A PROJECT REPORT ON
“Impact of Universal Banking on the operation of banks”
Under the Guidance of
Dr. M.K. Rastogi
Submitted By
Gulzar Ahmad
(MBA IV Semester)
(Roll no. 0805470028)
Submitted for the permission of Pursuing Research Project Report
[MBA-043]
DEPARTMENT OF MANAGEMENT
SESSION 2009-10
Babu Banarasi Das
National Institute Of Technology & Management
Lucknow (U.P.)
1
DECLARATION
I undersigned Gulzar Ahmad student of MBA 4th semester declare that I
have done the project on “ Impact of universal banking on .” has been
personally done by me under the guidance of Dr. M.K. Rastogi
(B.B.D.N.I.T.M) Lucknow in partial fulfillment of MBA Program- during
academic year-2008-10. All the data represented in this project is true &
correct to the best of my knowledge & belief.
I further declare that this project work is based on my original work and no
part of this project has been published or submitted to anybody.
[Gulzar ahmad]
2
Acknowledgement
To acknowledge all the persons who had helped for the fulfillment of the
project is not possible for any researcher but in spite of all that it becomes
the foremost responsibility of the researcher and also the part of research
ethics to acknowledge those who had played a great role for the completion
of the project.
So in the same sequence at very first, I would like to acknowledge my
parents because of whom I got the existence in the world for the inception
and the conception of this project. Later on I would like to confer the flower
of acknowledgement to Dr.M.K. Rastogi and other faculty members who
taught me that how to do project through appropriate tools and techniques.
Rest all those people who helped me are not only matter of
acknowledgment but also authorized for sharing my success.
3
Preface
Decision making is a fundamental part of the research process.
Decisions regarding that what you want to do, how you want to do,
what tools and techniques must be used for the successful completion
of the project. In fact it is the researcher’s efficiency as a decision
maker that makes project fruitful for those who concern to the area of
study.
Basically when we are playing with computer in every part of life, I
used it in my project not for the ease of my but for the ease of result
explanation to those who will read this project. The project presents
the role of financial system in life of persons.
I had toiled to achieve the goals desired. Being a neophyte in this
highly competitive world of business, I had come across several
difficulties to make the objectives a reality. I am presenting this hand
carved efforts in black and white. If anywhere something is found not
in tandem to the theme then you are welcome with your valuable
suggestions.
4
Executive Summary
Banking Industry which is basically my concern industry around which my project has to be
revolved is really a very complex industry. In the financial system, the players can be broadly
classified into the following groups: public sector banks, private sector banks, foreign banks, cooperative banks, all- India financial institutions and non-banks.
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.
The topic of this project is “Impact of Universal Banking on the Operation of Banks “Because of
the following reasons, I prefer this project work Banking is an essential industry. It is where we often wind up when we are seeking a problem
in financial crisis and money related query. Banking is one of the most regulated businesses in
the world.
Findings from the study show that the admission of foreign investors in Indian banking sector,
the competition and the service value also started to increase 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 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
India's financial system is currently undergoing a period of revolutionary changes so
much so that, in the very initial phase of the next millennium, its face may be totally
unrecognizable.
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TABLE OF CONTENTS
a) DECLARATION
i
b) ACKNOWLEDGEMENT
ii
c) PREFACE
iii
d) Executive Summary
iv
1. Introduction
1
2. Universal Banking
42
3. Research Methodology
79
4. Problems and Limitations of the Research
86
5. Major findings
88
6. Suggestions and Recommendations
90
7. Conclusion
92
8. Bibliography
93
6
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.
7
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 stalwarts of India's financial community
nodded their heads sagaciously when Prime Minister Manmohan Singh said in a
speech: "If there is one aspect in which we can confidentially assert that India is ahead
of China, it is in the robustness and soundness of our banking system." Indian banks
have been rated higher than Chinese banks by international rating agency Standard &
Poor's.
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. In the fierce battle for market share and mind share,
the most potent weapon is a strong, well recognized and trusted brand name. Brands
attract and convince people that they will get what is promised. 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
8
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.
Currently overall, banking in India is considered as fairly mature in terms of supply,
product range and reach-even though reach in rural India still remains a challenge for
the private sector and foreign banks. Even in terms of quality of assets and capital
adequacy, Indian banks are considered to have clean, strong and transparent balance
sheets-as compared to other banks in comparable economies in its region. 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 operates in a more competitive environment than before and
intermediates relatively large volume of international financial flows. The introduction of
Basel II norms from 2009 and the fair level playing field that will be available to foreign
banks from 2010 will further enhance the solidarity of the Indian banking sector and
open new avenues.
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
9
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
HISTORY OF BANKING IN INDIA
Without a sound and effective banking system in India it cannot have a healthy
economy. The banking system of India should not only be hassle free but it should be
able to meet new challenges posed by the technology and any other external and
internal factors. For the past three decades India's banking system has several
10
outstanding achievements to its credit. The most striking is its extensive reach. It is no
longer confined to only metropolitans or cosmopolitans in India. In fact, Indian banking
system has reached even to the remote corners of the country. This is one of the main
reasons of India's growth process. The government's regular policy for Indian bank
since 1969 has paid rich dividends with the nationalization of 14 major private banks of
India.Not long ago, an account holder had to wait for hours at the bank counters for
getting a draft or for withdrawing his own money. Today, he has a choice. Gone are
days when the most efficient bank transferred money from one branch to other in two
days. Now it is simple as instant messaging or dial a pizza. Money has become the
order of the day. The first bank in India, though conservative, was established in 1786.
From 1786 till today, the journey of Indian Banking System can be segregated into three
distinct phases.
They are as mentioned below:
1)
Pre-Nationalization Era.
2)
Nationalization Stage.
3)
Post Liberalization Era.
1) Pre-Nationalization Era:
In India the business of banking and credit was practices even in very early times. The
remittance of money through Hundies, an indigenous credit instrument, was very
popular. The hundies were issued by bankers known as Shroffs, Sahukars, Shahus or
Mahajans in different parts of the country.
11
The modern type of banking, however, was developed by the Agency Houses of
Calcutta and Bombay after the establishment of Rule by the East India Company in 18 th
and 19th centuries.
During the early part of the 19th Century, ht volume of foreign trade was relatively small.
Later on as the trade expanded, the need for banks of the European type was felt and
the government of the East India Company took interest in having its own bank. The
government of Bengal took the initiative and the first presidency bank, the Bank of
Calcutta (Bank of Bengal) was established in 180. In 1840, the Bank of Bombay and IN
1843, the Bank of Madras was also set up.These three banks also known as
“Presidency Bank”. The Presidency Banks had their branches in important trading
centers but mostly lacked in uniformity in their operational policies. In 1899, the
Government proposed to amalgamate these three banks in to one so that it could also
function as a Central Bank, but the Presidency Banks did not favor the idea. However,
the conditions obtaining during world war period (1914-1918) emphasized the need for
a unified banking institution, as a result of which the Imperial Bank was set up in1921.
The Imperial Bank of India acted like a Central bank and as a banker for other banks.
The RBI (Reserve Bank of India) was established in 1935 as the Central Bank of the
Country. In 1949, the Banking Regulation act was passed and the RBI was nationalized
and acquired extensive regulatory powers over the commercial banks.
In 1950, the Indian Banking system comprised of the RBI, the Imperial Bank of India,
Cooperative banks, Exchange banks and Indian Joint Stock banks.
2) Nationalization Stages:
12
After Independence, in 1951, the All India Rural Credit survey, committee of Direction
with Shri. A. D. Gorwala as Chairman recommended amalgamation of the Imperial Bank
of India and ten others banks into a newly established bank called the State Bank of
India (SBI). The Government of India accepted the recommendations of the committee
and introduced the State Bank of India bill in the Lok Sabha on 16 th April 1955 and it
was passed by Parliament and got the president’s assent on 8th May 1955. The Act
came into force on 1st July 1955, and the Imperial Bank of India was nationalized in
1955 as the State Bank of India.
The main objective of establishing SBI by nationalizing the Imperial Bank of India was
“to extend banking facilities on a large scale more particularly in the rural and semiurban areas and to diverse other public purposes.”
In 1959, the SBI (Subsidiary Bank) act was proposed and the following eight stateassociated banks were taken over by the SBI as its subsidiaries.
Name of the Bank
Subsidiary with effect from
1. State Bank of Hyderabad
1st October 1959
2. State Bank of Bikaner
1st January 1960
3. State Bank of Jaipur
1st January 1960
4. State Bank of Saurashtra
1st May 1960
5. State Bank of Patiala
1st April 1960
13
6. State Bank of Mysore
1st March 1960
7. State Bank of Indore
1st January 1968
8. State Bank of Travancore
1st January 1960
With effect from 1st January 1963, the State Bank of Bikaner and State Bank of Jaipur
with head office located at Jaipur. Thus, seven subsidiary banks State Bank of India
formed the SBI Group.
The SBI Group under statutory obligations was required to open new offices in rural and
semi-urban areas and modern banking was taken to these unbanked remote areas.
On 19th July 1969, then the Prime Minister, Mrs. Indira Gandhi announced the
nationalization of 14 major scheduled Commercial Banks each having deposits worth
Rs. 50 crore and above. This was a turning point in the history of commercial banking in
India.
Later the Government Nationalized six more commercial private sector banks with
deposit liability of not less than Rs. 200 crores on 15th April 1980, viz.
i)
Andhra Bank.
ii)
Corporation Bank.
iii)
New Bank if India.
iv)
Oriental Bank of Commerce.
v)
Punjab and Sind Bank.
vi)
Vijaya Bank.
14
In 1969, the Lead Bank Scheme was introduced to extend banking facilities to every
corner of the country. Later in 1975, Regional Rural Banks were set up to supplement
the activities of the commercial banks and to especially meet the credit needs of the
weaker sections of the rural society.
Nationalization of banks paved way for retail banking and as a result there has been an
alt round growth in the branch network, the deposit mobilization, credit disposals and of
course employment.
The first year after nationalization witnessed the total growth in the agricultural loans
and the loans made to SSI by 87% and 48% respectively. The overall growth in the
deposits and the advances indicates the improvement that has taken place in the
banking habits of the people in the rural and semi-urban areas where the branch
network has spread. Such credit expansion enabled the banks to achieve the goals of
nationalization, it was however, achieved at the coast of profitability of the banks.
Consequences of Nationalization:
 The quality of credit assets fell because of liberal credit extension policy.
 Political interference has been as additional malady.
 Poor appraisal involved during the loan meals conducted for credit disbursals.
 The credit facilities extended to the priority sector at concessional rates.
15
 The high level of low yielding SLR investments adversely affected the profitability
of the banks.
 The rapid branch expansion has been the squeeze on profitability of banks
emanating primarily due to the increase in the fixed costs.
 There was downward trend in the quality of services and efficiency of the banks.
3) Post-Liberalization Era---Thrust on Quality and Profitability:
By the beginning of 1990, the social banking goals set for the banking industry made
most of the public sector resulted in the presumption that there was no need to look at
the fundamental financial strength of this bank. Consequently they remained
undercapitalized. Revamping this structure of the banking industry was of extreme
importance, as the health of the financial sector in particular and the economy was a
whole would be reflected by its performance.
The need for restructuring the banking industry was felt greater with the initiation of the
real sector reform process in 1992. the reforms have enhanced the opportunities and
challenges for the real sector making them operate in a borderless global market place.
However, to harness the benefits of globalization, there should be an efficient financial
sector to support the structural reforms taking place in the real economy. Hence, along
with the reforms of the real sector, the banking sector reformation was also addressed.
The route causes for the lackluster performance of banks, formed the elements of the
banking sector reforms. Some of the factors that led to the dismal performance of banks
were.
 Regulated interest rate structure.
16
 Lack of focus on profitability.
 Lack of transparency in the bank’s balance sheet.
 Lack of competition.
 Excessive regulation on organization structure and managerial resource.
 Excessive support from government.
Against this background, the financial sector reforms were initiated to bring about a
paradigm shift in the banking industry, by addressing the factors for its dismal
performance.
In this context, the recommendations made by a high level committee on financial
sector, chaired by M. Narasimham, laid the foundation for the banking sector reforms.
These reforms tried to enhance the viability and efficiency of the banking sector. The
Narasimham Committee suggested that there should be functional autonomy, flexibility
in operations, dilution of banking strangulations, reduction in reserve requirements and
adequate financial infrastructure in terms of supervision, audit and technology. The
committee further advocated introduction of prudential forms, transparency in
operations and improvement in productivity, only aimed at liberalizing the regulatory
framework, but also to keep them in time with international standards. The emphasis
shifted to efficient and prudential banking linked to better customer care and customer
services.
BANKING STRUCTURE IN INDIA:
17
In today’s dynamic world banks are inevitable for the development of a country. Banks
play a pivotal role in enhancing each and every sector. They have helped bring a draw
of development on the world’s horizon and developing country like India is no exception.
Banks fulfills the role of a financial intermediary. This means that it acts as a vehicle for
moving finance from those who have surplus money to (however temporarily) those who
have deficit. In everyday branch terms the banks channel funds from depositors whose
accounts are in credit to borrowers who are in debit.
Without the intermediary of the banks both their depositors and their borrowers would
have to contact each other directly. This can and does happen of course. This is what
has lead to the very foundation of financial institution like banks.
Before few decades there existed some influential people who used to land money. But
a substantially high rate of interest was charged which made borrowing of money out of
the reach of the majority of the people so there arose a need for a financial
intermediate.
The Bank have developed their roles to such an extent that a direct contact between the
depositors and borrowers in now known as disintermediation.
Banking industry has always revolved around the traditional function of taking deposits,
money transfer and making advances. Those three are closely related to each other,
the objective being to lend money, which is the profitable activity of the three. Taking
deposits generates funds for lending and money transfer services are necessary for the
attention of deposits. The Bank have introduced progressively more sophisticated
versions of these services and have diversified introduction in numerable areas of
activity not directly relating to this traditional trinity
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INDIAN BANKING SYSTEM
Reserve Bank of India
Non-Schedule Banks
Schedule Banks
State co-op
Banks
Indian
Public Sector
Banks
State Bank of
India and its
Subsidiaries
Central co-op
Banks and
Primary Cr.
Societies
Commercial
Banks
Commercial Banks
Foreign
Private Sector
Banks
Other Nationalized
Banks
HDFC,
ICICI etc.
Regional Rural
Banks
Broad Classification of Banks in India:
19
1) The RBI: The RBI is the supreme monetary and banking authority in the country
and has the responsibility to control the banking system in the country. It keeps
the reserves of all scheduled banks and hence is known as the “Reserve Bank”.
2) Public Sector Banks:

