UNIVERSAL BANKING

Meaning:
Universal Banking is a multi-purpose and multifunctional financial supermarket (a company offering a wide range of financial services e.g. stock, insurance and real-estate brokerage) providing both banking and financial services through a single window.

Definition:
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".

THE CONCEPT OF UNIVERSAL BANKING

The entry of banks into the realm of financial services was followed very soon after the introduction of liberalization in the economy. Since the early 1990s structural changes of profound magnitude have been witnessed in global banking systems. Large scale mergers, amalgamations and acquisitions between the banks and financial institutions resulted in the growth in size and competitive strengths of the merged entities. By the mid-1990s, all the restrictions on project financing were removed and banks were allowed to undertake several in-house activities. Reforms in the insurance sector in the late 1990s, and opening up of this field to private and foreign players also resulted in permitting banks to undertake the sale of insurance products. At present, only an 'arm's length relationship between a bank and an insurance entity has been allowed by the regulatory authority, i.e. IRDA (Insurance Regulatory and Development Authority).

ADVANTAGES OF UNIVERSAL BANKING

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

Profitable Diversions:By diversifying the activities, the bank can use its existing expertise in one type of financial service in providing other types. So, it entails less cost in performing all the functions by one entity instead of separate bodies.

Resource Utilization:A bank possesses the information on the risk characteristics of the clients, which can be used to pursue other activities with the same clients. A data collection about the market trends, risk and returns associated with portfolios of Mutual Funds, diversifiable and non diversifiable risk analysis, etc, is useful for other clients and information seekers. Automatically, a

bank will get the benefit of being involved in the researching.

Easy Marketing on the Foundation of a Brand

Name:A bank's existing branches can act as shops of selling for selling financial products like Insurance, Mutual Funds without spending much efforts on marketing, as the branch will act here as a parent company or source. In this way, a bank can reach the client even in the remotest area without having to take resource to an agent.

One-stop shopping:The idea of 'one-stop shopping' saves a lot of transaction costs and increases the speed of economic activities. It is beneficial for the bank as well as its customers.

Investor Friendly Activities:Another manifestation of Universal Banking is bank holding stakes in a form : a bank's equity holding in a borrower firm, acts as a signal for other investor on to the health of the firm since the lending bank is in a better position to monitor the firm's activities.

DISADVANTAGES OF UNIVERSAL BANKING

Grey Area of Universal Bank:The path of universal banking for DFIs is strewn with obstacles. The biggest one is overcoming the differences in regulatory requirement for a bank and DFI. Unlike banks, DFIs are not required to keep a portion of their deposits as cash reserves.

No Expertise in Long term lending:In the case of traditional project finance, an area where DFIs tread carefully, becoming a bank may not make a big difference to a DFI. Project finance and Infrastructure finance are generally long- gestation projects and would require DFIs to borrow long- term. Therefore, the transformation into a bank may not be of great assistance in lending long-term.

NPA Problem Remained Intact:The most serious problem that the DFIs have had to encounter is bad loans or Non-Performing Assets (NPAs). For the DFIs and Universal Banking or installation of cutting-edge-technology in operations are unlikely to improve the situation concerning NPAs.

UNIVERSAL BANKING IN INDIA

In India Development financial institutions (DFIs) and refinancing institutions (RFIs) were meeting specific sect oral 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 harmonization 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-by-case approach towards allowing domestic financial institutions to become universal banks.

THE FUTURE TREND OF UNIVERSAL BANKING IN DIFFERENT COUNTRIES

Universal banks have long played a leading role in Germany, Switzerland, and other Continental European countries. The principal Financial institutions in these countries typically are universal banks offering the entire array of banking services. Continental European banks are engaged in deposit, real estate and other forms of lending, foreign exchange trading, as well as underwriting, securities trading, and portfolio management. In the Anglo-Saxon countries and in Japan, by contrast, commercial and investment banking tend to be separated. In recent years, though, most of these countries have lowered the barriers between commercial and investment banking, but they have refrained from adopting the Continental European system of universal banking. In the United States, in particular, the resistance to softening the separation of banking activities, as enshrined in the Glass-Steagall Act, continues to be stiff. In Germany and Switzerland the importance of universal banking has grown since the end of World War II. Will this trend continue so that universal banks could completely overwhelm the specialized institutions in the future? Are the specialized banks doomed to disappear? This question cannot be answered with a simple "yes" or "no".

