Universal Banks in India

8/18/2019 Universal Banks in India

1/33

CHAPTER 1

INTRODUCTION

1.1 Overview

The bank as an institution is changing; the industry is changing.

Advances in information and financial technologies are

transforming banking practices at the same time as regulatory

changes have transformed banking markets. Over the last

couple of years, the banking industry has seen a dynamic shift

from its traditional ways of operations which were limited and

narrow to modern and multi faceted “onestop shop! kind of a

scenario. "nter the #niversal $ank.

A #niversal $ank is a %onestop& supplier for all financial

products and activities, like deposits, shortterm and longterm

loans, insurance, investment banking etc. #niversal $anking

includes not only services related to savings and loans but also

investments. 'owever in practice the term (universal banks(

refers to those banks that offer a wide range of financial

services, beyond commercial banking and investment banking,

insurance etc. #niversal banking is a combination of

commercial banking, investment banking and various other

activities including insurance.

1


2/33

The report starts with a brief introduction to the banking system

in )ndia after which we take a look at the )ndian $anking

*egulation Act, 1++. -e then take a look at the *$) norms

governing banks followed by a brief look at the chronic

problem of /A&s.

1.0 #niversal $anking

-hat is a #niversal $ank

A universal bank is a multipurpose and multifunctional

financial supermarket providing both banking and financial

services through a single window. As per the website of -orld

$ank 2www.worldbank.org3, the concept is e4plained as

follows

“)n universal banking, large banks operate e4tensive networks

of branches, provide many different services, hold several

claims on firms 2including e5uity and debt3, and participate

directly in the corporate governance of firms that rely on the

banks for funding or as insurance underwriters.!

6imply put, a universal bank is a superstore for financial

products. #nder one roof, corporates can get loans and avail of

other handy services, while individuals can bank and borrow. To

convert itself into a universal bank, an entity has to negotiate

several regulatory re5uirements. Therefore, universal banks in a

nutshell have been in the form of a groupconcerns offering a

variety of financial services like deposits, short term and long

term loans, insurance, investment banking etc., under an

0


3/33

umbrella brand. The concept is prevalent in developed countries

like 7rance, 8ermany and #6A.

1.9 eed for #niversal $anking in )ndia

*esearch on the effects of universal banking has been

inconclusive as there is no clearcut evidence in favor of or

against it anywhere. evertheless, the #nited 6tates has once

again started moving cautiously towards universal banking

through the 8ramm:each$liley Act of 1+++ which rolled

back many of the earlier restrictions imposed by the 8lass

6teagall Act of 1+99. 6ome recent phenomenon, like the merger

between iticorp 2banking group3 and Travelers 2insurance

group3 confirmed the fact that universal banking is here to stay.

'ence it becomes all the more imperative to know whether we

need universal banks in )ndia. And whether it is a more efficient

concept than the traditional narrow banking.

-hat are the benefits to banks from universal banking

The standard argument given everywhere also by the various

*eserve $ank committees and reports in favour of universal

banking is that it enables banks to e4ploit economies of scale

and scope. -hat it means is that a bank can reduce average

costs and thereby improve spreads if it e4pands its scale of

operations and diversifies its activities.

9


4/33

$y diversifying, the bank can use its e4isting e4pertise in one

type of financial service in providing the other types. 6o, it

entails less cost in performing all the functions by one entity

instead of separate speciali


5/33

amongst themselves and also along with the Term :ending

)nstitutions

The phenomenon of universal banking as a distinct concept, as

different from narrow banking, came to the forefront in the

)ndian conte4t with the second arasimham ommittee 21++>3

and later the ?han ommittee 21++>3 reports recommending

consolidation of the banking industry through mergers and

integration of financial activities.

A universal bank can be a single company, a holding company

with wholly owned subsidiaries, a group of entities with crossholdings or even a flagship company which may or may not

have independent shareholders. The panel has argued that the

regulator should not impose the appropriate corporate structure.

alling for an enabling regulatory framework to ensure the

transition towards universal banking, the panel said a function

specific and institutionneutral regulatory framework must be

developed. @This concept of neutrality should be applicable to

both foreign and local entities,@ it said.


