UNIVERSAL BANKING IN INDIAN CONTEXT

GE-International Journal of Management Research

Vol. 4, Issue 5, May 2016 IF- 4.88 ISSN: (2321-1709)

© Associated Asia Research Foundation (AARF)

UNIVERSAL BANKING IN INDIAN CONTEXT

Rinu Jayaprakash

Assistant Professor, SCMS School of Technology & Management, Pratap Nagar,

Muttom, Aluva, Kerala-683106, India.

ABSTRACT

In India’s financial sector commercial banks has been playing a key role the banking sector. But with the advent of financial sector reforms which were introduced in the early 90’s the banking

sector saw the emergence of private sector banks. Consumers prefer to get all the sources under

a single roof which are being provided by the universal banking systems. Universal banking is a

super store for financial products under one roof. In international scenario universal banking

has been successful. In India too these opportunities need to be exploited. In this paper an

attempt is made to study the potential of Universal Banking for Indian market and future

prospects with universal banking. It is believed that the concept of financial supermarkets could

play a significant role in future given that an increasing number of transnational companies

have been set up in the region and also by the opening of Indian Banking sector to foreign

players.

Keywords: banking, Universal banking, financial supermarkets, transnational companies,

financial sector

Introduction

Today, the banks are no longer restricted to their traditional activity of accepting deposits and

trading, housing finance, pension funds, investment banking etc., which till the other day was the

domain of other non-banking organizations. Although reforms in the financial sector played an

important role in banking sector diversification, explosive growth of financial market in early

1980s had been the other reason for such a change. Financial market developments resulted in

disintermediation. This forced banks to enter into new areas of business in order to hang on to

their precious customers. Moreover, product boundaries have blurred, which was another striking

reason, forcing banks to go for diversification. Thus, as banks diversified their business

activities, they gradually began making a transition from being a traditional bank to Universal

bank.

In a nutshell, a Universal Banking is a superstore for financial products under one roof.

Corporate can get loans and avail of other handy services, while can deposit and borrow. It

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

helps service provider to build up long - term relationships with clients by catering to their

different needs. The client also benefits as he gets a whole range of services at lower cost and

under one roof.

Statement of the Problem

Today, almost all Indian commercial banks are offering a variety of service under one roof but in

spite of that, all of them do not enjoy the status of Universal bank.

In this paper an attempt is made to study the potential of Universal Banking for Indian market

and future prospects with universal banking.

Objective and methodology of the study

Keeping in view of the emerging importance of Universal banks in the current scenario, the

following objectives can be set for the research.

 To analyze the importance of universal banking in Indian context.  To study the potential of Universal banking in Indian market.

 To introspect the issues pertaining in India regarding the conversion in to universal

banks.

 To provide key suggestions in order to transform in to universal banks.

The study is based on secondary data to reflect the evolution of commercial banks from

Future Prospects of Universal Banking

In Indian context, a universal bank is a one-stop supplier for all financial products and activities,

like deposits, short-term and long-term loans, insurance, investment banking etc. Global

experience with universal banking has been varied. Universal

Banking has been prevalent in different forms in many European countries. This prohibited

commercial banks from investment banking activities, taking equity positions in borrowing

firms, selling insurance products etc. The idea was to mitigate risky behavior by restricting

commercial banks to their traditional activity of accepting deposits and lending. Research on the

effects of universal banking has been inconclusive as there is no clear-cut evidence in favors of

or against it anywhere.

Now, let us turn to the benefits accruing to the customers. The idea of one-stop-shopping saves a

lot of transaction costs and increases the speed of economic activity. To account for this,

appropriate regulation can be devised, which will ultimately benefit all the participants in the

market, including the banks themselves. In spite of the associated problems, there seems to be a

lot of interest expressed by banks and financial institutions in universal banking. In India, too, a

lot of opportunities are there to be exploited. Banks, especially the financial institutions, are

aware of it. And most of the groups have plans to diversify in a big way. Even though there

might not be profits forthcoming in the short run due to the switching costs incurred in moving to

a new business.