The German and Swiss experiences suggest that three factors will determine future growth of universal banking.
First, universal banks no doubt will continue to play an important role. They possess a number of advantages over specialized institutions. In particular, they are able to exploit economies of scale and scope in banking. These economies are especially important for banks operating on a global scale and catering to customers with a need for highly sophisticated financial services. As we saw in the preceding section, universal banks may also suffer from various shortcomings. However, in an increasingly competitive environment, these defects will likely carry far less weight than in the past.
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Second, although universal banks have expanded their sphere of influence, the smaller specialized institutions have not disappeared. In both Germany and Switzerland, they are successfully coexisting and competing with the big banks. In Switzerland, for example, the specialized institutions are firmly entrenched in such areas as real estate lending, securities trading, and portfolio management. The continued strong performance of many specialized institutions suggests that universal banks do not enjoy a comparative advantage in all areas of banking.

Third, universality of banking may be achieved in various ways. No single type of universal banking system exists. The German and Swiss universal banking systems differ substantially in this regard. In Germany, universality has been strengthened without significantly increasing the market shares of the big banks. Instead, the smaller institutions have acquired universality through cooperation. It remains to be seen whether the cooperative approach will survive in an environment of highly competitive and globalized banking.

SALIENT OPERATIONAL AND REGULATORY ISSUES OF RBI TO BE ADDRESSED BY THE FILES FOR CONVERSION INTO A UNIVERSAL BANK
a) Reserve requirements. Compliance with the cash
reserve ratio and statutory liquidity ratio requirements (under Section 42 of RBI Act, 1934, and Section 24 of the Banking Regulation Act, 1949, respectively) would be mandatory for an FI after its conversion into a universal bank.

b) Permissible activities. Any activity of an FI currently

undertaken but not permissible for a bank under Section 6(1) of the B. R. Act, 1949, may have to be stopped or divested after its conversion into a universal bank..

c) Disposal of non-banking assets. Any immovable property, howsoever acquired by an FI, would, after its conversion into a universal bank, be required to be disposed of within the maximum period of 7 years from the date of acquisition, in terms of Section 9 of the B. R. Act. d) Composition of the Board. Changing the composition of the Board of Directors might become necessary for some of the FIs after their conversion into a universal bank, to ensure compliance with the provisions of Section 10(A) of the B. R. Act, which requires at least 51% of the total number of directors to have special knowledge and experience. e) Prohibition on floating charge of assets. The floating charge, if created by an FI, over its assets, would require, after its conversion into a universal bank, ratification by the Reserve Bank of India under Section 14(A) of the B. R. Act, since a banking company is not

allowed to create a floating charge on the undertaking or any property of the company unless duly certified by RBI as required under the Section. f) Nature of subsidiaries. If any of the existing subsidiaries of an FI is engaged in an activity not permitted under Section 6(1) of the B R Act , then on conversion of the FI into a universal bank, delinking of such subsidiary / activity from the operations of the universal bank would become necessary since Section 19 of the Act permits a bank to have subsidiaries only for one or more of the activities permitted under Section 6(1) of B. R. Act. g) Connected lending. Section 20 of the B. R. Act prohibits grant of loans and advances by a bank on security of its own shares or grant of loans or advances on behalf of any of its directors or to any firm in which its director/manager or employee or guarantor is interested. The compliance with these provisions would be mandatory after conversion of an FI to a universal bank. h) Licensing. An FI converting into a universal bank would be required to obtain a banking licence from RBI under Section 22 of the B. R. Act, for carrying on banking business in India, after complying with the applicable conditions. i) 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.

j) Assets in India. An FI after its conversion into a universal bank, will be required to ensure that at the close of business on the last Friday of every quarter, its total assets held in India are not less than 75 per cent of its total demand and time liabilities in India, as required of a bank under Section 25 of the B R Act. k) 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.

Company Overview
Universal Bank provides personal and commercial banking products and services to Southern California residents. It offers community, money market, and VIP checking accounts; ATM, money market, and young savings accounts; and other investment depository accounts, as well as CD's and home equity lines. The company also provides passbook secured, mortgage, savings account, commercial real estate investment, home, small business, purchase, refinance, construction, new/used equipment purchase, inventory purchase, business expansion, business acquisitions, tenant improvements/renovations, working capital, debt repayment, and franchise purchase loans. In addition, it offers visa/debit cards, direct..