State Bank of India and its Associates (8)

Nationalized Banks (19)

Regional Rural Banks Sponsored by Public Sector Banks (196)
(3) Private Sector Banks:

Old Generation Private Banks (22)

Foreign New Generation Private Banks (8)

Banks in India (40)
(4) Co-operative Sector Banks:

State Co-operative Banks

Central Co-operative Banks

Primary Agricultural Credit Societies

Land Development Banks

State Land Development Banks
(5) Development Banks: Development Banks mostly provide long term finance for
setting up industries. They also provide short-term finance (for export and import
activities)
20

Industrial Finance Co-operation of India (IFCI)

Industrial Development of India (IDBI)

Industrial Investment Bank of India (IIBI)

Small Industries Development Bank of India (SIDBI)

National Bank for Agriculture and Rural Development (NABARD)

Export-Import Bank of India
Role of Banks:
Banks play a positive role in economic development of a country as repositories of
community’s savings and as purveyors of credit. Indian Banking has aided the
economic development during the last fifty years in an effective way. The banking sector
has shown a remarkable responsiveness to the needs of planned economy. It has
brought about a considerable progress in its efforts at deposit mobilization and has
taken a number of measures in the recent past for accelerating the rate of growth of
deposits. As recourse to this, the commercial banks opened branches in urban, semiurban and rural areas and have introduced a number of attractive schemes to foster
economic development.
The activities of commercial banking have growth in multi-directional ways as well as
multi-dimensional manner. Banks have been playing a catalytic role in area
development, backward area development, extended assistance to rural development
all along helping agriculture, industry, international trade in a significant manner. In a
way, commercial banks have emerged as key financial agencies for rapid economic
development.
21
By pooling the savings together, banks can make available funds to specialized
institutions which finance different sectors of the economy, needing capital for various
purposes, risks and durations. By contributing to government securities, bonds and
debentures of term-lending institutions in the fields of agriculture, industries and now
housing, banks are also providing these institutions with an access to the common pool
of savings mobilized by them, to that extent relieving them of the responsibility of
directly approaching the saver. This intermediation role of banks is particularly important
in the early stages of economic development and financial specification. A country like
India, with different regions at different stages of development, presents an interesting
spectrum of the evolving role of banks, in the matter of inter-mediation and beyond.
Mobilization of resources forms an integral part of the development process in India. In
this process of mobilization, banks are at a great advantage, chiefly because of their
network of branches in the country. And banks have to place considerable reliance on
the mobilization of deposits from the public to finance development programmes.
Further, deposit mobalization by banks in India acquired greater significance in their
new role in economic development.
Commercial banks provide short-term and medium-term financial assistance. The shortterm credit facilities are granted for working capital requirements. The medium-term
loans are for the acquisition of land, construction of factory premises and purchase of
machinery and equipment. These loans are generally granted for periods ranging from
five to seven years. They also establish letters of credit on behalf of their clients
favouring suppliers of raw materials/machinery (both Indian and foreign) which extend
22
the banker’s assurance for payment and thus help their delivery. Certain transaction,
particularly those in contracts of sale of Government Departments, may require
guarantees being issued in lieu of security earnest money deposits for
release of advance money, supply of raw materials for processing, full payment of bills
on the assurance of the performance etc. Commercial banks issue such guarantees
also.
The Role of Reserve Bank of India (RBI) – Banker’s Bank:
The Reserve Bank of India (RBI) is the central bank of India, and was established on
April 1, 1935 in accordance with the provisions of the Reserve Bank of India Act, 1934.
Since its inception, it has been headquartered in Mumbai. Though originally privately
owned, RBI has been fully owned by the Government of India since nationalization in
1949.
RBI is governed by a central board (headed by a Governor) appointed by the Central
Government. RBI has 22 regional offices across India. The Reserve Bank of India was
set up on the recommendations of the Hilton Young Commission. The commission
submitted its report in the year 1926, though the bank was not set up for nine years
Main Objective:
Monetary Authority

Formulates, implements and monitors the monetary policy.
23

Objective: maintaining price stability and ensuring adequate flow of credit to
productive sectors.
Regulator and supervisor of the financial system

Prescribes broad parameters of banking operations within which the country’s
banking and financial system functions.

Objective: maintain public confidence in the system, protect depositors’ interest
and provide cost-effective banking services to the public. The Banking
Ombudsman Scheme has been formulated by the Reserve Bank of India (RBI)
for effective redressal of complaints by bank customers
Manager of Exchange Control

Manages the Foreign Exchange Management Act, 1999.

Objective: to facilitate external trade and payment and promote orderly
development and maintenance of foreign exchange market in India.
Issuer of currency

Issues and exchanges or destroys currency and coins not fit for circulation.

Objective: to give the public adequate quantity of supplies of currency notes and
coins and in good quality.
Developmental role

Performs a wide range of promotional functions to support national objectives.
24
Related Functions

Banker to the Government: performs merchant banking function for the central
and the state governments; also acts as their banker.

Banker to banks: maintains banking accounts of all scheduled banks.

