Project Report

1. Project Report An Empirical Study on Universal Banking and its Potential for Indian Market Consumers

2. Introduction Universal Banking is a multi-purpose and multi-functional financial supermarket (a company offering a wide range of financial services e.g. stock, insurance and real-estate brokerage) providing both banking and financial services through a single window. A Universal Banking is a superstore for financial products under one roof. In practice the term 'universal banking' refers to those banks that offer a wide range of financial services, beyond the commercial banking functions like Mutual Funds, Merchant Banking, Factoring, Credit Cards, Retail loans, Housing Finance, Auto loans, Investment banking, Insurance etc. Universal banking is the opposite of narrow banking. Narrow banking legislation would require banks to back their liabilities with safe assets, such as government securities.

3. Narrow banking is the modern and more elaborated version of the “100 percent reserve banking” principle, invoked by early economists to correct the inadequacy of money reserve against the stock of banknotes in circulation. The benefits of narrow banking are: First, by locking bank assets in high-quality instruments, narrow banking regulation would minimize bank liquidity and credit risk. Second, since narrow banks would be prohibited from supplying risky loans and would collateralize deposits with high-quality assets, confidence in the value of their liabilities is tend to be increased. Third, with payment system access restricted to narrow banks, payment would be fully secure, because payment-system participants would be protected against liquidity, credit, and settlement risks, and because any shock to non-banks would be isolated, with no systemic fallout. The Banking sector was opened up for the private sector in line with Narsimham Committee’s recommendations.

4. The ICICI’s decision to turn itself into a universal bank ushered a new era in the banking scenario. The second Narasimham Committee noted that the global trends in banking industry towards consolidation and convergence led to the dismantling of boundaries among suppliers of various financial products. The Khan Working Group also recommended a progressive move towards universal banking and development of enabling regulatory framework. It is contended that universal banking will result in greater economic efficiency in the form of lower cost, higher output, and better products and therefore is believed to be the panacea for beleaguered development financial institutions (DFIs). Conflict of interests was one of the major reasons for introduction of Glass-Steagall Act of 1934 in United States. The Act prohibited commercial banks from collaborating with full-service brokerage firms or participating in investment bank activities. The Glass-Steagall Act was enacted during the Great Depression. It protected bank depositors from the additional risks associated with security transactions. The Act was dismantled in 1999. However, the enactment of the Gramm-Leach-Bliley Act (GLBA) in November 1999 effectively repealed the long-standing prohibitations on the mixing of banking with securities or insurance businesses and thus permitting “broad banking”. The repeal of these prohibitions are due to the increasingly persuasive evidence from academic studies of the pre Glass-Steagall era, the recent favourable experience in the U.S. following partial deregulation of banking activities, the experience of banking systems abroad with broader scopes for banking activities, and rapid technological change in telecommunications and data processing.

5. THE CONCEPT OF UNIVERSAL BANKING 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, which could maximize economies of scale and scope by building the production of financial services organization, called Universal Banking. Universal Banking, means the financial entities – the commercial banks, DFIs, NBFCs, - undertake multiple financial activities under one roof, thereby creating a financial supermarket. Universal banking generally takes one of the three forms: - a. In-house Universal Banking. E.g. Germany b. Through separately capitalized subsidiaries. E.g. England. c. Operations carried through a holding company. E.g. USA. (Nair, 1998)

7. Germany is one of the most commonly cited countries with a full universal banking system. Edwards (1996) states that the supply of external finance in the model of universal banking increases in line with the suppliers’ controlling power over their borrowers’ behaviours. the contribution of universal banks to the economy should not be only measured in terms of external funds they supply but also of improved information flows as a result of banks’ improved capability to compare companies within an industry and across industries within the whole economy. Most large enterprises will hire managers, who usually are financial experts, to handle daily business activities. The underlying problem is that these managers may be less concerned about long-run prospects of the company while short-run profitability is of their first priority. Their over-aggressiveness in maximizing short-run profits could increase the risk of bankruptcy. The representation of banks thus acts as a buffer and promotes the long-term financial health of enterprises. After investigating the severity of moral hazard problems in association with the universal banking system, it is suggested that when banks are allowed to take equity positions and participate in the decision-making process of the companies, their incentives to control moral hazard problems could be attenuated seriously. In addition, banks with controlling rights might sometimes lead enterprises to misallocate their funds for the sole benefits of the banks.