6/33

CHAPTER 2

BANKING SYSTEM IN INDIA

0.1 $anking 6ystem

The $anking system is an integral subsystem of the financial

system. )t represents an important channel of collecting small

savings from the households and lending it lo the corporate

sector.

The )ndian $anking system has The *eserve $ank of )ndia

2*$)3 as the ape4 body for all matters relating to the banking

system. )t is the %entral $ank& of )ndia. )t is the banker to all

other banks.

7unctions of *$)B

• urrency issuing authority

• $anker to the 8overnment

• $anker to other banks

• 7raming of Conetary /olicy

• "4change control

• ustodian to foreign "4change and 8old *eserves.

• Developmental activities

• *esearch and Development in the banking sector.

E


7/33

0.0 lassification of banks

lassification of $anks is as followsB

1. Non Scheduled Ban!" These are banks which are not

included in the 6econd 6chedule of the $anking *egulation Act.1+E. )t means they do not satisfy the conditions laid down by

that schedule. They are further classified as followsB

• entral ooperative $anks and primary redit 6ocieties.

• ommercial $anks.

F

/rivate 6ector

*egional*ural $anks

6$) G its

6ubsidiaries

ationali


8/33

2. Scheduled Ban!" 6cheduled $anks are which are included

in the 6econd 6chedule of the $anking *egulation Act, 1+E.

According to this schedule a scheduled bankB

a. Cust have paidup capital and reserve of not less than

*s.HH, HHH;

b. Cust also satisfy the *$) that its affairs are not conducted in

a manner detrimental to the interests of its depositors.

Scheduled #an! a$e !u#%d&'&ded a!"

• S(a(e Co%o)e$a(&'e Ban!" These are ooperatives owned

and managed by the state.

• Co**e$c&al Ban!" These are business entities whose main

business is accepting deposits and e4tending loans. Their main

ob=ective is profit ma4imi


9/33

sector banks that were nationali


10/33

CHAPTER 0

BANKING REGUATION ACT 1343

9.1 $anking *egulation Act

The banking sector in )ndia is primarily regulated by the

provisions of the $anking *egulation Act, 1++ 2$* Act3 and

The *eserve $ank of )ndia Act, 1+9 2*$) Act3.

$anking *egulation Act, 1++ 2$* Act3

Ban&n- #u!&ne!!"

o company can carry on banking business in )ndia unless it

holds a license issued in that behalf by the *eserve $ank of

)ndia. $anks must be duly registered as a banking company

under 6ection 00 of the $* Act. 6ection E of the $* Act

permits banks to engage in the following activities, apart from

banking, namelyB

• $orrowing, raising, or taking up of money; the lending or

advancing of money either upon or without security; and draw

• arrying on and transacting every kind of guarantee and

indemnity business;

• Canaging, selling and reali


11/33

0.1.1 Pa&d%u) ca)&(al and $e!e$'e!"

/ursuant to 6ection 11 of the $* Act, banking companies are

re5uired to maintain a certain aggregate value of its paid up

capital and reserves. 6ince we a banking company having place

of business in more than one 6tate and have places of business

in Cumbai and ?olkata, we are re5uired to maintain paid up

capital and reserves not less than *s. H.1H crores.

0.1.2 Re!e$'e /und"

"very banking company is re5uired to create a reserve fund and

shall, out of the balance of profit of each year, and before anydividend is declared, transfers to such reserve fund a sum

e5uivalent to not less than 0HJ of such profit. Any withdrawal

from this reserve fund shall be reported to the *$) within 01

days, e4plaining the circumstances relating to such withdrawal.

0.1.0 Penal(&e!"

The *$) may impose penalties on banks and their employees in

case of infringement of regulations under the $anking

*egulation Act. The penalty may be a fi4ed amount or may be

related to the amount involved in any contravention of the

regulations. The penalty may also include imprisonment.