Owner and operator of the depository (SGL) and exchange (NDS) for
government bonds.
There is now an international consensus about the need to focus the tasks of a central
bank upon central banking. RBI is far out of touch with such a principle, owing to the
sprawling mandate described above.
Supervisory Functions:
In addition to its traditional central functions, the Reserve bank has certain nonmonetary functions of the nature of supervision of banks and promotion of sound
banking in India. The Reserve Bank Act, 1934, and the Banking Regulation Act, 1949
have given the RBI wide powers of supervision and control over commercial and
cooperative banks, relating to licensing and establishments, branch expansion, liquidity
of their assets, management and methods of working, amalgamation, reconstruction
and liquidation. The RBI is authorized to carry out periodical inspections of the banks
and to call for returns and necessary information from them. The nationalization of 14
major Indian scheduled banks in July 1969 has imposed new responsibilities on the RBI
for directing the growth of banking and credit policies towards more rapid development
of the economy and realization of certain desired social objectives. The supervisory
25
functions of the RBI have helped a great deal in improving the standard of banking in
India to develop on sound lines and to improve the methods of their operation.
Promotional Functions:
With economic growth assuming a new urgency since Independence, the range of the
Reserve Bank’s functions have steadily widened. The Bank now performs a variety of
developmental and promotional functions, which, at one time, were regarded as outside
the normal scope of central banking. The Reserve Bank was asked to promote banking
habit, extend banking facilities to rural and semi-urban areas, and establish and
promote new specialized financing agencies. Accordingly, the Reserve bank has helped
in the setting up of the IFCI and the SFC: it set up the Deposit Insurance Corporation of
India in 1963 and the Industrial Reconstruction Corporation of India in 1972. These
institutions were set up directly or indirectly by the Reserve Bank to promote saving
habit and to mobilize savings, and to provide industrial finance as well as agricultural
finance. As far back as 1935, the RBI set up the Agricultural Credit Department to
provide agricultural credit. But only since 1951 the Bank’s role in this field has become
extremely important. The Bank has developed the co-operative credit movement to
encourage saving, to eliminate money-lenders from the villages and to route its short
term credit to agriculture. The RBI has set up the Agricultural Refinance and
Development Corporation to provide long-term finance to farmers.
Co-operative Banks:
26
The Co-operative bank has a history of almost 100 years. The Co-operative banks are
an important constituent of the Indian Financial System, judging by the role assigned to
them, the expectations they are supposed to fulfill, their number, and the number of
offices they operate. The co-operative movement originated in the West, but the
importance that such banks have assumed in India is rarely paralleled anywhere else in
the world. Their role in rural financing continues to be important even today, and their
business in the urban areas also has increased phenomenally in recent years mainly
due to the sharp increase in the number of co-operative banks.
While the co-operative banks in rural areas mainly finance agricultural based activities
including farming, cattle, milk, hatchery, personal finance etc. along with some small
scale industries and self-employment driven activities, the co-operative banks in urban
areas mainly finance various categories of people for self-employment, industries, small
scale units, home finance, consumer finance, personal finance, etc. Some of the cooperative banks are quite forward looking and have developed sufficient core
competencies to challenge state and private sector banks.
According to NAFCUB the total deposits & lendings of Co-operative Banks is much
more than Old Private Sector Banks & also the New Private Sector Banks. This
exponential growth of Co-operative Banks is attributed mainly to their much better local
reach, personal interaction with customers, their ability to catch the nerve of the local
clientele. Though registered under the Co-operative Societies Act of the Respective
States (where formed originally) the banking related activities of the co-operative banks
27
are also regulated by the Reserve Bank of India. They are governed by the Banking
Regulations Act 1949 and Banking Laws (Co-operative Societies) Act, 1965.
There are two main categories of the co-operative banks.
(a) Short term lending oriented co-operative Banks – within this category there are
three sub categories of banks viz state co-operative banks, District co-operative banks
and Primary Agricultural co-operative societies.
(b) Long term lending oriented co-operative Banks – within the second category
there are land development banks at three levels state level, district level and village
level.
Features of Cooperative Banks
Co-operative Banks are organized and managed on the principal of co-operation, selfhelp, and mutual help. They function with the rule of “one member, one vote”. Function
on “no profit, no loss” basis. Co-operative banks, as a principle, do not pursue the goal
of profit maximization. Co-operative bank performs all the main banking functions of
deposit mobilization, supply of credit and provision of remittance facilities. Co-operative
Banks provide limited banking products and are functionally specialists in agriculture
related products. However, co-operative banks now provide housing loans also.
UCBs provide working capital loans and term loan as well. The State Co-operative
Banks (SCBs), Central Co-operative Banks (CCBs) and Urban Co-operative Banks
(UCBs) can normally extend housing loans upto Rs 1 lakh to an individual. The
scheduled UCBs, however, can lend upto Rs 3 lakh for housing purposes.
28
The UCBs can provide advances against shares and debentures also. Co-operative
bank do banking business mainly in the agriculture and rural sector. However, UCBs,
SCBs, and CCBs operate in semi urban, urban, and metropolitan areas also.
The urban and non-agricultural business of these banks has grown over the years. The
co-operative banks demonstrate a shift from rural to urban, while the commercial banks,
from urban to rural. Co-operative banks are perhaps the first government sponsored,
government-supported, and government-subsidized financial agency in India. They get
financial and other help from the Reserve Bank of India NABARD, central government
and state governments. They constitute the “most favoured” banking sector with risk of
nationalization. For commercial banks, the Reserve Bank of India is lender of last resort,
but co-operative banks it is the lender of first resort which provides financial resources
in the form of contribution to the initial capital (through state government), working
capital, refinance.
Co-operative Banks belong to the money market as well as to the capital market.
Primary agricultural credit societies provide short term and medium term loans. Land
Development Banks (LDBs) provide long-term loans. SCBs and CCBs also provide both
short term and term loans. Co-operative banks are financial intermediaries only partially.
The sources of their funds (resources) are (a) central and state government, (b) the
Reserve Bank of India and NABARD, (c) other co-operative institutions, (d) ownership
funds and, (e) deposits or debenture issues. It is interesting to note that intra-sectoral
flows of funds are much greater in co-operative banking than in commercial banking.
Inter-bank deposits, borrowings, and credit from a significant part of assets and
29
liabilities of co-operative banks. This means that intra-sectoral competition is absent and
intra-sectoral integration is high for co-operative bank.
Some co-operative banks are scheduled banks, while others are non-scheduled banks.
For instance, SCBs and some UCBs are scheduled banks but other co-operative bank
are non-scheduled banks. At present, 28 SCBs and 11 UCBs with Demand and Time
Liabilities over Rs 50 crore each included in the Second Schedule of the Reserve Bank
of India Act.
Co-operative Banks are subject to CRR and liquidity requirements as other scheduled
and non-scheduled banks are. However, their requirements are less than commercial
banks. Since 1966 the lending and deposit rate of commercial banks have been directly
regulated by the Reserve Bank of India. Although the Reserve Bank of India had power
to regulate the rate co-operative bank but this have been exercised only after 1979 in
respect of non-agricultural advances they were free to charge any rates at their
discretion. Although the main aim of the co-operative bank is to provide cheaper credit
to their members and not to maximize profits, they may access the money market to
improve their income so as to remain viable.
Private Sector Banks
Private banking in India was practiced since the beginning of banking system in India.
The first private bank in India to be set up in Private Sector Banks in India was Indus Ind
Bank. It is one of the fastest growing Bank Private Sector Banks in India. IDBI ranks the
tenth largest development bank in the world as Private Banks in India and has promoted
30
a world class institutions in India.The first Private Bank in India to receive an in principle
approval from the Reserve Bank of India was Housing Development Finance
Corporation Limited, to set up a bank in the private sector banks in India as part of the
RBI's liberalization of the Indian Banking Industry. It was incorporated in August 1994 as
HDFC Bank Limited with registered office in Mumbai and commenced operations as
Scheduled Commercial Bank in January 1995.ING Vaysya, yet another Private Bank of
India was incorporated in the year 1930. Bangalore has a pride of place for having the
first branch inception in the year 1934. With successive years of patronage and
constantly setting new standards in banking, ING Vaysya Bank has many credits to its
account.
Entry of Private Sector Banks:
There has been a paradigm shift in mindsets both at the Government level in the
banking industry over the years since Nationalization of Banks in 1969, particularly
during the last decade (1990-2000). Having achieved the objectives of Nationalization,
the most important issue before the industry at present is survival and growth in the
environment generated by the economic liberalization greater competition with a view to
achieving higher productivity and efficiency in January 1993 for the entry of Private
Sector banks based on the Nationalization Committee report of 1991, which envisaged
a larger role for Private Sector Banks.
The RBI prescribed a minimum paid up capital of Rs. 100 crores for the new bank and
the shares are to be listed at stock exchange. Also the new bank after being granted
license under the Banking Regulation Act shall be registered as a public limited
company under the companies Act, 1956.
31
Not only multinational groups but also some private investors from India show their
interest in this field. Some of them are as follows
Private Banks
 Indusland bank
 ICICI bank
 HDFC
 Jammu & Kashmir bank
 Centurion bank
 City union bank
 Federal bank
 Saraswat bank
 Dhanlaksmi bank
 Kotak bank
 Cosmos bank
 Bank of Rajasthan
 Bank of Punjab
 ING VYSYA bank
 South Indian bank
32
FOREIGN BANKS
 Standard charted bank
 City bank
 American express bank
 ABN Amro bank
 HSBC
 Asian development bank
 Abu Dhabi C bank
Role of Banks:
Banks play a positive role in economic development of a country as repositories of
community’s savings and as purveyors of credit. Indian Banking has aided the
economic development during the last fifty years in an effective way. The banking sector
has shown a remarkable responsiveness to the needs of planned economy. It has
brought about a considerable progress in its efforts at deposit mobilization and has
taken a number of measures in the recent past for accelerating the rate of growth of
deposits. As recourse to this, the commercial banks opened branches in urban, semiurban and rural areas and have introduced a number of attractive schemes to foster
economic development.
The activities of commercial banking have growth in multi-directional ways as well as
multi-dimensional manner. Banks have been playing a catalytic role in area
33
development, backward area development, extended assistance to rural development
all along helping agriculture, industry, international trade in a significant manner. In a
way, commercial banks have emerged as key financial agencies for rapid economic
development by pooling the savings together, banks can make available funds to
specialized institutions which finance different sectors of the economy, needing capital
for various purposes, risks and durations. By contributing to government securities,
bonds and debentures of term-lending institutions in the fields of agriculture, industries
and now housing, banks are also providing these institutions with an access to the
common pool of savings mobilized by them, to that extent relieving them of the
responsibility of directly approaching the saver. This intermediation role of banks is
particularly important in the early stages of economic development and financial
specification. A country like India, with different regions at different stages of
