Universal Banking | SBI Clerk Exam 2018 | Banking Awareness

Universal Banking is a multipurpose and multi functional financial superstore providing both banking and financial services. Universal Banking is also known as full service financial firms. A universal bank may undertake multifarious financial services under one roof which may include:

Receiving money on current or deposit accounts and lending of money for trade, industries, exports, agriculture etc.
Mortgage financing, project financing infrastructure lending, asset securitization, leasing, factory etc.
Remittance of funds, custodial services, credit/ debit cards, collection of cheques etc.
Corporate advisory, services, insurance depository service, Merchant banking and foreign exchange operations.

Therefore in universal banking under one roof corporate can get loans and avail, other financial services, while individuals can bank and borrow.

Objectives:

The few objectives of Universal Banking are as follows:

To help in bringing harmony in the role of financial institution and banks.
To offer world class financial services to the clients by using information technology and cross selling.
To reduce per customer cost.
To increase per customer revenue.
To take benefit of economics of scale.
To compete with international banks by expanding business beyond the national boundaries.

Universal Banking in India:

The phenomenon of universal banking came to fore-front of Indian scene with the second Narasimham committee (1998) and later the Khan Committee (1998) reports recommending consolidation of the banking industry through mergers and integration of financial activities.

When development finance institutions were set up with objective of catering the investment needs of industries were denied budget allocations by the government they resorted to raising long term funds from markets in form of bonds. Which was an expensive deal and moreover globalization and liberalization of economy resulted in failure of many Indian Industrial borrowers who could not become competitive in global market for a variety of reasons also added to DFI’s list of NPA’s. Thus resulting into their dismal financial results. It was then that RH Khan committee (1998) and Narsimham committee (1998) suggested Universal Banking as one of the solution for ailing development finance institutions.

RBI Guidelines:

According to RBI guidelines of April 2001, financial institutions have an option to convert into a bank provided they ensure compliance with following provisions.

Reserve Provisions: A financial institution will have to comply with cash reserve ratio and statutory liquidity ratio provisions after its conversion into a universal bank.
Permissible activities: In case an activity which is not permissible for a bank under section 6 (1) of Banking Regulation Act 1949 is presently undertaken by financial institution, such activity will have to stopped after its conversion into a universal bank.
Composition of Board: The section 10 (A) of Banking Regulation Act 1949 requires that at least 51 % of the total number of directors should have special knowledge and experience. This provision has to be complied while constituting the board after transformation from Financial Institution to bank.

Benefits of Universal Banking:

To the Organization: When a bank diversifies its activities as a universal bank it can use its existing expertise in one type of financial service in providing the other types. So it entails less cost in performing all the functions by one entity instead of separate specialized body.
To the customers: Universal bank being a one stop shop for all varied services, save a lot of transaction costs and increases the speed of economic activity.
To shareholders: One manifestation of universal banking is a bank holding stakes in a firm. When a lender has a stake in a firm he is in better position to monitor the firm to safeguard his interest which sends a good signal about the financial health of the firm to the investors.

Drawbacks of Universal Banking:

Universal banking leads to a loss in economies of specialization.
Problem of the bank indulging in too many risky activities.

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