/ursuant to a circular issued by the *$) on Carch 0H, 0HH0,

*$) approval would not be re5uired for rights issues by both

listed and unlisted private sector banks.

11


12/33

9.0 *$) orms

*$) orms to be followed by banks

9.0.1 apital Ade5uacy *atio 2A*3.

9.0.0 ash *eserve *atio 2**3.

9.0.9 6tatutory :i5uidity *atio 26:*3

9.0. $ank *ate.

9.0. "4posure orms.

0.2.1 Ca)&(al Ade5uac6 Ra(&o 7CAR8)n )ndia banks are institutions where depositors place their hard

earned savings on the assumptions that the risk shall be borne

by the bank. )n such a scenario, the banks must have enough

capital to meet unforeseen contingencies to that the confidence

of the depositors is not shaken. To fulfill this need the *$) has

laid down the norms of apitalAde5uacy that need to be

fulfilled by banks. The banks have to maintain the apital

Ade5uacy *atio 2A*3 specified by *$) from time to time.

0.2.2 Ca!h Re!e$'e Ra(&o 7CRR8

** is the minimum reserve deposits which banks have (to

compulsorily keep with the *$). These are calculated as

specific percentage to *eservable :iabilities arrived at in the

basis of et Demand and Time :iabilities 2DT:3.

10


13/33

• et Demand and Time :iabilities 2DT:3B

• DT: constitutes liabilities of banks which it owes to the

banking system and others.

Thus DT: K :iabilities to others L et )nter $ank :iabilities

2)$:3.-here

)$: K :iabilities to $anking system Assets with $anking

6ystem.

• alculation of **B

• ** rate is prescribed from time to time by the *$l. At

present it is at J.

• Caintenance periodB The ** so computed shall be re5uired to

be maintained for a fortnight. The minimum daily ** to be

maintained is H J for the first seven days of the reporting

week and EJ for the remaining period. 'owever on the 1th

day or the reporting 7riday entire reserve re5uirement has to be

met on a product basis.

• Mields and /enalties" *$) gives bank an interest of E J on the

reserves kept above 9J of DT: with it. This means that at

current ** rate of J *$) pays interest only on the .J of

the deposits. )t has the goal of aligning this yield with the $ank

*ate.

0.2.0 S(a(u(o$6 &5u&d&(6 Ra(&o 7SR8"

According to section 020A3 of Amended $anking *egulation

Act, 1++ a scheduled bank and every other banking company,

shall, in addition to the cash reserves maintained by them under

6ection 0 of *$) Act, maintain reserves in cash or gold valued

19


14/33

at price not e4ceeding tlie current market price or in

unencumbered approved securities valued at price determined.

The banks should maintain such reserves not e4ceeding HJ

and not less than 0J as the *$) may from time to time

specify, of the total of it(s demand and time liabilities 2DT:3,

as on last 7riday of the second preceding fortnight. At present,

6:* is at 0J.

• alculation of 6:*B A bank has to maintain;

a3 0J of DT: or

b3 0J 2current rate3 of *: whichever is higher.

• Caintenance periodB All statutory reserves are to be

maintained for a period of a fortnight. An important difference

from ** is that that the 6:* reserves for the fortnight will be

accessed base on the DT: of the reporting 7riday of the

preceding fortnight. 6ince TD: is known in advance 6:*

figures can be calculated based on actual figures. Also unlike**, there is no fle4ibility of maintaining these reserves on

average basis. They have to be maintained on a daily basis.

2.2.4 Ban Ra(e

The rate at which *$) lends to commercial banks by

rediscounting bills or eligible paper is called tlie bank rate. )t is

basically the refinancing rate. The banks decide interest rates

based on the bank rate. )t is also of the tools used by *$) to

control inflation. At present, bank rate is at EJ.

1


15/33

0.2.9 E:)o!u$e No$*!

The *$) has stipulated certain ceiling relating to advances and

interest rates which banks have to adhere to which carrying out

their lending operations. 6ome of them are as followsB

a."4posure to a single borrower should not e4ceed 1 J of

advances.

b."4posure to a business group should not e4ceed H J.

c."4posure to stock market should not e4ceed J of total

advances as at the end of previous year.