development, presents an interesting spectrum of the evolving role of banks, in the
matter of inter-mediation and beyond.
Mobilization of resources forms an integral part of the development process in India. In
this process of mobilization, banks are at a great advantage, chiefly because of their
network of branches in the country. And banks have to place considerable reliance on
the mobilization of deposits from the public to finance development programmes.
Further, deposit mobilization by banks in India acquired greater significance in their new
role in economic development.
Commercial banks provide short-term and medium-term financial assistance. The shortterm credit facilities are granted for working capital requirements. The medium-term
34
loans are for the acquisition of land, construction of factory premises and purchase of
machinery and equipment. These loans are generally granted for periods ranging from
five to seven years. They also establish letters of credit on behalf of their clients
favouring suppliers of raw materials/machinery (both Indian and foreign) which extend
the banker’s assurance for payment and thus help their delivery. Certain transaction,
particularly those in contracts of sale of Government Departments, may require
guarantees being issued in lieu of security earnest money deposits for
release
of
advance money, supply of raw materials for processing, full payment of bills on the
assurance of the performance etc. Commercial banks issue such guarantees also.
Current scenario
Currently overall, banking in India is considered as fairly mature in terms of supply,
product range and reach-even though reach in rural India still remains a challenge for
the private sector and foreign banks. Even in terms of quality of assets and capital
adequacy, Indian banks are considered to have clean, strong and transparent balance
sheets-as compared to other banks in comparable economies in its region. The
Reserve Bank of India is an autonomous body, with minimal pressure from the
government. The stated policy of the Bank on the Indian Rupee is to manage volatilitywithout any stated exchange rate-and this has mostly been true. With the growth in the
Indian economy expected to be strong for quite some time-especially in its services
sector, the demand for banking services-especially retail banking, mortgages and
investment services are expected to be strong. M&As, takeovers, asset sales and much
more action (as it is unraveling in China) will happen on this front in India
35
.In March 2006, the Reserve Bank of India allowed Warburg Pincus to increase its stake
in Kotak Mahindra Bank (a private sector bank) to 10%. This is the first time an investor
has been allowed to hold more than 5% in a private sector bank since the RBI
announced norms in 2005 that any stake exceeding 5% in the private sector banks
would need to be vetted by them. Currently, India has 88 scheduled commercial banks
(SCBs) - 28 public sector banks (that is with the Government of India holding a stake),
29 private banks (these do not have government stake; they may be publicly listed and
traded on stock exchanges) and 31 foreign banks.
They have a combined network of over 53,000 branches and 17,000 ATMs. According
to a report by ICRA Limited, a rating agency, the public sector banks hold over 75
percent of total assets of the banking industry, with the private and foreign banks
holding 18.2% and 6.5% respective
CHALLENGES IN BANKING SECTOR
After the nationalization of Banks, increasing adoption of technology, continuous
mergers in the banking, modernizing backroom operation in the banks and competition
pave the path of growth of Indian banking. By the mid-1990, the near monopoly of
public sector banks faced the competition by the more customer-focused private sector
entrants. This competition forced older and nationalized banks to revitalize their
operations.
36
Year 1992 was the golden period of Indian Banking system due to the scam-tainted
stock market. Large proportion of household saving moved into the banking system,
which recorded an annual growth of 20 percent in deposit.
But along with the continuous growth and modernization, there are several challenges
confronting the banking sector. The main challenges facing the banking sector is the
deployment of funds in quality assets and the management of revenues and costs. The
problem of NPA (non- performing assets), overall credit recovery system still exist.
There is a continuous reforms and modernization is in process. A number of
recommendations of two Narasimham committees have been implemented.
Foreign Banks are focusing on corporate and on the middle class consumer and
providing them better service. Nationalized Banks are also attempting to get on the path
of automation. Strong Banks will acquire the weaker banks. The member of foreign
banks operating in India has increased significantly and their share of total assets has
also increased. In the year 2001 estimated foreign bank account for 14.7 percent of the
total net profit of commercial banking sector in India.
The Reserve Bank of India’s recently released report on Trend and Progress of Banking
(2003-04) once again highlights the major issues in Indian banking in the light of
increasing global competition. The financial sector reforms have to go hand in hand with
the overall economic reform process.
To achieve this, a number of suggestions have been put forward from time to time.
Since the banks have been exposed to competition at home and also at global level,
Indian banks are taking steps under the overall regulatory and supervisory framework of
37
the RBI. Due to new practices, greater accountability and market discipline among the
participants, the Indian financial system is now moving closer to global standards.
Accordingly, an elaborate roadmap has been drawn to move the Indian banks closer to
Basel II norms. No doubt, there are some problems in this respect.
Indian banks have smaller asset bases and volume of operations in comparison with
international standards. No bank is big enough to rank among the top 100 banks of the
world. The operations of the Indian banks are mostly in the domestic sector. Some of
them have a few foreign branches but they are not exposed to significant lending or
investments in the overseas market. Indian banks are not major banks of world class
stature. There is also huge cost involved for putting in place proper automation system
needed to switch over to the Basel II model.
Public sector banks in the past have adapted themselves to international
practices such as computerization, asset liability management and Basel I norms.
Under the circumstances it should not be difficult for banks to adopt the Basel II norms
as it provides opportunity to Indian banks to raise their standard of banking practices as
per international standards. The Basel Accord is something that has to be adopted if
Indian Banks are interested in becoming global players. Initially RBI had taken a view
that the standards will apply only to a few select banks depending on the strength of the
institutions. But now the RBI has taken a view that the standards will apply to all the
banks. Accordingly, a taskforce has been formed to examine the related issues. The
report has pointed out that as much as two-thirds of the recent growth in credit has been
38
on account of retail loans. That means corporate borrowing is yet to pick up significantly
in spite of rise in investment demand.
Another important aspect of the report is its analysis of the cooperative banks. They are
facing a deep crisis with the rising NPA’s and the financial position of one third of these
banks is not satisfactory. Cooperative banks need restructuring if they are to survive in
the competitive environment. They have to turn to modern technologies for better
performance. The new private and foreign banks have thrown open many challenges for
the Urban Cooperative Banks (UCBs). They have to strategically alter their business
models in terms of marketing and dealing with customers at the lowest cost. They
should not be slow in providing round the clock service to the customers.
The major challenge before the cooperative banks is technology. Some cooperative
banks are facing challenges created by a few badly managed banks. These banks have
to use technology for value addition and cost reduction, for easing the work of the bank
staff and to attract customers. Finally, for maintaining orderly growth, UCBs have to be
more professional in their approach in order to face new realities.
The Changing Landscape of Banking Sector
Under Universal Banking, banks would handle (a) Working Capital (b) Long term Capital
(Term Loans) meant for industrial development. The ongoing reforms process, growing
use of technology, increased competition and product innovation has all put the banking
sector on a high growth trajectory. However significant challenge lie ahead for the banks
in the country as they gear unto embrace international standards and best practices in
line with BASEL II norms.
39
A Word about Basel Committee
Founded in 1974, the Basel Committee is made up of central banking officials from
leading industrial nations including the U.S., Canada, France, Germany, Italy, Japan
and the U.K. The committee does not have enforcement powers, instead, it
recommends broad standards, guidelines and best practices that central bank in
member nations can use the foundation for their own policies or statutes. Basel
committee addresses the need for better risk management practices, transparency,
audit, and secrecy as third party contractors are used to support e-banking services, but
has also increased banks’ exposure to financial and legal risks.
The banking sector in India has undergone remarkable changes since the economic
reforms were initiated in 1991-92. The period has been marked by a slew of reforms in
the sector, which provided the much-needed impetus for the growth of the sector as a
whole. Some of the major initiatives during this period deregulation of interest rates,
adoption of prudential norms in terms of capital adequacy, asset classification and
provisioning, lowering of reserve requirements in terms of Statutory Liquidity Ratio
(SLR) and Cash reserve ratio (CRR), dilution of government equity holding in Public
Sector Banks (PSBs), opening of the sector to private participation, permission to
foreign banks to expand their operations through subsidiaries, introduction of ‘Universal
Banking’, greater emphasis on risk management by allowing banks to participate in
instruments such as interest rate swaps, cross country forward contracts, liquidity
adjustment facility, liberalization of FDI norms in banks, and the introduction of Real
Time Gross Settlement (RTGS), among others. These measures along with Reserve
Bank of India (RBI) efforts to adopt international Banking standards and best practices
40
as prescribed in the Basel Accords have no doubt helped the domestic banking industry
enter a new era. Further it has pushed banks to put greater emphasis on risk
management and corporate governance areas that were until now ignored.
Growing Competition
The opening of the banking sector to private as well as foreign banks has been a major
milestone in the history of the industry in the country. As a result of the deregulation of
the sector, a host of new generation private banks have entered the scene. This along
with the permission to foreign banks to expand their operations in the country through
subsidiaries has galvanized the domestic banking sector, dominated so far by the
hitherto slow and lethargic public sector banks. Increased competitive pressure is
forcing public sector banks to wake up from their deep slumber and adapt to the
changing business environment so as to remain competitive. On the positive side, PSBs
have begun responding to the challenge well; although many of them are yet to gear up
to meet the challenges of the deregulatory era.
The entry of new generation private sector and foreign banks is rewriting the rules of
banking in the country. Today, there is a greater emphasis on customer convenience,
which is the key to success. Technology has emerged as a key enabler to achieve this
objective, and is now an integral component of any bank strategy. It is helping new
generation banks overcome the disadvantage of late entry by allowing them to achieve
greater market penetration without having a ‘brick-and-mortar’ structure, which is time
consuming and expensive. The proliferation of ATMs of both private and foreign banks
in the towns and cities of India prove that. A majority of these banks are now widening
and running their operations almost branchless, using technology platforms like ATMs,
41
Internet banking, etc. Also, technology is helping banks in bringing down their
operational costs, which is allowing them to stay competitive even as competition is
heating up.
Recommendations of Narasimham Committee on Commercial Banking System
(1991)
The narasimham committee (1991) assumed that the financial resources of the
commercial banks from the general public and were by the banks in trust and that the
bank funds were to be deployed for maximum benefit of the depositors. This
assumption automatically implied that even the government had no business to
endanger the solvency, health and efficiency of the nationalized banks under the pretext
of using banks funds for social banking, poverty eradication, etc. Accordingly, the
narasimham committee aimed at achieving three major changes in the banking sector in
India-;

