Beruflich Dokumente
Kultur Dokumente
INVESTMENT BANKING
ASSUMPTION UNIVERSITY
MBA
CERTIFICATION
Narayan K Prabhu
Project Guide
Dean
Global Institute for Management Science
Kingdom of Bahrain
Centre Coordinator
Assumption University
99
Preface
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
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.
99
Executive Summary
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, co-operative banks, all- India financial
a problem in financial crisis and money related query. Banking is one of the most
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
99
Assets (NPA). For the DFIs and Universal Banking or installation of cutting-edge-
so much so that, in the very initial phase of the next millennium, its face may be
totally unrecognizable.
99
TABLE OF CONTENTS
1. Introduction
2. Universal Banking
3. Research Methodology
5. Major findings
7. Conclusion
8. Bibliography
99
99
INTRODUCTION
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
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
99
establish themselves firmly in the market. It is no longer an option for a company to
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
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
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
Basel II norms from 2009 and the fair level playing field that will be available to foreign
99
banks from 2010 will further enhance the solidarity of the Indian banking sector and
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. Thus,
emerged new financial conglomerates that could maximize economies of scale and
Banking
99
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
outstanding achievements to its credit. The most striking is its extensive reach. It is no
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.
1) Pre-Nationalization Era.
2) Nationalization Stage.
1) Pre-Nationalization Era:
99
In India the business of banking and credit was practices even in very early times. The
popular. The hundies were issued by bankers known as Shroffs, Sahukars, Shahus or
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 18th
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
99
In 1950, the Indian Banking system comprised of the RBI, the Imperial Bank of India,
2) Nationalization Stages:
After Independence, in 1951, the All India Rural Credit survey, committee of Direction
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 16th 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
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 semi-
In 1959, the SBI (Subsidiary Bank) act was proposed and the following eight state-
99
3. State Bank of Jaipur 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
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
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.
99
iv) Oriental Bank of Commerce.
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
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
Consequences of Nationalization:
The quality of credit assets fell because of liberal credit extension policy.
99
Poor appraisal involved during the loan meals conducted for credit disbursals.
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
There was downward trend in the quality of services and efficiency of the banks.
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
importance, as the health of the financial sector in particular and the economy was a
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.
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.
99
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.
Lack of competition.
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.
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
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.
99
BANKING STRUCTURE IN INDIA:
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
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
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
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
99
versions of these services and have diversified introduction in numerable areas of
Central co-op
State co-op Commercial Banks and Commercial Banks
Banks Banks Primary Cr.
Societies
Indian Foreign
Public Sector
Banks Private Sector HDFC,
Banks ICICI etc.
99
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”.
(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)
99
• Industrial Finance Co-operation of India (IFCI)
Role of Banks:
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
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, semi-urban and
rural areas and have introduced a number of attractive schemes to foster economic
development.
way, commercial banks have emerged as key financial agencies for rapid economic
development.
99
By pooling the savings together, banks can make available funds to specialized
institutions which finance different sectors of the economy, needing capital for various
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,
spectrum of the evolving role of banks, in the matter of inter-mediation and beyond.
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
Commercial banks provide short-term and medium-term financial assistance. The short-
term 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
the banker’s assurance for payment and thus help their delivery. Certain transaction,
99
particularly those in contracts of sale of Government Departments, may require
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 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.
Government. RBI has 22 regional offices across India. The Reserve Bank of India was
submitted its report in the year 1926, though the bank was not set up for nine years
Main Objective:
Monetary Authority
99
• Objective: maintaining price stability and ensuring adequate flow of credit to
productive sectors.
Ombudsman Scheme has been formulated by the Reserve Bank of India (RBI)
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
Developmental role
99
Related Functions
• Banker to the Government: performs merchant banking function for the central
• 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
Supervisory Functions:
In addition to its traditional central functions, the Reserve bank has certain non-
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
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
99
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
Co-operative Banks:
99
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
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 co-
operative banks are quite forward looking and have developed sufficient core
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
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.
99
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
(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.
Co-operative Banks are organized and managed on the principal of co-operation, self-
help, 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
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.
99
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,
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 liabilities
99
of co-operative banks. This means that intra-sectoral competition is absent and intra-
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
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
99
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.
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
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
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
99
Not only multinational groups but also some private investors from India show their
Private Banks
Indusland bank
ICICI bank
HDFC
Centurion bank
Federal bank
Saraswat bank
Dhanlaksmi bank
Kotak bank
Cosmos bank
Bank of Rajasthan
Bank of Punjab
99
FOREIGN BANKS
City bank
HSBC
Role of Banks:
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
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, semi-urban and
rural areas and have introduced a number of attractive schemes to foster economic
development.