1


16/33

CHAPTER 4

UNI;ERSA BANKING GUIDEINES

.1 8uidelines

1. Re!e$'e $e5u&$e*en(!" ompliance with the cash reserve

ratio and statutory li5uidity ratio re5uirements 2under 6ection

0 of *$) Act, 1+9, and 6ection 0 of the $anking *egulation

Act, 1++, respectively3 would be mandatory for an 7) after its

conversion into a universal bank.

2. D&!)o!al o+ non%#an&n- a!!e(!" Any immovable property,

howsoever ac5uired by an 7), would, after its conversion into a

universal bank, be re5uired to be disposed of within the

ma4imum period of F years from the date of ac5uisition, in

terms of 6ection + of the $. *. Act.

0. Co*)o!&(&on o+ (he Boa$d" hanging the composition of the

$oard of Directors might become necessary for some of the 7)s

after their conversion into a universal bank, to ensure

compliance with the provisions of 6ection 1H2A3 of the $. *.

Act, which re5uires at least 1J of the total number of directors

to have special knowledge and e4perience

4. P$oh&(&on on +loa(&n- cha$-e o+ a!!e(!" The floating

charge, if created by an 7), over its assets, would re5uire, after its conversion into a universal bank, ratification by the *eserve

$ank of )ndia under 6ection 12A3 of the $. *. Act, since a

banking company is not allowed to create a floating charge on

1E


17/33

the undertaking or any property of the company unless duly

certified by *$) as re5uired under the 6ection.

9. Re!($&c(&on on &n'e!(*en(!" An 7) with e5uity investment in

companies in e4cess of 9H per cent of the paid up share capital

of that company or 9H per cent of its own paidup share capital

and reserves, whichever is less, on its conversion into a

universal bank, would need to divest such e4cess holdings to

secure compliance with the provisions of 6ection 1+203 of the

$. *. Act, which prohibits a bank from holding shares in a

company in e4cess of these limits.. B$anch ne(o$" An 7), after its conversion into a bank,

would also be re5uired to comply with e4tant branch licensing

policy of *$) under which the new banks are re5uired to allot at

east 0 per cent of their total number of branches in semiurban

and rural areas.

1F


18/33


19/33

an adventure might even lead to failures, which will have

impact on the system.

0. )nternationally, studies on universal banking have established

that si


20/33

risky than the traditional banking. Coreover as they are new

areas in )ndia, it would be all the more comple4 for the

domestic banks. Therefore they re5uire high professional

standards supported by sophisticated risk management

techni5ues at the bank level. As banking system in )ndia had

been tradition bound and functioned in a closed environment for

several decades, e4posures to universal banking scenario might

give banks tendency to behave reckless and indulge in

irresponsible speculation in the investment activities due to

demonstration effect..

. #niversal banking portrayed with not only wide range of

functionsN productsN services innovated as an outcome of

financial reforms and globali


21/33

CHAPTER 9

COMPARISON O/ A PUBIC SECTOR AND A

PRI;ATE SECTOR BANK

.1 6tate $ank of )ndia

The origin of the 6tate $ank of )ndia goes back to the first

decade of the nineteenth century with the establishment of the

$ank of alcutta in alcutta on 0 Iune

1>HE. Three years later the bank received its charter and was re

designed as the $ank of $engal 20 Ianuary 1>H+3. A uni5ue

institution, it was the first =ointstock bank of $ritish )ndia

sponsored by the 8overnment of $engal. The $ank of $ombay

21 April 1>H3 and the $ank of Cadras 21 Iuly 1>93 followed

the $ank of $engal. These three banks remained at the ape4 of

modern banking in )ndia till their amalgamation as the )mperial

$ank of )ndia on 0F Ianuary 1+01.

The $ank is actively involved since 1+F9 in nonprofit activity

called ommunity 6ervices $anking. All our branches and

administrative offices throughout the country sponsor and

participate in large number of welfare activities and social

causes. Our business is more than banking because we touch the

lives of people anywhere in many ways.