Ensuring a degree of operational flexibility.

Internal autonomy for the banks in their decision making process.

Greater degree of professionalism in banking operations.
Towards this end, narasimham committee recommendations covered such subjects as
directed investments, directed credit programmes, structural of rate of interest,
structural reorganization of the Indian banking system, and organization, methods and
procedures of banks in India.
42
In Structural Reorganization of the Banking System
To bring about greater efficiency in banking operations, the narasimham committee
(1991) proposed substantial reduction in number of public sector banks through
mergers and acquisition. According to committee, the broad pattern should consist of-;

Three or four large banks including SBI should become international in character.

Eight to ten banks should national bank with wide network of branches through
out the country.

The rest should remain as local banks with operations be confined to a specific
region.

RBI should permit the establishment of new banks in the private sector, provided
they conform to the minimum start-up capital and other requirements. The
government should make declaration that no further banks be nationalized.

Foreign banks are allowed to open their branches in India either as fully owned
or subsidiaries. This would improve efficiency.

Foreign banks and Indian banks are allowed to set-up joint ventures in regard to
merchant and investment banking.

Since the country had already a network of rural and semi-urban branches, the
system of licensing of branches with the objective of spreading the banking habit
should be discontinued. Banks should have freedom to open branches.
43
On Organization and Methods and Procedures In Banks
In order to tone up the working of the banks, the narasimham committee (1991)
recommended that
Each bank should be free and autonomous.

Every bank should go for a radical change in working technology and culture, so
to become competitive internally and to be in step with wide- ranging innovations
taking place.

Over- regulation and over- administration should be avoided and greater reliance
should be placed on internal audit and internal inspection.

The various guidelines issued by government or RBI in regard to internal
administration should be examined in the context of the independence and
autonomy of bank.

The quality of control over the banking system between RBI and the banking
division of ministry and finance should end forthwith and RBI should be the
primary agency for regulation.

The appointment of chief executive of bank and the board of directors should not
be based on political considerations but on professionalism and integrity.
So despite impressive quantitative achievements in resources mobilization and in
extending the credit reach, several distortions had crept into the banking system over
the years. Several public sector banks had become weak financially and were unable to
meet the challenges of the competitive environment. The narasimham committee was
forthright in apportioning the blame to the government of India and the finance ministry
44
of this sad state of affairs. The public sector banks has been used and abused by the
government, the officials and the bank employees and the trade unions. The
recommendations of narasimham committee(1991) has been revolutionary in many
aspects and were opposed by trade unions and even by finance ministry of central
government and of course, the progressive economist who generally championed the
public sector banks. The government however accepted many of the recommendations
of the narasimham committee (1991).
Narasimham Committee on Banking Sector Reforms (1998)
The finance ministry of government of India appointed Mr. M. Narasimham as
chairman of one more committee, this time it was called as the committee on
banking sector reforms. The committee was asked to “review the progress of
banking sector reforms to the date and chart a programme on financial sector
reforms necessary to strengthen India’s financial system and make it internationally
competitive”. The narasimham committee on banking sector reforms submitted this
report to the government in April 1998. This report covers the entire issues relating
to capital adequacy, bank mergers, the condition of global sized banks, recasting of
banks boards etc. some important findings are as follows-;

Need For Stronger Banking System- The narasimham committee has made
out a stronger banking system in country, especially in the context of capital
account convertibility (CAC) which would involve large amount of inflow and
outflow of capital and consequent complications for exchange rate management
and domestic liquidity. To handle this India would need a strong resilient banking
and financial system.
45

Experiment with the Concept of Narrow Banking- The narasimham
committee is seriously concerned with the rehabilitation of weak public sector
banks which have accumulated a high percentage of non-paying assets (NPA),
and in some cases, as high as 20% of their total assets. They suggested the
concept of narrow banking to rehabilitate such weak banks.

Small Local Banks- The narasimham committee has argued that “While two or
three banks with an international orientation and 8 to 10 of larger banks should
take care of their needs of the large and medium corporate sector ad larger of
the small enterprises, there will still be a need for a large number of local banks.”
The committee has suggested the setting up of small local banks which should
be confined to states or clusters of districts in order to serve local trade, small
industry etc.

Capital Adequacy Ratio- The narasimham committee has also suggested that
the government should consider raising the prescribed capital adequacy ratio to
improve the inherent strength of banks and to improve their risk taking ability.

Public Ownership and Real Autonomy- The narasimham committee has
argued that government ownership and management of banks does not
enhance autonomy and flexibility in working of public sector banks. Accordingly,
the committee has recommended a review of functions of banks boards with a
view to make them responsible for enhancing shareholder value through
formulation of corporate strategy.

Review and Updating Banking Laws- The narasimham committee has
suggested the urgent need to review and amended the provisions of RBI Act,
46
Banking Regulation Act, State Bank of act etc so as to bring them on same line
of current banking needs.
Really speaking there was no purpose of setting up the second narasimham
committee on banking sector reforms even before a decade has elapsed for the full
implementation of the recommendations of First committee. As one critics has
commented: “ barring this is, a stray recommendation here or there like the
categorical rejection of the merger of weak with strong banks and the suggestion to
try out narrow banking, as far as all other issues are concerned”
47
48
Universal Banking includes not only services related to savings and loans but also
investments. However in practice the term 'universal banks' refers to those banks that
offer a wide range of financial services, beyond commercial banking and investment
banking, insurance etc. Universal banking is a combination of commercial banking,
investment banking and various other activities including insurance. If specialized
banking is the one end universal banking is the other. This is most common in
European countries.
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.
49
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 liberalisation 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 harmonisation of facilities and obligations .
Also report of the Committee on Banking Sector Reforms or Narasimham Committee
(NC) has major bearing on the issues considered by the Khan Working Group.
The issue of universal banking resurfaced in Year 2000, when ICICI gave a
presentation to RBI to discuss the time frame and possible options for transforming itself
into an universal bank. Reserve Bank of India also spelt out to Parliamentary Standing
Committee on Finance, its proposed policy for universal banking, including a case-bycase 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
50
smooth conversion into an 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.
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 build 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-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 banking sector
51
PRODUCTS AND SERVICES OFFERED BY UNIVERSAL BANKS
Broad Classification of Products in a Universal bank:
The different products in an universal bank can be broadly classified into:

Retail Banking.

Trade Finance.

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.
Retail Banking:

Deposits

Loans, Cash Credit and Overdraft

Negotiating for Loans and advances

Remittances

Book-Keeping (maintaining all accounting records)

Receiving all kinds of bonds valuable for safe keeping
Trade Finance:

Issuing and confirming of letter of credit.
52

Drawing, accepting, discounting, buying, selling, collecting of bills of exchange,
promissory notes, drafts, bill of lading and other securities
Treasury Operations:

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.
Common Banking Products Available:
Some of common available banking products which arein universal banks are explained
below:
1) Credit Card: Credit Card is “post paid” or “pay later” card that draws from a
line-money made available by the card issuer (bank) and gives one a
to pay. If the amount is not paid full by the end of the period, one
credit
grace period
is charged interest.
53
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. India at present has about 3 million credit cards in circulation.
2) Debit Cards: Debit Card is a “prepaid” or “pay now” card with some stored
Debit Cards quickly debit or subtract money from one’s savings account, or
value.
if
one
were taking out cash.
Every time a person uses the card, the merchant who in turn can get the money
transferred to his account from the bank of the buyers, by debiting an exact amount of
purchase from the card. To get a debit card along with a Personal
Identification
Number (PIN). When he makes a purchase, he enters this number on the shop’s PIN
pad. When the card is swiped through the electronic terminal, it dials the acquiring bank
system – either Master Card or Visa that validates the PIN and finds out from the
54
issuing bank whether to accept or decline the transaction. The customer never
overspread because the amount spent is debited immediately from the customers
account. So, for the debit card to work, one must already have the money in the account
to cover the transaction. There is no grace period for a debit card purchase. Some debit
cards have monthly or per transaction fees.
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 one’s own money at the time of sale, so they are often easier
than credit cards to obtain.
The major limitation of Debit Card is that currently only some 3000-4000 shops country
wide accepts it. Also, a person can’t operate it in case the telephone lines are down.
3) Automatic Teller Machine:
The introduction of ATM’s has given the customers
the facility of round the clock banking. The ATM’s are used by banks for making the
customers dealing easier. ATM card is a device that allows customer who has an ATM
card to perform routine banking transaction at any time without interacting with human
teller. It provides exchange services. This service helps the customer to withdraw
money even when the banks ate closed. This can be done by inserting the card in the
ATM and entering the Personal Identification Number and secret Password.
ATM’s are currently becoming popular in India that enables the customer to withdraw
their money 24 hours a day and 365 days. It provides the customers with the ability to
withdraw or deposit funds, check account balances, transfer funds and check statement
55
information. The advantages of ATM’s are many. It increases existing business and
generates new business. It allows the customers.

To transfer money to and from accounts.

To view account information.

To order cash.

To receive cash.
Advantages of ATM’s:
To the Customers

ATM’s provide 24 hrs., 7 days and 365 days a year service.

Service is quick and efficient

Privacy in transaction

Wider flexibility in place and time of withdrawals.

The transaction is completely secure – you need to key in Personal Identification
Number (Unique number for every customer)
To Banks

Alternative to extend banking hours.

Crowding at bank counters considerably reduced.

Alternative to new branches and to reduce operating expenses.

Relieves bank employees to focus an more analytical and innovative work.

Increased market penetration.
56
ATM’s 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.
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 became a part of
“SWADHAN” a system of shared payments networks, introduced by the Indian Bank
4) E-Cheaques: The e-cheaques consists five primary facts. They are the consumers,
the merchant, consumer’s bank the merchant’s bank and the e-mint and the clearing
process. This cheaquring system uses the network services to issue and process
payment that emulates real world chaquing. The payer issue a digital cheaques to the
payee ant the entire transactions are done through internet. Electronic version of
cheaques are issued, received and processed. A typical electronic cheque transaction
takes place in the following manner:

The customer accesses the merchant server and the merchant server presents
its goods to the customer.

The consumer selects the goods and purchases them by sending an e-cheque to
the merchant.

The merchant validates the e-cheque with its bank for payment authorisation.
57

The merchant electronically forwards the e-cheque to its bank.

The merchant’s bank forwards the e-cheque to the clearing house for cashing.

The clearing house jointly works with the consumer’s bank clears the cheque and
transfers the money to the merchant’s banks.

The merchant’s bank updates the merchant’s account.

