This document discusses universal banking in India. Universal banking combines commercial banking, investment banking, insurance, and other financial activities under one roof. In India, the Narsimham Committee Report and S.H. Khan Committee Report in 1998 advised consolidating the banking industry through mergers and integrating financial activities, suggesting universal banking. Some large domestic financial institutions in India have been permitted to become universal banks, such as ICICI in 2000. Universal banking allows for economies of scale, profitable diversification, better resource utilization, easy marketing using existing brand names, and one-stop shopping convenience for customers. However, it also presents challenges such as different regulatory requirements for banks versus other financial institutions, lack of expertise in long-term lending, and

1. UNIVERSAL BANKING
Kartik Jain
Assistant Manager
Axis Bank

2. UNIVERSAL BANKING - MEANING

Universal banking is a combination of Commercial banking,
Investment banking, Development banking, Insurance and
many other financial activities. It is a place where all
financial products are available under one roof.
 So, a universal bank is a bank which offers commercial
bank functions plus other functions such as Merchant
Banking, Mutual Funds, Factoring, Credit cards, Housing
Finance, Auto loans, Retail loans, Insurance, etc.

3. UNIVERSAL BANKING IN INDIA
 Universal banking is done by very large banks. These banks
provide a lot of finance to many companies. So, they take part in
the Corporate Governance (management) of these companies.
These banks have a large network of branches all over the
country and all over the world. They provide many different
financial services to their clients.
 ln India, two reports in 1998 mentioned the concept of universal
banking. They are, the Narsimham Committee Report and the
S.H. Khan Committee Report. Both these reports advised to
consolidate (bring together) the banking industry through mergers
and integration of financial activities. That is, they advised a
combination of all banking and financial activities. That is, they
suggested a Universal banking.
 In 2000, ICICI asked permission from RBI to become a universal
bank. RBI wants some big domestic financial institutions to
become universal banks.

4. ADVANTAGES OF UNIVERSAL BANKING
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.
Many Committees and reports by Reserve Bank of India are in favour of Universal banking
as it enables banks to use economies of scale and scope.
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.
3) 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
4) 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.
5) 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.


5. DISADVANTAGES OF UNIVERSAL BANKING
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 requirement 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 to a DFI. 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 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.

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

7.  g) Restriction on investments. An FI with equity investment in companies in excess of 30 per
cent of the paid up share capital of that company or 30 per cent of its own paid-up share capital
and reserves, whichever is less, on its conversion into a universal bank, would need to divest
such excess holdings to secure compliance with the provisions of Section 19(2) of the B. R. Act,
which prohibits a bank from holding shares in a company in excess of these limits.
 h) Connected lending. Section 20 of the B. R. Act prohibits grant of loans and advances by a
bank on security of its own shares or grant of loans or advances on behalf of any of its directors
or to any firm in which its director/manager or employee or guarantor is interested. The
compliance with these provisions would be mandatory after conversion of an FI to a universal
bank.
 i) Licensing. An FI converting into a universal bank would be required to obtain a banking
license from RBI under Section 22 of the B. R. Act, for carrying on banking business in India,
after complying with the applicable conditions.
 j) Branch network An FI, after its conversion into a bank, would also be required to comply with
extant branch licensing policy of RBI under which the new banks are required to allot at least 25
per cent of their total number of branches in semi-urban and rural areas.
 k) Assets in India. An FI after its conversion into a universal bank, will be required to ensure that
at the close of business on the last Friday of every quarter, its total assets held in India are not
less than 75 per cent of its total demand and time liabilities in India, as required of a bank under
Section 25 of the B R Act.
 l) Format of annual reports. After converting into a universal bank, an FI will be required to
publish its annual balance sheet and profit and loss account in the forms set out in the Third
Schedule to the B R Act, as prescribed for a banking company under Section 29 and Section 30
of the B. R. Act.

8.  m) Managerial remuneration of the Chief Executive Officers. On conversion into a universal
bank, the appointment and remuneration of the existing Chief Executive Officers may have to be
reviewed with the approval of RBI in terms of the provisions of Section 35 B of the B. R. Act. The
Section stipulates fixation of remuneration of the Chairman and Managing Director of a bank by
Reserve Bank of India taking into account the profitability, net NPAs and other financial
parameters. Under the Section, prior approval of RBI would also be required for appointment of
Chairman and Managing Director.
 n) Deposit Insurance. An FI, on conversion into a universal bank, would also be required to
comply with the requirement of compulsory deposit insurance from DICGC up to a maximum of
Rs.1 lakh per account, as applicable to the banks.
 o) Authorized Dealer's License. Some of the FIs at present hold restricted AD 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.
 p) Priority sector lending. On conversion of an FI to a universal bank, the obligation for lending
to "priority sector" up to a prescribed percentage of their 'net bank credit' would also become
applicable to it.
 q) Prudential norms. After conversion of an FI in to a bank, the extant prudential norms of RBI
for the all-India financial institutions would no longer be applicable but the norms as applicable to
banks would be attracted and will need to be fully complied with.

9. Banks in India are present in the following areas of the universal
banking activity –
 1. Credit market
 2. Consumer finance market
 3. Savings market
 4. Money market
 5. Capital market
 6. Forex market
 7. Commodities market
 8. International banking
 9. Advisory service market (merchant banking)

10.  10. Investment banking
 11. Insurance market
 12. Factoring
 13. Credit, Debit and Smart cards
 14. Pension market
 15. Project financing
 16. Venture capital
 17. On-line share broking
 18. Internet banking
 19. Telephone banking
 20. Mobile banking
 21. Securitisation

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