99
The activities of commercial banking have growth in multi-directional ways as well as
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
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
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
Further, deposit mobilization by banks in India acquired greater significance in their new
99
Commercial banks provide short-term and medium-term financial assistance. The short-
term 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
the banker’s assurance for payment and thus help their delivery. Certain transaction,
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
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 volatility-without 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
99
expected to be strong. M&As, takeovers, asset sales and much more action (as it is
.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
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
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.
99
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,
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.
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
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
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,
99
Indian banks are taking steps under the overall regulatory and supervisory framework of
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
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
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
99
on account of retail loans. That means corporate borrowing is yet to pick up significantly
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
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
99
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
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,
(SLR) and Cash reserve ratio (CRR), dilution of government equity holding in Public
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
as prescribed in the Basel Accords have no doubt helped the domestic banking industry
99
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
have begun responding to the challenge well; although many of them are yet to gear up
The entry of new generation private sector and foreign banks is rewriting the rules of
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
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,
Internet banking, etc. Also, technology is helping banks in bringing down their
99
operational costs, which is allowing them to stay competitive even as competition is
heating up.
(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-;
reorganization of the Indian banking system, and organization, methods and procedures
of banks in India.
99
To bring about greater efficiency in banking operations, the narasimham committee
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
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
Foreign banks are allowed to open their branches in India either as fully owned or
Foreign banks and Indian banks are allowed to set-up joint ventures in regard to
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
99
In order to tone up the working of the banks, the narasimham committee (1991)
recommended that-
Every bank should go for a radical change in working technology and culture, so
taking place.
Over- regulation and over- administration should be avoided and greater reliance
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
The appointment of chief executive of bank and the board of directors should not
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
of this sad state of affairs. The public sector banks has been used and abused by the
99
government, the officials and the bank employees and the trade unions. The
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
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
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
Need For Stronger Banking System- The narasimham committee has made
account convertibility (CAC) which would involve large amount of inflow and
and domestic liquidity. To handle this India would need a strong resilient banking
99
Experiment with the Concept of Narrow Banking- The narasimham
and in some cases, as high as 20% of their total assets. They suggested the
Small Local Banks- The narasimham committee has argued that “While two or
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
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.
argued that government ownership and management of banks does not enhance
of corporate strategy.
99
Review and Updating Banking Laws- The narasimham committee has
suggested the urgent 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
committee on banking sector reforms even before a decade has elapsed for the full
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”
99
99
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 is the one end universal banking is the other. This is most common in European
countries.
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,
99
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
financial sector, there has been blurring of distinction between the commercial 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 .
(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-
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
99
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
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
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
99
PRODUCTS AND SERVICES OFFERED BY UNIVERSAL BANKS
• 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
• Remittances
Trade Finance:
99
• Drawing, accepting, discounting, buying, selling, collecting of bills of exchange,
Treasury Operations:
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
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
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 credit
line-money made available by the card issuer (bank) and gives one a grace period
to pay. If the amount is not paid full by the end of the period, one is charged interest.
99
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
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
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
2) Debit Cards: Debit Card is a “prepaid” or “pay now” card with some stored value.
Debit Cards quickly debit or subtract money from one’s savings account, or if one were
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 issuing bank
99
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
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
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
99
information. The advantages of ATM’s are many. It increases existing business and
• To order cash.
• To receive cash.
Advantages of ATM’s:
To the Customers
• Privacy in transaction
To Banks
99
• Increased market penetration.
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
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
• The customer accesses the merchant server and the merchant server presents
99
• 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.
• 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
• 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,
their cheque handling process with computer networks and other electronic
equipments. These banks are dispensing with the use of paper cheques. The
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
99
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
cash. The payment office directs the computer to credit an employee’s account with the
person’s pay.
can access information about his/her account through a telephone call and by
• To get a particular work done through the bank, the users may leave his
• Facility to stop payment on request. One can easily know about the cheque
status.
99
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
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
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.
confirmed to the branches where one has to approach the branch in person,
The Internet Banking now is more of a normal rather than an exception due to the fact
99
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.
• 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
• Easy online application for all accounts, including personal loans and mortgages
Electronic Cash: Companies are developing electronic replicas of all existing payment
Automatic Payments: Utility companies, loans payments, and other businesses use on
automatic payment system with bills paid through direct withdrawal from a bank
account.
99
Stored Value Cards: Prepaid cards for telephone service, transit fares, highway tolls,
restaurants for payment of goods and services. This system has made functioning of the
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
process where at the customer’s request the physical stock is converted into
In January 1998 SEBI (Securities and Exchange Board of India) initiated DEMAT
trade on shares it has become compulsory to have a share demat account and all
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
99
There is no physical movement of share certification any more. Any buying or selling of
1) If the investor wants to sell his shares, he has to place an order with his broker
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
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
99
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
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
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
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
99
At present, there is no formal forum for interaction between DFI’s and banks despite the
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
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
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.
resources at lower rate of interest, at least to meet the needs of infrastructural finance.
trend. But at the same time, "Big may not always be beautiful". Further, an
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
99
operations of banks and DFI’s should not remain only on paper but should promote a
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
In the Indian context, universal banks would mean harmonizing the roles of
short-term debt.
investment banks, which essentially means bringing together debt and equity type of
financing.