1. E:)o!u$e (o E:)o$(!"

6preading its arms around the world, the 6$)s )nternational

$anking 8roup delivers the full range of crossborder finance.

01


22/33

The Domestic wing provides services like merchant banking,

shipping finance and pro=ect e4port finance. The 7oreign

Offices wing offers the entire range of international trade and

industrial finance products, while the ?olkatabased 7oreign

Department undertakes treasury and currency operations.

The )nternational 6ervices division renders speciali


23/33

e4clusively for the development of agriculture through credit

deployment.

Our branches have covered a whole gamut of agricultural

activities like crop production , horticulture , plantation crops,

farm mechani from *s.19, +0F r as at the end of Carch

0HH i.e. a growth of *s. ,H>> r 29E.9J3 on yearonyear

basis. The disbursements to agriculture were to the order of *s.

+,>1 r and were higher by E1J over last year.

.0 ))) $ank

))) $ank was originally promoted in 1++ by ))) :imited,

an )ndian financial institution, and was its whollyowned

subsidiary. )))(s shareholding in ))) $ank was reduced to

EJ through a public offering of shares in )ndia in fiscal 1++>,

an e5uity offering in the form of AD*s listed on the M6" in

fiscal 0HHH, ))) $ank(s ac5uisition of $ank of Cadura

:imited in an allstock amalgamation in fiscal 0HH1, and

09


24/33

secondary market sales by ))) to institutional investors in

fiscal 0HH1 and fiscal 0HH0. ))) was formed in 1+ at the

initiative of the -orld $ank, the 8overnment of )ndia and

representatives of )ndian industry. The principal ob=ective was

to create a development financial institution for providing

mediumterm and longterm pro=ect financing to )ndian

businesses. )n the 1++Hs, ))) transformed its business from a

development financial institution offering only pro=ect finance

to a diversified financial services group offering a wide variety

of products and services, both directly and through a number of

subsidiaries and affiliates like ))) $ank. )n 1+++, )))

become the first )ndian company and the first bank or financial

institution from nonIapan Asia to be listed on the M6".

1. E:)o!u$e (o E:)o$(!"

))) $ank&s international operations have formed strategic tie

ups with some global banks to e4pand its reach. )ts partners

include "mirates $ank in Dubai, D$6 in 6ingapore, :loyds

$ank in the #?, -ells 7argo in the #6, and $ank of Contreal

in anada.

The bank went international few years back. )t now has eight

offices in "urope, -est Asia and 6outheast Asia. )ts

international business contributes F> per cent to its overall

revenues. ))) $ank continued to build on its e4isting

presence in various geographies as well as enter new markets...

The $ank(s subsidiaries have two branches in the #nited

?ingdom and four branches in anada. )n addition to providing

credit and trade finance solutions to )ndian companies, the $ank

0


25/33

is e4panding its international retail franchise through

technologybased banking services.

2. E:)o!u$e (o A-$&cul(u$e"

Da&$6 Sec(o$"

))) $ank has been working with various cooperatives as

well as private players in this sector.

/roduct suiteB

13 -orking apitalB

-orking apital is designed to take care of the day to day

business re5uirements of the organi


26/33

.9 OC/A*)6O O7 ))) $A? AD 6$)

CHAPTER <

/UTURE O/ INDIAN BANKING

0E

/A*T)#:A*6 ))) 6$)

ar 10.9J 10.EJ

6:* 9E,9>.+ cr 0,+F>.01 cr

/rovision

Cade 7or 0>0.>0 cr 0FHE.1 cr

/A To et

Advances .>0J 0.1J

/ercentage )n

*etail $anking E1J 0J

/ercentage )n

orporate

$anking

9J

0J


27/33

E.1 The -ay 7orward for the )ndian $anking )ndustry

The banking sector in )ndia is entering another e4citing phase.

