Universal Banking

Universal banking is a system of banking where banks undertake a blanket of financial services like investment banking, commercial banking, development banking, insurance and other financial services including functions of merchant banking, mutual funds, factoring, housing finance, insurance etc.

In simple words, Universal Banking means that Financial Institutions (FIs) and Banks are allowed to undertake all kinds of activity of banking , financing and related businesses. As per the World Bank, the definition of the Universal Bank is as follows: In Universal banking, the 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. So we can say that Universal bank is a Financial Supermarket which provides all financial products under one roof.

Apart from savings and loans, the Universal banks provides services such as investing in securities, credit cards, project finance, remittances, payment systems, project counselling, merchant banking, forex operations, insurance and so on.

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

Universal Banking is usually undertaken by large banks who can manage the cost of such widespread operations.  The concept was culmination of reports submitted by Narasimham Committee and S.H. Khan Committee which had suggested to consolidate the financial industry of India via medium of merging financial activities carried by different types of financial institutions.

The practice of universal banking  is common in European countries in which it is found in three forms:

• In-house universal banks
• Universal banking through separate subsidiaries
• Universal banking through holding companies

Universal Banking in India

The second Narasimham committee of 1998 gave an introductory remark on the concept of the Universal banking, as a different concept than the Narrow Banking. Narsimham Committee II suggested that Development Financial Institutions (DFIs) should convert ultimately into either commercial banks or non-bank finance companies.

However, the concept of Universal Banking conceptualized in India after the RH Khan Committee recommended it as a different concept. The Khan Working Group held the view that DFIs (Development Finance Institutions) should be allowed to become banks at the earliest.

Advantages of Universal Banking

Economies of Scale would result in greater economic efficiency in the form of lower cost, higher output and better products.

• Increased diversions and increased profitability
• Better Resource Utilization.
• Brand name leverage
• Existing clientele leverage
• Value added services
• ‘One-stop shopping’ saves a lot of transaction costs

Hurdles in Universal Banking

• Different regulatory framework for Financial Institutions and Banks
• No expertise in both the fields as both need domain expertise.
• Long gestation of Infrastructure Financing

RBI Guidelines on Universal Banking

Some of the guidelines are as follows:

• Once the FI becomes a universal Bank, it would be compliant with the CRR and SLR requirements of the RBI.
• The activity which is permissible for the FI but NOT permissible for Bank would have to be stopped.
• Any immovable property acquired by the FI would have to be disposed of in 7 years time.
• The composition of the Board of Directors would be required to be changed so that it is compliant with the Section 10 (A) of the Banking Regulation Actwhich requires at least 51% of the total number of directors to have special knowledge and experience.
• If there is any floating charge on any of its assets, it would have to be ratified by the RBI 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 14 (A) of B R Act.
• If there is any subsidiary that is engaged in an activity which is not permissible under the B R Act, then the subsidiary will have to be delinked.
• Banks cannot hold shares in the companies in excess of 30% of the paid up share capital of that company or 30 per cent of its own paid-up share capital and reserves as per the B R act, so , the FI after becomes a Universal Bank shall divert the excess of the equity.
• 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.
• The FI would require obtaining a license from RBI to carry business of banking in India and has to comply with the applicable conditions.
• The FI would need to comply with the existing branch licensing policy of RBI which requiresallotting at least 25 per cent of their total number of branches in semi-urban and rural areas.
• At the close of business on the last Friday of every quarter, the FI after becomes a Universal Bank, would make sure that 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.
• Publishing annual Financial reports as per requirements of the B R Act

Relevance of Universal Banking

The relevance and importance of these institutions can be gauged from the host of economic functions they cater to. They share high value of investors’ trust as they generally have equity stakes in many firms which gives a boost to investors to invest in these firms. RBI favours the system as it is able to reach economies of scale as all services are provided under one roof and handled by financial experts who can deal with different products. Even the marketing efforts and costs are reduced by in-house selling of new services to existing customers which then take it to new ones by word-of-the-mouth marketing technique. There are some flip-flops which need to be handled well for better performance. Even though there is a range of financial services available but each of these have to satisfy a unique set of regulations which often makes the operations cumbersome. Also, as universal banking is a ball-game of the big players in banking, it thus is always open to fears of monopolising the markets. In addition, if these banks fail, it will be a severe jolt to the banking system and the investor confidence. While some feel that such banking helps in diversifying risk, others are of the view that separately handling of different banking services is less risky.