Discussion and Analysis

There are different opinions regarding the universal banking. For some the approach is very

slow, for some it is a steady approach. The debate regarding „Should India have universal

banking and if so when?‟ is very much on. A lot has been written about it domestically; however

the following are the issues which are key in Indian context.

a. Regulatory burden:

In India there is an urgent need to reduce the regulatory burden, particularly for banks vis-à-vis

mutual funds and insurance companies, if the banks are expected to compete in free market

place.

b. Regulatory requirements:

For conversion into universal bank salient operational and regulatory issues of RBI is to be

addressed by the FI‟s.

c. Distinction between Maturity and Duration

This is the issue of debate between long term and short term. Somehow DFIs are the suppliers of

term finance, where the maturity is clearly specified which could be between 3 years to 7 years,

whereas banks are providers of short-term finance where in reality bank finance in a way

amounts to financing in perpetuity since there are in general no definite maturity dates. Usually

the deposit base of the banks have are short duration but with a variably high interest rates but

it‟s not the case with DFIs. Their funds have a longer duration with less interest rate.

d. Optimal Transition path:

The transition path contains several operational and regulatory issues for information and

guidance of DFIs. The S H Khan working group and the discussion paper on the subject prepared

by RBI eventually felt that DFIs should transform themselves into commercial banks but in a

phased manner.

Salient operational and regulatory issues to be addressed by the FIs for

conversion into a Universal Bank [RBI circular]

a) Reserve requirements

Compliance with the cash reserve ratio and statutory liquidity ratio requirements (under Section

42 of RBI Act, 1934, and Section 24 of the Banking Regulation Act, 1949, respectively) would

be mandatory for an FI after its conversion into a universal bank.

b) Permissible activities

Any activity of an FI currently undertaken but not permissible for a bank under Section 6(1) of

the B. R. Act, 1949, may have to be stopped or divested after its conversion into a universal

bank.

c) Disposal of non-banking assets

Any immovable property, howsoever acquired by an FI, would, after its conversion into a

universal bank, be required to be disposed of within the maximum period of 7 years from the

d) Composition of the Board

Changing the composition of the Board of Directors might become necessary for some of the FIs

after their conversion into a universal bank, to ensure compliance with the provisions of Section

10(A) of the B. R. Act, which requires at least 51% of the total number of directors to have

special knowledge and experience.

e) Prohibition on floating charge of assets

The floating charge, if created by an FI, over its assets, would require, after its conversion into a

universal bank, ratification by the Reserve Bank of India under Section 14(A) of the Banking

Regulation Act, since a banking company is not allowed to create a floating charge on the

undertaking or any property of the company unless duly certified by RBI as required under the

Section.

f) Nature of subsidiaries

If any of the existing subsidiaries of an FI is engaged in an activity not permitted under Section

6(1) of the B R Act, then on conversion of the FI into a universal bank, delinking of such

subsidiary / activity from the operations of the universal bank would become necessary since

Section 19 of the Act permits a bank to have subsidiaries only for one or more of the activities

permitted under Section 6(1) of Banking Regulation Act.

g) Restriction on investments

An FI with equity investment in companies in excess of 30 per cent of the paid up share capital

of that company or 30 per cent of its own paid-up share capital and reserves, whichever is less,

on its conversion into a universal bank, would need to divest such excess holdings to secure

compliance with the provisions of Section 19(2) of the Banking Regulation Act, which prohibits

a bank from holding shares in a company in excess of these limits.

h) Connected lending

Section 20 of the Banking Regulation Act prohibits grant of loans and advances by a bank on

security of its own shares or grant of loans or advances on behalf of any of its directors or to any

firm in which its director/manager or employee or guarantor is interested. The compliance with

i) Licensing

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

under Section 22 of the Banking Regulation Act, for carrying on banking business in India, after

complying with the applicable conditions.

j) Branch network

An FI, after its conversion into a bank, would also be required to comply with extant branch

licensing policy of RBI under which the new banks are required to allot at least 25 per cent of

their total number of branches in semi-urban and rural areas.

k) Assets in India

An FI after its conversion into a universal bank, will be required to ensure that at the close of

business on the last Friday of every quarter, its total assets held in India are not less than 75 per

cent of its total demand and time liabilities in India, as required of a bank under Section 25 of the

Banking Regulation Act.

l) Format of annual reports

After converting into a universal bank, an FI will be required to publish its annual balance sheet

and profit and loss account in the in the forms set out in the Third Schedule to the B R Act, as

prescribed for a banking company under Section 29 and Section 30 of the Banking Regulation

Act.

m) Managerial remuneration of the Chief Executive Officers

On conversion into a universal bank, the appointment and remuneration of the existing Chief

Executive Officers may have to be reviewed with the approval of RBI in terms of the provisions

of Section 35 B of the Banking Regulation Act.