)n the last couple of years, )ndian banks have cleaned up their

balance sheets. The ne4t phase will involve a significant

reconstructing of their earnings statements. The ne4t phase of

)ndian $anking is going to revolve around the J s

1. Co!("

The ne4t big earnings driver, *O" enhancer a valuation trigger

for )ndian banks will be a sustainable process of cost efficiencyvia significant reduction in workforce through natural attrition.

2. C$ed&("

:oan growth will lead to further improvement in the core

earnings of )ndian $anks. -hile the interest margins are

unlikely to improve from the current levels, margins ad=usted

for /A provisions will improve, leading to higher *o"s and

valuations.

0. Ca)&(al"

"5uity dilutions from banks will be at significant premiums to

the book value. This will boost the books of banks and make

them well capitali


28/33

$anks. /rivate sector banks are already strong in this area. -e

could now see the stateowned banks also e4ploiting their

distribution and customer base to increase their incomes, grab

market share and raise their *O"&s.

)ndian state owned banks have a large distribution network of

nearly E+HHH branches. They also en=oy the trust of the

customers they serve. Thus, they are ideally placed to tap this

emerging opportunity. ommissions 2fee incomes3 for banks are

likely to rise rapidly over the ne4t few years, led by deepeningof the market and wider product offering Ps by the banks. A

strong growth in fee income is also e4pected to boost banks&

*o"s 2as very low capital is re5uired to generate fee income3.

ew sources of revenues are opening upB

1. reditNdebit cards

The use of plastic money is on an uptrend in )ndia. The credit

card growth in 7MH> 2as against 0J growth in 7M HF3. The

total number of credit cards sold in )ndia at the end of 7MH

was about 1Hm, which is e4pected to reach 1m by 7MH.

)ndiaB redit ard 8rowth

0>

o. of redit ards m :'6


29/33

6ourceB Qenture )nfotech

redit ardsB 'ow the pie is shared 2 7M OF3

6ourceB Qenture )nfotech

0+

8rowth J *'6


30/33

The usage of debit cards is more pronounced in )ndia, an

indicator of a loanaverse society. The number of debit cards in

circulation is more than double the credit cards. 'ence, the

)ndian banks have a clear lead over the foreign banks. As debit

cards have direct relations with the account, )ndian banks will

continue to grow, because of large customer base. 6$), on the

back of its sheer si


31/33

$anking scenario has changed rapidly since 1++Hs. The decade

of +Hs has witnessed a sea change in the way banking is done in

)ndia. Technology has made tremendous impact in

banking. %Anywhere banking& and %Anytime banking& have

become a reality. The financial sector now operates in a more

competitive environment than before and intermediates

relatively large volume of international financial flows. -e are

slowly but surely moving from a regime of “large number of

small banks! to “small number of large banks.! The new era is

going to be one of consolidation around identified corecompetencies. Cergers and ac5uisitions in the banking sector

are going to be the order of the day. 6uccessful merger of

'D7 $ank and Times $ank has demonstrated that trend

towards consolidation is almost an accepted fact. -e are also

looking for such signs in respect of a number of old private

sector banks, many of which are not able to cushion their /As,

e4pand their business and induct technology due to limited

capital base.

oming times may usher in large banking institutions. )n )ndia,

one of the largest financial institutions, ))), took the lead

towards universal banking with its reverse merger with )))

$ank coming through a couple of years ago with )D$)

following suit. This trend may lead logically to promoting the

concept of financial super market chain, making available all

types of credit and nonfund facilities under one roof or

speciali


32/33

The big 5uestion we have to ponder is whether these stable

conditions marked by all round improvement in banks&

performance can continue into 0HH> onward in the light of

potentially dramatic changes that include, among others, a

sliding dollar, rising interest rates, introduction of $asel ))

accord and international accounting standards, and the possible

flattening of consumer lending boom. 'opefully, the banking

industry in tandem with the regulatory authorities will rise to

the occasion, and collectively face the challenges and

opportunities that lie ahead.

BIBIOGRAPHY

90


33/33

$ooks and Caga

Documents

Universal Banks in India