The consumer’s bank updates the consumer’s account with the withdrawal
information.
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.
5)
Electronic Funds Transfer (EFT): Many modern banks have computerised 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 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
58
cash. The payment office directs the computer to credit an employee’s account with the
person’s pay.
6)
Telebanking: Telebanking refers to banking on phone services.. a 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.
7)

Information on the current interest rates.

Information with regard to foreign exchange rates.

Request for a DD or pay order.

D-Mat Account related services.

And other similar services.
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 access to real-time banking services, regardless of their location.
But there is much more to mobile banking from just on-lie 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
59
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) technology6 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.
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 request a statement 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.
60
Benefits of Internet Banking:

Reduce the transaction costs of offering several banking services and diminishes
the need for longer numbers of expensive brick and mortar branches and staff.

Increase convenience for customers, since they can conduct many banking
transaction 24 hours a day.

Increase customer loyalty.

Improve customer access.

Attract new customers.

Easy online application for all accounts, including personal loans and mortgages
Financial Transaction on the Internet:
Electronic Cash: Companies are developing electronic replicas of all existing payment
system: cash, cheque, credit cards and coins.
Automatic Payments: Utility companies, loans payments, and other businesses use on
automatic payment system with bills paid through direct withdrawal from a bank
account.
Direct Deposits: Earnings (or Government payments) automatically deposited into
bank accounts, saving time, effort and money.
Stored Value Cards: Prepaid cards for telephone service, transit fares, highway tolls,
laundry service, library fees and school lunches.
61
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.
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.
9)
Demat: Demat is short for de-materialisation of shares. In short, Demat is a
process where at the customer’s 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.
How to Operate DEMAT ACCOUNT?
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.
62
1) 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 hi s account with the number of shares sold by him.
2) 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.
3) Payment for the electronic shares bought or sold is to be made in the same way
as in the case of physical securities.
SOME COMMENTS BY EXPERTS
According to ICICI CEO Mr. K V Kamath
He is seriously exploring merger options with the aim of becoming a Universal Banking
group. And he already has two mergers - with the Shipping Credit & Investment
Corporation of India (SCICI) in early 1997 and ITC Classic in December 1997. Both the
mergers have enabled ICICI to become bigger and better. It is proposed that the merger
between IDBI and ICICI will definitely result in a mega-institution since the combined
entity will become the second largest Indian Company in terms of income.
RBI is willing to consider the transformation of DFI’s into banks only 5 -year hence.
RBI's argument is that a 'transitional path' is needed to enable DFI’s become either -full
fledged NBFCs or banks. But the pretext of 'transitional phase' may be just a trick to
delay decision-making. The discussion paper on harmonizing the role and operations of
banks and DFI’s discusses that there is a special role for DFI’s till such time as the long
term debt market gains depth and liquidity. Therefore, one should forget about Universal
Banking since it will take a long time for long-term debt market to fully develop in India.
The biggest stumbling block to developing such a market is RBI's own s loth in
63
revamping its Public Debt Offices (PDO's) .
The Reserve Bank has proposed that banks be given the power to sell the security in
case assets become non-performing. Currently, banks have to go through a long drawn
legal process before it can sell a security and recover the money from the defaulting
borrower.
However, in the developed international markets like the US for instance, the bank can
foreclose the loan without any resort to the legal process.
The need for such system gains ground in India as banks and financial institutions are
unable to recover funds even though they have adequate asset cover. By the time a
decision comes through the value of the asset has depreciated and not much cash is
recovered. However, for banks and financial institutions to foreclose without resorting to
the courts or the debt recovery tribunal, an enabling legislation will have to be passed.
Regarding the realisability of the security, the rating agencies Moody's and Standard
and Poor feel that since the security is not realizable, financial intermediaries should
make an enhanced provision for NPA’s.
It is also sometimes debated that non-performing assets were due to the fact that
policies had changed. In this regard, the financial intermediaries opined that time should
be given before an asset is classified as NPA’s. The steel industry is a case in point. It
has been suggested that in case a loan is rescheduled, it must be shown separately, in
order to give transparency to the banking system.
At present, there is no formal forum for interaction between DFI’s and banks despite the
emerging overlap in their functional areas. Narasimham committee recommended
64
merging strong banks together, rather than strong with weak, and Khan suggests
merger between banks and DFI’s. Bu t neither committee provided any details or
tackles reducing labour or closing inefficient branches.
According to Mr. A D Navaneethan, MD & CEO, Karur Vysya Bank (KVB)
It is a historical fact that monolithic organizations, like a super-bank, cannot care for the
customers. The banking system in India has over 67000 branches today, and it is
questioned whether the development financial institutions will set up a similar network.
However, there should be a level playing field between different players in the financial
market. Further, all banks must be allowed to grow such that instead of a geographical
based tiered system, it should be more on functional lines.
According to Mr. S V Venkataramanan, Former Governor of RBI
In the long run, DFI’s have to become what is recognized in the west as wholesale
banks.To assist that, they should be NBFCs would be wrong. There is also need to
ensure access for DFI’s to more resources in the national and international capital
markets.
Indeed, there should be a degree of statutory pre-emption to enable DFI’s to access
resources at lower rate of interest, at least to meet the needs of infrastructural finance.
The issue of Universal Banking-as exists in Germany, is increasingly becoming a global
trend. But at the same time, "Big may not always be beautiful". Further, an
allencompassing supervisory should not be created.
There is continuing need for maintaining separate supervisory organizations for different
functions like IRA, SEBI, etc. REI's discussion paper on harmonizing the role and
operations of banks and DFI’s should not remain only on paper but should promote a
65
genuine exchange of views.
According to Mr. C M Vasudev, Special Secretary (Banking)
It is not prudent for banks and development financial institutions to keep all their eggs in
one basket- either short term or long term. Ideally, there must be a mix of long and short
term liabilities and assets. In such a case, while banks will have an opportunity to
increase their profitability, they will have to deal with greater risks. The challenge for
banks are to deal with new types of risks-market risk, credits risk, etc. Therefore, there
is a need to adopt a risk-mitigation mechanism.
In the Indian context, universal banks would mean harmonizing the roles of
development financial institutions and banks-which means harmonizing long-term and
short-term debt.
In the global context, however, it means a combination of commercial banks and
investment banks, which essentially means bringing together debt and equity type of
financing.
According to Mr. G P Gupta, Chairman – IDBI
Former State Bank of India chairman M S Verma has suggested a merger of the largest
bank, viz. State Bank of India (SBI) and the largest financial institution of India, viz.,
Industrial Development Bank of India (IDBI) thereby making the India's biggest
universal bank. But the more politically connected bankers are of the view that the
finance ministry is not in favor of such a deal for the simple reason that it will create an
institution "which will be too big". The numbers are simply enormous. SBI has over
8,900 branches and an asset base of Rs. 179,673 crores. By merely adding up the two
balance sheets, the resulting entity will have an asset base of over Rs. 250,000 crores.
66
However, with a higher equity base, the proposed merged entity will have to return
higher net profits if only to maintain its return on capital.
Further, if the purpose of the merger is to build a more responsive and market sawy
entity, then product distribution channels have to be strengthened and revamped. In the
specific issue of a hypothetical SBI-IDBI merger, the merged entity could have the
benefit in the sense that the liability profile would span the entire horizon (short-to-long
term), and so would its lending profile.
Additionally, the merged entity would not have to spend any more resources to
reequipping
itself in learning new skills since SBI has skills in assessing short-term,
working capital requirements of a company. Whereas IDBI has skills in project
appraisal.
The mega entity could also have the advantage of spreading its lending across various
time baskets and industry groups, which will reduce stress in the system.
But there are flip sides of this issue also. There may be brand confusion, i.e., whether
the merged entity would be just SBI or IDBI or SBI-IDBI. The new brand may not be as
effective as the old brands. Second, both entities are in customer businesses. A merger,
without a clear idea of objectives, could lead to customer disorientation and significant
loss of business.
Further, all the staff cuts in mega-bank mergers in the recent past are proof that they
are cutting costs not by rationalizing products but by cutting staff strength. Further, Mr.
G P Gupta, Chairman - IDBI says, If some of the DFI’s go for the conversion into
67
commercial banks or setting up banking subsidiaries, it is simply to take advantage of
deposit resources, which are available mainly to commercial banks and to a very limited
extent to the DFI’s.
According to Mr. T T Ram Mohan, Faculty of IIM – Ahmadabad
Narasimham (II) committee had suggested that weak banks should be recapitalized and
then merged with strong banks. But after the experience PNB & SBI have had with
mergers foisted on them by REI, the banking system has developed a strong fear of the
prospect.
In any case, banks can acquire both term funds and expertise by simply merging with
the DFI’s. Such mergers make sense from the standpoint of the DFI’s too because it's
hard to see how they can ever compete with the banks' network of branches by building
from scratch. Both Narasimham (II) and KWG had viewed mergers of DFI’s with banks
Favorably.One of the best things to have happened to commercial banks post
liberalization is the cleaning up of their balance sheets through re-capitalization. The
DFI’s were not subject to such a clean up and as a result, their NPA’s have mounted.
There are few takers in the market today for the NPA’s figures being put out by some of
the DFI’s. The problem is so big that mergers with banks are infeasible without recapitalization of DFI’s by the government on a scale that is hard to contemplate in the
present fiscal situation.
According to Mr. V H Ramakrishna, General Manager - Bank of India
Since it will not be possible for DFI’s to establish branch networks in the immediate
future, they should be allowed to open accounts for clients in existing branches and
gradually expand. This will enable first charge on the cash flow of the account holders.
68
Further, DFI’s should be subject to reserve requirements on an incremental basis.
Internationally, development banks are allowed to open operating accounts of
customers and issue letters of credit.
The debate on establishing an appropriate regulating body essentially revolves around
the choice between a multiple body and a single body. The single body option enjoys
greater preference. Under a multiple system, the operations of a universal bank would
be subject to the regimen of REI, the SEBI, the Insurance Regulatory Authority of India,
and the comptroller and auditor-general, causing substantial duplication. Evidently, it
would be essential to separate the regulatory and central bank functions of REI. Further,
it would require all existing regulators to be represented in a super-regulator.
According to Mr. P V Narasimham, Chairman & Managing Director – IFCI
Within 3 to 4 years, IFCI proposes to convert itself into a bank to access low-cost
deposits. It will become a wholesale bank catering to industry and will offer all products
so as to have a better asset-liability match. It will rely more on the current account
balances of companies. They have to keep a cash float. That will be IFCI's source of
cheap funds. IFCI proposes to have branches only in major centers. IFCI will access
trade finance, go into factoring and even cash management for companies. IFCI will
transform into a new type of entity and not remain only in the development finance
mode. The Reserve Bank has permitted us to achieve this in 5 years.
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
69
Strengths:
 Economies Of Scale
The main advantage of Universal Banking is that it results in greater economic
efficiency in the form of lower cost, higher output and better products. Various Reserve
Banks Committees and reports in favor of Universal Banking, is that it enables banks to
exploit economies of scale and scope. It means a bank can reduce average costs and
thereby improve spreads if it expands its scale of operations and diversifying activities.
 Profitable Diversions
By diversifying the activities, the bank can use its existing expertise in one type of
financial service in providing other types. So, it entails less cost in performing all the
functions by one entity instead of separate bodies.
 Resource Utilization
A bank possesses the information on the risk characteristics of the clients, which it can
use to pursue other activities with the same client. A data collection about the market
trends, risk and returns associated with portfolios of Mutual Funds, diversifiable and non
diversifiable risk analysis, etc are useful for other clients and information seekers.
Automatically, a bank will get the benefit of being involved in Research.
 Easy marketing on the foundation a of Brand name
A bank has an existing network of branches, which can act as shops for selling products
like Insurance, Mutual Fund without much efforts on marketing, as the branch will act
70
here as a parent company or source. In this way a bank can reach the remotest client
without having to take recourse ton an agent.
 One stop shopping
The idea of 'one stop shopping' saves a lot of transaction costs and increases the speed
of economic activities. It is beneficial for the bank as well as customers.
 Investor friendly activities
Another manifestation of Universal Banking is bank holding stakes in a firm. A bank's
equity holding in a borrower firm, acts as a signal for other investors on to the health of
the firm, since the lending bank is in a better position to monitor the firm's activities.
Weaknesses:

Grey area of Universal Bank
The path of Universal Banking for DFIs is strewn with obstacles. The biggest one is
overcoming the differences in regulatory requirements for a bank and DFI. Unlike
banks, DFIs are not required to keep a portion of their deposits as cash reserves.
 No expertise in long term lending
In the case of traditional project finance an area where DFIs tread carefully, becoming a
bank may not make a big difference. Project finance and Infrastructure Finance are
generally long gestation projects and would require DFIs to borrow long term.
Therefore, the transformation into a bank may not be of great assistance in lending
long-term.
71
 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 cuttingedge-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)
Threats:
 Big Empires
Universal Banking is an outcome of the mergers and acquisitions in the banking sector.
The Finance Ministry is also empathetic towards it. But there will be big empires which
may put the economy in a problem. Universal Banks will be the largest banks, by their
asset base, income level and profitability there is a danger of 'Price Distortion'. It might
take place by manipulating interests of the bank for the self interest motive instead of
social interest. There is a threat to the overall quality of the products of the bank,
because of the possibility of turning all the strengths of the Universal Banking into
72
weaknesses. (e.g. - the strength of economies of scale may turn into the degradation of
qualities of bank products, due to over expansion.
If the banks are not prudent enough, deposit rates could shoot up and thus affect
profits. To increase profits quickly banks may go in for riskier business, which could lead
to a full in asset quality. Disintermediation and securitization could further affect the
business of banks.
Opportunities:
 To increase efficiency and productivity
Liberalization offers opportunities to banks. Now, the focus will be on profits rather than
on the size of balance sheet. Fee based incomes will be more attractive than mobilizing
deposits, which lead to lower cost funds. To face the increased competition, banks will
need to improve their efficiency and productivity, which will lead to new products and
better services.
 To get more exposure in the global market
In terms of total asset base and net worth the Indian banks have a very long road to
travel when compared to top 10 banks in the world. (SBI is the only Indian bank to
appear in the top 100 banks list of 'Fortune 500' based on sales, profits, assets and
market value. It also ranks II in the list of Forbes 2000 among all Indian companies) as
the asset base sans capital of most of the top 10 banks in the world are much more
than the asset base and capital of the entire Indian banking sector. In order to enter at
least the top 100 segment in the world, the Indian banks need to acquire a lot of mass in
their volume of operations.
73
Pure routine banking operations alone cannot take the Indian banks into the league of
the Top 100 banks in the world. Here is the real need of universal banking, as the wide
range of financial services in addition to the Commercial banking functions like Mutual
Funds, Merchant banking, Factoring, Insurance, credit cards, retail, personal loans, etc.
will help in enhancing overall profitability.
 To eradicate the 'Financial Apartheid'
A recent study on the informal sector conducted by Scientific Research Association for
Economics (SRA), a Chennai based association, has found out that, 'Though having a
large number of branch network in rural areas and urban areas, the lowest strata of the
society is still out of the purview of banking services. Because the small businesses in
the city, 34% of that goes to money lenders for funds. Another 6.5% goes to pawn
brokers, etc.
The respondents were businesses engaged in activities such as fruits and vegetables
vendors, laundry services, provision stores, petty shops and tea stalls. 97% of them do
not depend the banking system for funds. Not because they do not want credit from
banking sources, but because banks do not want to lend these entrepreneurs. It is a
situation of Financial Apartheid in the informal sector. It means with the help of retail
and personal banking services Universal Banking can reach this stratum easily.
74
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 set
up banking subsidiaries and to enter the insurance business along with banks. DFIs
75
were also allowed to undertake working capital financing and to raise short-term funds
within limits. It was the Narasimham 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 Bank’s
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 account factors such as the status of reforms, the state of
preparedness of the institutions, 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 Bank’s 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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Lets discuss the impact of universal banking on the performance of State bank of India.
State bank of India transform it into an universal bank in 2004.Following are the some
performance indicator of State bank of India
Capital adequacy ratio- it provide cushioning effect to the bank. It improve the risk
taking ability of the bank. Following graph shows the capital adequacy ratio of the 5
financial years of the State bank of India
GRAPH-
1
Interpretation
Capital adequacy ratio of the Sate bank of India is increased by 14.37 percent in FY
2008-09(14.24) as compared to FY 2004-05(12.45)
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Business per employee- it shows the average amount of business which is done by
employee of State bank of india
GRAPH-2
Interpretation
The of business per employee is increased by 23 percent in 2005-06, 19 percent in
2006-07, 27.73 percent in 2007-08, 22 percent in 2008-09. If compare the 2008-09 to
2004-05 then it is increased by 128.73 percent inFY 2008-09 as compared to FY 200405
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Profit per employee- the followingbgraph represent the amount of profit on each
employee.
GRAPH-3
Interpretation
Profit per employee is increased by 4.46 percent in 2005-06, 9.25 percent in 2006-07,
57.32 percent in 2007-08, 27.16 percent in 2008-09. If compare the 2008-09 to 2004-05
then it is increased by 128.32 percent in FY 2008-09 as compared to FY 2004-05
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Return on Assets Return on assets shows the ratio of the return on assets.
GRAPH-4
Interpretation
ROA is decreased by 10.10 percent in 2005-06, decreased by 5.61 percent in 2006-07,
but in 2007-08 it us increased by 20.23 percent it is also increased by 2.97 percent in
2008-09. If compare the 2008-09 to 2004-05 then it is increased by 5.05 percent in FY
2008-09 as compared to FY 2004-05
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Net NPA ratio- it shows the percentage of NPA to assets
GRAPH-5
NET NPA ratio is decreased by 29.05 percent in 2005-06, decreased by 17.02 percent
in 2006-07, but in 2007-08 it is increased by 14.10 percent it is decreased by 1.12
percent in 2008-09. If compare the 2008-09 to 2004-05 then it is decreased by 33.58
percent in FY 2008-09 as compared to FY 2004-05
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ADVANTAGES OF UNIVERSAL BANKING
 Economies of scale from lower operational costs, i.e., larger scale can avoid the
wasteful duplication of marketing, research and development and information
gathering efforts.
 By offering a broader set of financial products than what a specialized bank
provides, a universal bank is able to establish long-term relationship with the
customers and provide them with a package of financial services through a
single-window.
 Flexibility in adapting to the fast changing environment.
 Better and innovative products.
 Reduction of risk by diversification.
 Access to international financial markets.
 Higher output due to specialization.
1.1.2 LIMITATIONS OF UNIVERSAL BANKING
 The failure of a larger institution could have serious ramifications for the entire
system in that if one universal bank were to collapse, it could lead to a systemic
financial crisis. Thus, Universal Banking could subject the economy to the
increased systemic risk.
 Universal bankers may be tempted to take excessive risks. In such cases, the
government would be forced to step in to save the bank.
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 Vulnerable to high risks due to investment banking activities coupled with focus
on commercial banking activities.
 By virtue of their sheer size, universal banks may gain monopoly power in the
market, which can have significant undesirable consequences for economic
efficiency.
 Universal banks may tend to work primarily with large established customers and
ignore or discourage smaller and newly established businesses.
 Universal banks could use such practices as limit pricing or predatory pricing to
prevent smaller specialized banks from serving the market. This argument mainly
stems from the economies of scale and scope.
 Combining commercial and investment banking gives rise to conflict of interests,
as universal banks may not objectively advise their clients on optimal means of
financing or they may have an interest in securities because of underwriting
activities.
 There may be conflict between the investment banker's promotional role and the
commercial banker's obligation to provide disinterested advice .
 Banks may deploy their own assets in securities with consequent risk to
commercial and savings deposits.
 Unsound loans may be made in order to shore up the price of securities or the
financial position of companies in which a bank had invested its own assets.
 A commercial bank's financial interest in the ownership, price, or distribution of
securities inevitably may tempt bank officials to press their banking customers
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into investing in securities which the bank itself was under pressure to sell
because of its own pecuniary stake in the transaction.
AREA OF RESEARCH
The banking industry in India has undergone a sea of change ever since the
economic form process was initiated. There is no doubt that the banking industry
continues to play a cardinal role in spread heading the economic activity of the
country. From an industry almost monopolized by the nationalized bank till the
90's it has now emerged as a conglomerate of nationalized, private and foreign
banks setting new trends in the way banking is carried out. Banking Industry which
is basically my concern industry around which my project has to be revolved is
really a very complex industry. And to work for this was really a complex and
hectic task. The area of this research is finance.
SCOPE OF RESEARCH
The findings of this study is helpful for banks in understanding of impact of
universal banking and taking decision regarding the universal banking
RESEARCH OBJECTIVE
 Find out the steps undertaken by banks for adopting universal banking.