The Section stipulates fixation of remuneration of the Chairman and Managing Director of a

bank by Reserve Bank of India taking into account the profitability, net NPAs and other financial

parameters. Under the Section, prior approval of RBI would also be required for appointment of

n) Deposit insurance

An FI, on conversion into a universal bank, would also be required to comply with the

requirement of compulsory deposit insurance from DICGC up to a maximum of Rs.1 lakh per

account, as applicable to the banks.

o) Authorized Dealer's License

Some of the FIs at present hold restricted AD license from RBI, Exchange Control Department

to enable them to undertake transactions necessary for or incidental to their prescribed functions.

On conversion into a universal bank, the new bank would normally be eligible for full-fledged

authorized dealer license and would also attract the full rigour of the Exchange Control

Regulations applicable to the banks at present, including prohibition on raising resources through

external commercial borrowings.

p) Priority sector lending

On conversion of an FI to a universal bank, the obligation for lending to "priority sector" up to a

prescribed percentage of their 'net bank credit' would also become applicable to it.

q) Prudential norms

After conversion of an FI in to a bank, the extant prudential norms of RBI for the all-India

financial institutions would no longer be applicable but the norms as applicable to banks would

be attracted and will need to be fully complied with.

Conclusion

Commercial banks in India have been offering a variety of services under one umbrella brand.

Today, the changing needs of customers have forced banks to look beyond their traditional

banking activities and offer a variety of products ranging from deposits, short-term and

long-term loans, insurance, mutual funds, stock trading, housing loans, investment banking,

consultancy etc. under an umbrella brand. Thus, banks are gradually moving towards becoming

Universal banks as they have become multi-purpose and multi-functional supermarket providing

Therefore, conclusively, it can be said that most of the Indian commercial banks are on the

verge of becoming universal banks in near future as most of them have been offering services

ranging from insurance to mutual funds, from housing finance to pension funds and from stock

broking to investment banking.

The following are the steps suggested for transforming into universal banks:

a. The net regulatory burden have to be equalized across the financial system (including banks,

DFIs, mutual funds, NBFCs and Insurance companies).

b. The regulatory burden on the over regulated entities have to be lowered.

c. Strong competition need to be promoted and encouraged.

d. Do not allow the merger of a weak bank with a viably strong DFI or vice-versa.

e. DFIs should be permitted to set up a 100 percent owned banking subsidiaries.

f. The minimum level of SLR requirement need to be re-examined in order to meet the best of

international standards.

References

1. Approach to universal banking, Mid-term Review of the Monetary and Credit Policy of

Reserve Bank of India for 1999-2000.

2. RBI Circular paper on 'Salient operational and regulatory issues to be addressed by the

FIs for conversion into a Universal Bank.'

3. Dr. KRS Nair, Universal Banking, Indian Management, (May 1999) pp. 48-51.

4. Chaitanya, Krishna V, Universal banking, The Indian Perspective,( 2005) pp.11-15.

5. “Universal Banking”, Banking Briefs (Internal Circulation), SBI Staff College, Sixth

edition, 2001, pp. 94-95.

7. Mor, Dr. Nachiket & Rupa Rege Nitsure, Universal Banking Issues& concerns, paper

presented at national seminar by RBI at ASCI, Hyderabad, 1999.

8. www.rbi.org.in

9. RBI. (2002). Universal Banking: introduction, RBI rules and regulation, Universal

Banking in India. Retrieved January 2012, from

www.banknetindia.com/banking/ubfeature.htm.

10. Sbankaran, S, Universal Banking by DFI: Handy But no solution to NPA's. Business