allow user to surf the net on
their mobiles to access anything and everything. This is a very flexible way of transacting
banking business. Already ICICI and HDFC banks have tied up cellular service provides
such as Airtel, Orange, Sky Cell, etc. in Delhi and Mumbai to offer these mobile banking
services to their customers.

3.2.8 Internet Banking:

Internet banking involves use of internet for delivery of banking products and
services. With internet banking is now no longer confirmed to the branches where one has to
approach the branch in person, to withdraw cash or deposits a cheque or requests a statement

39
of accounts. In internet banking, any inquiry or transaction is processed online without any
reference to the branch (anywhere banking) at any time.

The Internet Banking now is more of a normal rather than an exception due to the fact
that it is the cheapest way of providing banking services. As indicated by McKinsey
Quarterly research, presently traditional banking costs the banks, more than a dollar per
person, ATM banking costs 27 cents and internet banking costs below 4 cents approximately.
ICICI bank was the first one to offer Internet Banking in India.

Benefits of Internet Banking:

1. Reduce the transaction costs of offering several banking services and diminishes the
need for longer numbers of expensive brick and mortar branches and staff.
2. Increase convenience for customers, since they can conduct many banking transaction
24 hours a day.
3. Increase customer loyalty.
4. Improve customer access.
5. Attract new customers.
6. Easy online application for all accounts, including personal loans and mortgages
7. Financial Transaction on the Internet:
8. Electronic Cash: Companies are developing electronic replicas of all existing payment
system: cash, cheque, credit cards and coins.
9. Automatic Payments: Utility companies, loans payments, and other businesses use on
automatic payment system with bills paid through direct withdrawal from a bank
account.
10. Direct Deposits: Earnings (or Government payments) automatically deposited into
bank accounts, saving time, effort and money.
11. Stored Value Cards: Prepaid cards for telephone service, transit fares, highway tolls,
laundry service, library fees and school lunches.
12. Point of Sale transactions: Acceptance of ATM/Cheque at retail stores and restaurants
for payment of goods and services. This system has made functioning of the stock
Market very smooth and efficient.

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 13. Cyber Banking: It refers to banking through online services. Banks with web site
Cyber branches allowed customers to check balances, pay bills, transfer funds, and
apply for loans on the Internet.

Advantages of Internet Banking:

Internet Banking has several advantages over traditional one which makes operating an account
simple and convenient. It allows you to conduct various transactions using the bank's website
and offers several advantages. Some of the advantages of internet banking are:

1. Online account is simple to open and easy to operate.

2. It is quite convenient as you can easily pay your bills, can transfer funds between
accounts, etc. Now you do not have to stand in a queue to pay off your bills; also you do
not have to keep receipts of all the bills as you can now easily view your transactions.

3. It is available all the time, i.e. 24x7. You can perform your tasks from anywhere and at
any time; even in night when the bank is closed or on holidays. The only thing you need
to have is an active internet connection.

4. It is fast and efficient. Funds get transferred from one account to the other very fast. You
can also manage several accounts easily through internet banking.

5. Through Internet banking, you can keep an eye on your transactions and account balance
all the time. This facility also keeps your account safe. This means that by the ease of
monitoring your account at any time, you can get to know about any fraudulent activity
or threat to your account before it can pose your account to severe damage.

6. It also acts as a great medium for the banks to endorse their products and services. The
services include loans, investment options, and many others.

Disadvantages of Internet Banking

Though there are many advantages of internet banking, but nothing comes without disadvantages
and everything has its pros and cons; same is with internet banking. It also has some

41
disadvantages which must be taken care of. The disadvantages of online banking include the
following:

1. Understanding the usage of internet banking might be difficult for a beginner at the first
go. Though there are some sites which offer a demo on how to access online accounts,
but not all banks offer this facility. So, a person who is new might face some difficulty.

2. You cannot have access to online banking if you dont have an internet connection; thus
without the availability of internet access, it may not be useful.

3. Security of transactions is a big issue. Your account information might get hacked by
unauthorized people over the internet.

4. Password security is a must. After receiving your password, do change it and memorize
it otherwise your account may be misused by someone who gets to know your password
inadvertently.

5. You cannot use it, in case; the banks server is down.

6. Another issue is that sometimes it becomes difficult to note whether your transaction was
successful or not. It may be due to the loss of net connectivity in between, or due to a
slow connection, or the banks server is down.

Internet Banking has definitely made the life easy for users by providing online access to various
banking services.