To come out with valuable suggestions for improvement
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RESEARCH METHOD
OLOGY
 Research design:
Exploratory research
 Methods of data collection:
The most desirable approach with regards to the selection of the research
methodology depends on the nature of the particular problem, time and resources
available along with the desired level of accuracy. As for as method of data
collection is considered secondary data sources have been used
 SECONDRY DATA:
Secondary data is collected from websites , magazines, journals and news
paper
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INTRODUCTION TO RESEARCH WORK
This report is an attempt to study the Impact of universal banking on the operations of
banks. Ever since the financial sector reforms were introduced in early 90’s the banking
sector saw the emergence of new generation private sector banks. These banks gained
at most popularity as they have technology edge and better business models when
compared to public sector banks and the most important thing is they are able to attract
more volumes simply because they meet their customers requirements under one roof.
If the newer players can do that then why can’t the bigger players like the Financial
Institutions (FIs) try their hands on it? Here comes the concept of universal banking, its
emergence, merits and related issues.
Business boom in universal banks, and entities like SBI, ICICI, HDFC and
Kotak Mahindra have all become one-stop departmental stores for
Mutual funds, loans, insurance and much else (see chart).
The spinoffs
For savvy institutions, the appeal of becoming a universal bank is now
Irresistible. Institutions like ICICI, SBI and HDFC have realised that it
helps to spread risks among different segments. They are also waking up
to the sheer potential for growth: life insurance premium to GDP in India
is estimated at less than 2%; retail loans are less than 3% of GDP; and
more than 70% of mutual fund collections are only from the major
metros. Besides, with more and more middle class customers wanting to spread
their wealth across banking products, equity, mutual funds, pension
products and insurance— leading banks see sense in becoming one-stop
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shops—so they can capture the consumer completely.
In fact, changing consumer preferences has clearly been the biggest driver
of universal banking in India. A retail customer would have been quite
content with a bank deposit about 20 years ago. Today he spreads his
wealth around: equities, mutual funds, pension products and insurance,
for example. A bank either has to offer it all to him, or lose him.
Today, many banks have begun to migrate to the universal Banking model, which has
opened up new avenues of growth for them. Several banks are now foraying into areas
such as credit cards, insurance, DEMAT services, mortgage financing, investment
banking, securitization, mutual funds, insurance, etc. , thereby offering different
services to their customers under one roof. This is also fueling the growth of these
banks. As the competition increases, it will make consolidation in the sector inevitable.
With the highly fragmented nature of the sector, it is not unlikely that many banks
especially PSBs will find some of their branches unproductive and unsustainable. The
greater cost competitiveness of private banks will also force PSBs with inefficient
operations and high costs to either close those branches of merge with other banks to
bring down the costs. Signs of consolidation have already begun to emerge. The high
profile merger of Times Bank with HDFC Bank five years ago marked the arrival of
Mergers and Acquisitions (M&A) in the banking sector in the country. A couple of
recent mergers clearly send a signal that consolidation is inevitable. The merger
between ICICI Bank and Bank of Madura, Nedungadi Bank’s merger with Punjab
National Bank, and more recently, the merger of the beleaguered Global Trust Bank
with the government-owned Oriental Bank of Commerce vindicate the argument.
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Industry experts opine that there may be many more mergers on the cards. The Union
Finance Minister has also hinted that he is favourable to mergers between banks,
especially government-owned ones. He was recently quoted saying, “Consolidation
alone will give banks the muscle, size and scale to act local and seek new markets, new
classes of borrowers.” This gives enough indication as to what lies in store for the
banks, particularly the PSBs, as far as consolidation is concerned. Further as banks in
India look forward to expanding their presence outside the country and have a global
reach they will be competing with global behemoths like the Citigroup, HSBC Bank, etc.
in terms of strong balance sheet, and economies of scale and size. To acquire these
capabilities Indian banks will have to look beyond organic growth. State-owned banks
like State Bank of India and Bank of Baroda, and private sector players like ICICI Bank
have already made their intentions of going global clear. 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. Even then, some groups
like the HDFC (commercial banking and insurance joint venture with Standard
Assurance), ICICI (commercial banking), SBI (investment banking) etc., have already
started diversifying from their traditional activities through setting up subsidiaries and
joint ventures. In a recent move, the Life Insurance Corporation increased its stakes in
Corporation Bank and is planning to sell insurance to the customers of the Bank.
Corporation Bank itself has been planning to set up an insurance subsidiary since a
long time. Even a specialized DFI, like IIBI, is now talking of turning into a universal
bank. From the above description impact of universal banking on the operation of banks
are a follows.
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Improved financial health
The ongoing reforms process has seen several major positive changes for the Indian
banking sector. Deregulation has enabled banks in India to improve their financial
health in terms of capital adequacy, asset quality, profitability, and provisioning (read:
Non Performing Assets). Many of the PSU Banks have shown improved Capital
Adequacy Ratio (CAR) for the fiscal 2002-03 as against the previous fiscal. Further, the
progress made on the NPA front too is encouraging, though it needs to be further
improved. For instance, only eight PSBs have shown NPAs of more than 5% for the
fiscal 2003, as compared to 15% in the previous fiscal. According to Standard & Poor’s,
key structural reforms have improved the asset quality, profitability and capital
adequacy ratio of banks, besides increasing transparency and efficiency in the system.
This is an encouraging sign as the Indian banking industry has for long been suffering
the chronic problem of NPAs. However, the Securitization Act that came into vogue two
years ago is helping banks clean their balance sheets. However, as the banks have
pointed out the Act suffers from certain loopholes and, therefore, needs fine-tuning.
Technology:
E-banking and mobile-banking services construct customer confidence in the that will
increase the business of banks
Risk Management:
With increasing pace of globalization and easy flow of money across the globe, banks in
the country will be exposed to several new kinds of risk, prominently country risk,
besides the traditions risks like credit risk, and operational risk. In this backdrop, banks
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will be required to strengthen their risk management and surveillance systems and
improve their credit assessment and risk management skills.
International Best Practices: If the banks in the country have to compete with
international banks, they will have to gear up to embrace international best practices
and standards in terms of operating, reporting and disclosure norms.
Corporate Governance:
With growing emphasis on the part of listed companies worldwide on creating
shareholder wealth; domestic banks, which are seeing a dilution in government
ownership, will come under intense pressure to be more transparent in their operations,
and improve disclosure and reporting practices. Hence these banks will have to gear up
to meet the stock market demands, and improve their corporate governance practices.
Increased integration with the global economy and the fast changing banking
environment in the country along with the reform process will be an overwhelming
challenge for the banking sector. Factors such as cost competitiveness, giving
emphasis on acquiring and leveraging technology capabilities to deliver services, strong
balance sheet, better risk management skills, and, perhaps a global presence will hold
key to the success of banks in the future.
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LIMITATIONS AND PROBLEMS
No company can rely on it finding through any bind og study because the customers
and the future is uncertain. Therefore organization has to develop an eagle’s site grab
each and every opportunity existing in the market

Time is a limiting factor in any research.

This research is based on secondary data

This is not an exhaustive study some import conclusions might have escaped my
observation
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FINDINGS
 By the admission of foreign investors in Indian banking sector, the competition
and the service value also started to increase.
 By offering a broader set of financial products than what a specialized bank
provides, a universal bank is able to establish long-term relationship with the
customers and provide them with a package of financial services through a
single-window
 By virtue of their sheer size, universal banks may gain monopoly power in the
market, which can have significant undesirable consequences for economic
efficiency.
 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.
 With the increasing degree of deregulation and exposure of banks to various
types of risks, efficient risk management systems have become essential
 The most serious problem of DFIs have had to encounter is bad loans or Non
Performing Assets (NPA). For the DFIs and Universal Banking or installation of
cutting-edge-technology in operations are unlikely to improve the situation
concerning NPAs.
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SUGGESTIONS AND RECOMMENDATIONS
 There is need to review and amended the provisions of RBI Act, Banking
Regulation Act, State Bank of act etc so as to bring them on same line of
current banking needs
 Government should consider raising the prescribed capital adequacy ratio
to improve the inherent strength of banks and to improve their risk taking
ability
 weak public sector banks which have accumulated a high percentage of
non-paying assets (NPA), and in some cases, as high as 20% of their total
assets. They suggested the concept of narrow banking to rehabilitate such
weak banks.
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CONCLUSION
The banking scenario has changed drastically. The changes which have
taken place in the last ten years are more than the changes took place in last fifty years
because of the institutionalisation, liberalisation, globalisation and automation in the
banking industry.
Universal banking is the fastest growing sector of the banking industry with the
key success by attending directly the needs of the end customers is having glorious
future in coming years.
universal banking sector as a whole is facing a lot of competition ever since
financial sector reforms were started in the country. Walk-in business is a thing of past
and banks are now on their toes to capture business. Banks therefore, are now
competing for increasing their business.
There is a need for constant innovation in universal banking. This requires
product development and differentiation, micro-planning, marketing, prudent pricing,
customization, technological upgradation, home / electronic / mobile banking, effective
risk management and asset liability management techniques.
However, the kind of technology used and the efficiency of operations would
provide the much needed competitive edge for success in universal banking business.
Furthermore, in all these customer interest is of chief importance. The banking sector in
India is representing this and I do hope they would continue to succeed in this traded
path.
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Bibliography
BOOKS
 Research Methodology – C.R. Kothari (New Age International Publishers, 2nd edition)
 Shekhar K.C (2005), Banking Theory and Practice, Vikas Publishing House
Magazines’ and journals’
 Annual reports of State bank ok India
WEBSITES
 www.banknetindia.com/banking/ubfeature.htm: Universal Banking: introduction,
RBI rules and regulations, Universal Banking in India
 www.answers.com/topic/universal-banking: Universal Banking: definition
 www.investopedia.com/terms/u/universalbanking.asp Universal Banking:
definition
 www.cato.org/pubs/journal/cj13n2/cj13n2-8.pdf Universal Banking: Future
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