KEY DEVELOPMENTS FOR UNIVERSAL BANK

Universal Bank Announces Earnings Results for the Second Quarter and First Half Ended June 2010 07/30/2010 Universal Bank announced earnings results for the second quarter and first half ended June 2010. Its net losses in the second quarter of 2010 alone stood at UAH 72.828 million, whereas the bank was in the black January through March with a net profit of UAH 101,000. The bank's net losses April through June 2010 grew by 4.3% year-overyear, from UAH 69.816 million. The net losses of the Bank January through June 2010 amounted to UAH 72.727 million, which was 27.2% down on the same period of 2009. Universal Bank Reports Earnings Results for the Fourth Quarter and Full Year 2009 02/2/2010 Universal Bank reported earnings results for the fourth quarter and full year 2009. For the fourth quarter, net loss reached UAH 60.396 million, while in fourth quarter 2008 its net loss totaled UAH 283,000. The net loss of 2009 came to UAH 230.889 million, while in 2008 the bank earned UAH 3.784 million in net profit.

STRATEGIC OPTIONS WITH BANKS TO COPE WITH THE CHALLENGES

Leading players in the industry have embarked on a series of strategic and tactical initiatives to sustain leadership. The major initiatives include:Investing in state of the art technology as the back bone to ensure reliable service delivery. Leveraging the branch network and sales structure to mobilize low cost current and savings deposits. Making aggressive forays in the retail advances segment of home and personal loans. Implementing organization wide initiatives involving people, process and technology to reduce the fixed costs and cost per transaction. Focusing on fee based income to compensate for squeezed spread, (e.g. CMS, trade services). Innovating Products to capture customer mind share to begin with and later the wallet share. Improving the asset quality as per Base II norms.

REFERENCES AND BIBLIOGRAPHY

1. The World Bank Report on Universal Banking and the Financing of Industrial Development. 2. http://banknetindia.com/universalbanking 3. http://www.hss.caltech.edu/~fohlin/booko ut- ger-nov00.pdf. 4.http://www.thehindu.com/2002/07/23/st ories/2002072304301300.htm 5. http://www.managementor.com 6. www.arabfinance.com/glossary/u.htm

AN APPROACH TO UNIVERSAL BANKING.

The Narsimham Committee II suggested that Development Financial Institutions (DFIs) should convert ultimately into either commercial banks or non-bank finance companies. The Khan Working Group held the view that DFIS should be allowed to become banks at the earliest. The RBI released a 'Discussion Paper' (DP) in January 1999 for wider public debate. The feedback on the discussion paper indicated that while the universal banking is desirable from the point of view of efficiency of resource use, there is need for caution in moving towards such a system by banks and DFIs. Major areas requiring attention are the status of financial sector reforms, the state of preparedness of the concerned institutions, the evolution of the regulatory regime and above all a viable transition path for institutions which are desirous of moving in the direction of universal banking. It is proposed to adopt the following broad approach for considering proposals in this area: The principle of "Universal Banking" is a desirable goal and some progress has already been made by permitting banks to diversify into investments and long-term financing and the DFIs to lend for working capital, etc. However, banks have certain special characteristics and as such any dilution of RBI's prudential and supervisory norms for conduct of banking business would be inadvisable. Further, any conglomerate, in which a bank is present, should be subject to a consolidated approach to supervision and regulation. Though the DFIs would continue to have a special role in the Indian financial System, until the debt market demonstrates substantial improvements in terms of liquidity

and depth, any DFI, which wishes to do so, should have the option to transform into bank (which it can exercise), provided the prudential norms as applicable to banks are fully satisfied. To this end, a DFI would need to prepare a transition path in order to fully comply with the regulatory requirement of a bank. The DFI concerned may consult RBI for such transition arrangements. Reserve Bank will consider such requests on a case by case basis. The regulatory framework of RBI in respect of DFIs would need to be strengthened if they are given greater access to short-term resources for meeting their financing requirements, which is necessary. In due course, and in the light of evolution of the financial system, Narasimham Committee's recommendation that, ultimately there should be only banks and restructured NBFCs can be operationalised.

ACKNOWLEDGEMENT

We express our sincere thanks to our esteem institution Gurunanak Khalsa College. We wish to express our sincere thanks to our professors and to our subject teacher ANITA MISS For being the constant source of inspiration for completing the project. It is our foremost duty to thanks all those have supported us and our group members who have helped us in completing this project.

MEMBERS OF GROUPS

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NAMES OF MEMBERS SIMRAN KAUR SHRUTIKA PADWAL SONAM TIWARI POOJA VICHARE SHRUTIKA WARANG

ROLL NO 24 25 36 37 39

INDEX
PARTICULARS
1 Meaning and Definition of UB. 2 Approach to UB. 3 UB-advantages & disadvantages . 4 UB in different countries 5 The Future trends of UB 6 The German and Swiss suggest three factors. 7 Salient Operational and Regulatory Issues. 8 Company Overview 9 Strategic Options 1 Conclusion 0 1 Bibliography 1

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