Understanding Universal Banking

Understanding Universal Banking In simple words, Universal Banking means that Financial Institutions (FIs) and Banks are allowed to undertake all kinds of activity of banking , financing and related businesses. As per the World Bank, the definition of the Universal Bank is as follows: In Universal banking, the 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. So we can say that Universal bank is a Financial Supermarket which provides all financial products under one roof. Apart from savings and loans, the Universal banks provides services such as investing in securities, credit cards, project finance, remittances, payment systems, project counselling, merchant banking, forex operations, insurance and so on. In a nutshell, a Universal Banking is a superstore for financial products under one roof. Corporate can get loans and avail of other handy services, while can deposit and borrow. It includes not only services related to savings and loans but also investments. The second Narasimham committee of 1998 gave an introductory remark on the concept of the Universal banking, as a different concept than the Narrow Banking. Narsimham Committee II suggested that Development Financial Institutions (DFIs) should convert ultimately into either commercial banks or non-bank finance companies. However, the concept of Universal Banking conceptualized in India after the RH Khan Committee recommended it as a different concept. The Khan Working Group held the view that DFIs (Development Finance Institutions) should be allowed to become banks at the earliest. Advantages: Economies of Scale would result in greater economic efficiency in the form of lower cost, higher output and better products. Increased diversions and increased profitability Better Resource Utilization. Brand name leverage Existing clientele leverage Value added services 'one-stop shopping' saves a lot of transaction costs Hurdles: Different regulatory framework for Financial Institutions and Banks No expertise in both the fields as both need domain expertise. Long gestation of Infrastructure Financing RBI Guidelines on Universal Banking: Some of the guidelines are as follows: Once the FI becomes a universal Bank, it would be compliant with the CRR and SLR requirements of the RBI. The activity which is permissible for the FI but NOT permissible for Bank would have to be stopped. Any immovable property acquired by the FI would have to be disposed of in 7 years time. The composition of the Board of Directors would be required to be changed so that it is compliant with the Section 10 (A) of the Banking Regulation Act which requires at least 51% of the total number of directors to have special knowledge and experience. If there is any floating charge on any of its assets, it would have to be ratified by the RBI since a banking company is not allowed to create a floating charge on the undertaking or any property of the company unless duly certified by RBI as required under the Section 14 (A) of B R Act. If there is any subsidiary that is engaged in an activity which is not permissible under the B R Act, then the subsidiary will have to be delinked. Banks cannot hold shares in the companies in excess of 30% of the paid up share capital of that company or 30 per cent of its own paid-up share capital and reserves as per the B R act, so , the FI after becomes a Universal Bank shall divert the excess of the equity. Section 20 of the B. R. Act prohibits grant of loans and advances by a bank on security of its own shares or grant of loans or advances on behalf of any of its directors or to any firm in which its director/manager or employee or guarantor is interested. The compliance with these provisions would be mandatory after conversion of an FI to a universal bank. The FI would require obtaining a license from RBI to carry business of banking in India and has to comply with the applicable conditions. The FI would need to comply with the existing branch licensing policy of RBI which requires allotting at least 25 per cent of their total number of branches in semi-urban and rural areas. At the close of business on the last Friday of every quarter, the FI after becomes a Universal Bank, would make sure that its total assets held in India are not less than 75 per cent of its total demand and time liabilities in India, as required of a bank under Section 25 of the B R Act. Publishing annual Financial reports as per requirements of the B R Act Download article as PDF Banking GK, general awareness with special reference to banking Last Updated: November 22, 2013 Comments ibulubotamvalentina this site has helped me a lot in my assignments Reply Current Affairs January 2014 December 2013 November 2013 October 2013 September 2013 August 2013 July 2013 June 2013 May 2013 April 2013 March 2013 February 2013 January 2013 Current Affairs 2012 Current Affairs 2011 Quiz Section Quiz 601-700 Quiz 501-600 Quiz 401-500 Quiz 301-400 Quiz 201-300 Quiz 101-200 Quiz 1-100 Current Affairs Awards Persons Policy Business Environment International Science-Tech India-World Sports Socio-economic Banking English Synonyms States GK Haryana Rajasthan Tamil Nadu Karnataka Maharashtra Kerala Odisha Bank Exams Section Finance, Business and Economy Quiz Bank PO Study Material Government Schemes in India Marketing Aptitude for Bank PO Computer Awareness Recent Articles Rainfed Agriculture in India Agricultural Biosecurity Bill, 2013 Lok Adalat Alternative Dispute Resolution in India Classical languages of India General Knowledge of Criminal Law (Amendment) Act, 2013 Mahatma Gandhi Pravasi Suraksha Yojana Village Buddha General Knowledge of Basel III Various Bodies for Skill Development Sector Multiple Choice Question Bank Ancient Indian History Medieval Indian History Modern Indian History Indian Polity and Constitution Indian Economy General Science Geography Sponsored Links