3.2.9 Demat:

42
 Demat is short for de-materialization of shares. In short, Demat is a process where at
the customers request the physical stock is converted into electronic entries in the
depository system. In January 1998 SEBI (Securities and Exchange Board of India) initiated
DEMAT ACCOUNTANCY System to regulate and to improve stock investing. As on date,
to trade on shares it has become compulsory to have a share demat account and all trades
take place through demat. One needs to open a Demat Account with any of the branches of
the bank. After opening an account with any bank, by filling the demat request form one can
handover the securities. The rest will be taken care by the bank and the customer will receive
credit of shares as soon as it is confirmed by the Company/Register and Transfer Agent.
There is no physical movement of share certification any more. Any buying or selling of
shares is done via electronic transfers. If the investor wants to sell his shares, he has to place
an order with his broker and give a Delivery Instruction to his DP (Depository Participant).
The DP will debit his account with the number of shares sold by him. If one wants to buy
shares, he has to inform his broker about his Depository Account Number so that the shares
bought by him are credited in to his account. Payment for the electronic shares bought or
sold is to be made in the same way as in the case of physical securities.

3.3 Universal Banking Services:

Banking covers so many services that it is difficult to define it. However, these
basic services have always been recognized as the hallmark of the genuine banker. These are:

1) The receipt of the customers deposits

2) The collection of his cheques drawn on other banks
3) The payment of the customers cheques drawn on himself
4) There are other various types of banking services like:
5) Advances Overdraft, Cash Credit, etc.
6) Deposits Saving Account, Current Account, etc.
7) Financial Services Bill discounting etc
8) Foreign Services Providing foreign currency, travelers cheques, etc.
9) Money Transmission Funds transfer etc.

43
 10) Savings Fixed deposits, etc.
11) Services of place or time ATM Services.
12) Status Debit Cards, Credit Cards, etc.

3.4 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:

1. 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.

2. 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.

44
 3. 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, diversifi able 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 to an agent.

4. One stops 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.

5. 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.

6. 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 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.

Weaknesses:

45
 1. 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.

2. 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.

3. 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. 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:

1. 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

46
to improve their efficiency and productivity, which will lead to new products and better
services.

2. 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.

3. 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.

Threats:

47
 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 t heir
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.

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 CHAPTER 4
COMMITTEE
REPORTS,
GUIDELINES AND
ITS IMPACT

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4.1 Khan Committee on Universal Banking:

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: -

A. Give banking license to DFIs

B. Merge banks with banks, DFIs
C. Bring down CRR progressively
D. Phase out SLR
E. Redefine priority sector
F. Set up a super regulator to coordinate regulators activities
G. Develop risk-based supervisory framework
H. Usher in legal reforms in debt recovery
I. State level FIs be allowed to go public and come under RBI
J. DFIs be permitted to have wholly-owned banking subsidiaries
K. Remove cap on FIs resources mobilization
L. Grant authorized dealers license to DFIs
M. Set up a standing committee to coordinate lending policies

Recommendations:

1. About 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.

2. About 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.

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 3. About The Main Areas Of Operations Of DFIs And Banks Presently And How:

Universalization 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 are less
dominant presently. Some of them may even diversify into insurance and other related areas.

4. About Requirement Of Cost Considerations In Universalization:

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.

5. About 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.

6. About The Committee Which Recommended Universal Banking & What It

Suggested:

The S H Khan Committee suggested the concept of Universal Banking. It also

suggested to give banking license 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 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,

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grant authorized dealers license to DFIs, set up a standing committee to coordinate lending
policies etc.

7. About The Likely Gains From Universalization:

The universalization 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 Bank s
Business Volumes or Profits.

8. About The Apprehensions Of Universalization:

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.

4.2 Need Of Universal Banking In India As Per Committees:

The phenomenon of universal bankingas different from narrow banking is suddenly

in the news. With the second Narsimham 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 reportsin favor 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 improves
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. A bank has an existing network of branches, which can act as shops for

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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,
e.g., in the case of project lending to the same firm, which has purchased insurance from
banking. 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). This means that commercial banks can enter insurance business either by
acting as agents or by setting up joint ventures with insurance companies. 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.

4.3 NARASIMHAN COMMITTEE:

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

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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, Narsimham Committee's recommendation that, ultimately there should be only banks
and Restructured NBFCs can be operationalized.

4.4 RBI Guidelines for Existing Banks/FIs for Conversion into Universal Banks:

Salient operational and regulatory issues to be addressed by the FIs For the conversion
into Universal bank are: -

1. 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

2. 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.

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 3. 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.

4. 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

5. 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.

6. 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.

7. 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.

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 8. 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.