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.
99
However, with a higher equity base, the proposed merged entity will have to return
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
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 commercial
99
resources, which are available mainly to commercial banks and to a very limited extent
to the DFI’s.
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
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 re-
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.
99
Internationally, development banks are allowed to open operating accounts of
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,
would be essential to separate the regulatory and central bank functions of REI. Further,
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
The solution of Universal Banking was having many factors to deal with which further
Strengths:
99
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
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
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.
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
here as a parent company or source. In this way a bank can reach the remotest client
99
One stop shopping
The idea of 'one stop shopping' saves a lot of transaction costs and increases the speed
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:
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.
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.
99
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-
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,
ICICI suffered the least in this section, but the IDBI has got worst hit of NPAs,
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
weaknesses. (e.g. - the strength of economies of scale may turn into the degradation of
99
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:
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.
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.
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
99
Funds, Merchant banking, Factoring, Insurance, credit cards, retail, personal loans, etc.
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.
Since the early 1990s, banking systems worldwide have been going through a
99
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
services. The general trend has been towards downstream universal banking where
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
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,
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
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
99
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
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
regulation.
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
99
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
GRAPH-1
Interpretation
99
Capital adequacy ratio of the Sate bank of India is increased by 14.37 percent in FY
Business per employee- it shows the average amount of business which is done by
GRAPH-2
Interpretation
99
The of business per employee is increased by 23 percent in 2005-06, 19 percent in
05
Profit per employee- the followingbgraph represent the amount of profit on each
employee.
GRAPH-3
Interpretation
99
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
Return on Assets Return on assets shows the ratio of the return on assets.
GRAPH-4
Interpretation
99
ROA is decreased by 10.10 percent in 2005-06, decreased by 5.61 percent in 2006-07,
GRAPH-5
99
NET NPA ratio is decreased by 29.05 percent in 2005-06, decreased by 17.02 percent
Economies of scale from lower operational costs, i.e., larger scale can avoid the
gathering efforts.
single-window.
99
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
Universal bankers may be tempted to take excessive risks. In such cases, the
Vulnerable to high risks due to investment banking activities coupled with focus
By virtue of their sheer size, universal banks may gain monopoly power in the
efficiency.
Universal banks may tend to work primarily with large established customers and
Universal banks could use such practices as limit pricing or predatory pricing to
prevent smaller specialized banks from serving the market. This argument mainly
as universal banks may not objectively advise their clients on optimal means of
activities.
There may be conflict between the investment banker's promotional role and the
99
Banks may deploy their own assets in securities with consequent risk to
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.
securities inevitably may tempt bank officials to press their banking customers
into investing in securities which the bank itself was under pressure to sell
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
banks setting new trends in the way banking is carried out. Banking Industry which
really a very complex industry. And to work for this was really a complex and
SCOPE OF RESEARCH
99
The findings of this study is helpful for banks in understanding of impact of
RESEARCH OBJECTIVE
• Find out the steps undertaken by banks for adopting universal banking.
99
RESEARCH METHODOLOGY
Research design:
Exploratory research
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
• SECONDRY DATA:
99
Secondary data is collected from websites , magazines, journals and news
paper.
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
Business boom in universal banks, and entities like SBI, ICICI, HDFC and
The spinoffs
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
99
metros. Besides, with more and more middle class customers wanting to spread
In fact, changing consumer preferences has clearly been the biggest driver
content with a bank deposit about 20 years ago. Today he spreads his
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
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
99
National Bank, and more recently, the merger of the beleaguered Global Trust Bank
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,
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
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
99
bank. From the above description impact of universal banking on the operation of banks
are a follows.
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
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
99
will be required to strengthen their risk management and surveillance systems and
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
Corporate Governance:
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
sheet, better risk management skills, and, perhaps a global presence will hold key to the
99
99
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
• This is not an exhaustive study some import conclusions might have escaped my
observation
99
99
FINDINGS
single-window
By virtue of their sheer size, universal banks may gain monopoly power in the
efficiency.
The idea of 'one stop shopping' saves a lot of transaction costs and increases the
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
99
cutting-edge-technology in operations are unlikely to improve the situation
concerning NPAs.
99
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
to improve the inherent strength of banks and to improve their risk taking
ability
non-paying assets (NPA), and in some cases, as high as 20% of their total
weak banks.
99
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
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
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
99
customization, technological upgradation, home / electronic / mobile banking, effective
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.
99
Bibliography
BOOKS
Research Methodology – C.R. Kothari (New Age International Publishers, 2nd edition)
Shekhar K.C (2005), Banking Theory and Practice, Vikas Publishing House
WEBSITES
definition
99