9. Licensing:

An FI converting into a universal bank would be required to obtain a banking license

from RBI under Section 22 of the B. R. Act, for carrying on banking business in India, after
complying with the applicable conditions.

10. 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.

11. 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.

12. 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 Third Schedule to
the B R Act, as prescribed for a banking company under Section 29 and Section 30 of the B.
R. Act.

13. 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

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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.

14. 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.

15. 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.

16. 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 .

17. 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.

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4.5 Impact of Universal Banking:

Since the early 1990s, banking systems worldwide have been going through a rapid
transformation. Mergers, amalgamations and acquisitions have been undertaken on a large
scale in order to gain size and to focus more sharply on competitive strengths. This
consolidation has produced financial conglomerates that are expected to maximize
economies of scale and scope by bundling the production of financial services. The general
trend has been towards downstream universal banking where banks have undertaken
traditionally non-banking activities such as investment banking, insurance, mortgage
financing, securitization, and particularly, insurance. Upstream linkages, where non -banks
undertake banking business, are also on the increase. The global experience can be
segregated into broadly three models. There is the Swedish or Hong Kong type model in
which the banking corporate engages in in-house activities associated with banking. In
Germany and the UK, certain types of activities are required to be carried out by separate
subsidiaries. In the US type model, there is a holding company structure and separately
capitalized subsidiaries.

In India, the first impulses for a more diversified financial intermediation were
witnessed in the 1980s and 1990s when banks were allowed to undertake leasing, investment
banking, mutual funds, factoring, hire-purchase activities through separate subsidiaries. By
the mid-1990s, all restrictions on project financing were removed and banks were allowed to
undertake several activities in-house. In the recent period, the focus is on Development
Financial Institutions (DFIs), which have been allowed to setup banking subsidiaries and to
enter the insurance business along with banks. DFIs were also allowed to undertake working
capital financing and to raise short-term funds within limits.

It was the Narsimham Committee II Report (1998) which suggested that the DFIs
should convert themselves into banks or non-bank financial companies, and this conversion
was endorsed by the Khan Working Group (1998). The Reserve Banks Discussion Paper
(1999) and the feedback thereon indicated the desirability of universal banking from the
point of view of efficiency of resource use, but it also emphasized the need to take into

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account factors such as the status of reforms, the state of preparedness of the i nstitutions, and
a viable transition path while moving in the desired direction.

Accordingly, the mid-term review of monetary and credit policy, October 1999 and
the annual policy statements of April 2000 and April 2001 enunciated the broad approach to
universal banking and the Reserve Banks circular of April 2001 set out the operational and
regulatory aspects of conversion of DFIs into universal banks. The need to proceed with
planning and foresight is necessary for several reasons. The move towards universal banking
would not provide a panacea for the endemic weaknesses of a DFI or its liquidity and
solvency problems and/or operational difficulties arising from undercapitalization, non -
performing assets, and asset liability mismatches, etc.

The overriding consideration should be the objectives and strategic interests of the
financial institution concerned in the context of meeting the varied needs of customers,
subject to normal prudential norms applicable to banks. From the point of view of the
regulatory framework, the movement towards universal banking should entrench stability of
the financial system, preserve the safety of public deposits, improve efficiency in financial
intermediation, ensure healthy competition, and impart transparent and equitable regulation.

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CHAPTER 5
CONCLUSION

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 5.1 CONCLUSION:

Universal banking concept can be successfully implemented only when the bank
managers have a positive attitude towards it. This is deemed important as the bank managers are
the ultimate authority to create awareness on the variety of services that are offered by the bank
and at the same time popularize those services among customers of banks so as to generate
demand. From the primary data analysis, it was found that bank managers, in general, have a
favorable attitude towards universal banking concept. Thus, it can be concluded that it is a
positive sign which would ultimately help the banks in their transition towards universal banking
framework.

It is rather very unfortunate to note that although bank managers and customers have a
positive attitude towards Universal Banking concept, what is lacking is the level of awareness
among the bank customers on the variety of services that are presently offered by the banks. A
bank can successfully 182 function as a Universal bank and sustain that status only when it has
sufficient transactions in each of its specialized unit/ area of business. Since the awareness of
banking and financial services among the existing or the potential customers is less, it is indeed a
matter of concern for the individual bank management. Thus, this can be a major obstacle and a
demotivating factor in the transition process for the banks because if there are few takers of the
services that are offered by the banks, such a transformation may not be cost effective.

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BIBLIOGRAPHY

Reference:

www.indiatimes.com

www.icfaipress.org

www.financialexpress.com

www.economictimes.com

www.answers.com/topic/universal-banking

www.investopedia.com/terms/u/universalbanking

www.google.com

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