8. The difficulty in monitoring large universal banks is also a major concern. The consequence of inefficient monitoring could lead to financial instability. Benston (1994) states that universal banks tend to be larger so that collapse of a single bank of this type could cause substantial distress in the financial system. When several of those large universal banks are to collapse, this will greatly increase the risk to the economy’s payments system. At the same time, it is more difficult to regulate universal banks because of their close and complex ties to businesses. Hence, financial regulators either have to regulate universal banks very tightly, thus hindering economic efficiency, or be faced with the possibility of a taxpayer bailout. • THE NEED BEHIND THE ADVENT OF UNIVERSAL BANKING • To make pace with the present need of corporate. means there is a need of developing a strong domestic financial system to cater the need of the corporate sector. It is possible if banks have strong capital/asset base. It fortifies the importance of Universal Banking. Along with that, the ongoing clamor of Mergers and Acquisitions in the corporate sector, this needs financial assistance as well as consulting. Indian banking, with the help of Universal Banking has technology edge and better business models, compared to pre-liberalizations era, today they are able to attract and gain more volumes simply because they meet their customers' requirements better than anyone else. • . Funds Mobilization and Credit Rationing. The traditional activities of banks are deposit taking and lending. Deposits are liabilities of banks, while funds extended by banks to borrowers are their assets. The fundamental function of banks is to mobilize available funds from the surplus units to the deficit units.

9. There are three basic mechanisms that banks apply in order to monitor their borrowers. First, a bank can directly obtain information of the borrower’s cash flowwhen the bank itself handles the borrower’s deposit account. The second arrangementis more formal as restrictive covenants are stipulated in a loan contract. The borroweris required to maintain a pre-set range of liquidity determined by the bank. Lastly, the bank is granted the right to monitor the operation of the enterprises that borrowfrom them. Universal banks often apply the last mechanism and maintain a close andextensive connection with borrowers.

10. SWOT Analysis • Strengths:*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. • Profitable Diversions: By diversifying the activities, the bank can use its existing expertise in one type of financial service in providing other types. • * 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. • Easy marketing on the foundation a of Brand name: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. • *One stop shopping. • Investor friendly activities: A bank's 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.

11. Weaknesses:* Grey area of Universal Bank: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.*No expertise in long term lending: In the case of traditional project finance an area where DFIs tread carefully, becoming a bank may not make a big difference. *NPA problem remained intact: The most serious problem of DFIs have had to encounter is bad loans or Non Performing Assets (NPA).but the IDBI has got worst hit of NPAs, considering the negative developments at Dabhol Power Company (DPC). Threats:*Big Empires: 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 qualities of bank products, due to over expansion. Opportunities:*To increase efficiency and productivity: 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.

12. To get more exposure in the global market: 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. • *To eradicate the 'Financial Apartheid: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.

13. THE FUTURE TREND OF UNIVERSAL BANKING IN DIFFERENT COUNTRIES International Scenario Universal banks have long played a leading role in Germany, Switzerland, and other Continental European countries. The principal financial institutions in these countries typically are universal banks offering the entire array of banking services. Continental European banks are engaged in deposit taking, real estate and other forms of lending, foreign exchange trading, as well as underwriting, securities trading, and portfolio management. Salient Characteristics of the German and Swiss Banking Systems It is certainly true that in countries like Germany and Switzerland large universal banks with nationwide networks of branches play an important, if not dominant, role. Universal Banking and Specialization In Germany and Switzerland, financial institutions may be classified into broadly similar groups: big banks, government-owned savings banks, regional banks, cooperative banks, branches of foreign banks, and private banks. In addition, both countries feature one of two remaining groups of diverse and highly specialized institutions. Regional banks tend to be more specialized than the big institutions. The largest German regional banks, however, have turned into truly universal institutions. In Switzerland most of the regional banks, in fact, are small savings banks heavily engaged in mortgage lending. These banks do not play a significant role in investment banking and they are not active abroad.

14. Cooperative banks, like government-owned savings banks, are institutions focusing on the savings business. Although initially conceived as self-help organizations, which mainly accepted deposits from and lent funds to members of the cooperative, they gradually evolved into universal banks when they set up central institutions, as was done in Germany. In Switzerland, by contrast, cooperative banks remained less important, as indicated by their respective shares in total assets of the banking system (Table 1). Due to their small market share, Swiss cooperative banks have not expanded into universal banking to any great extent. Table 1 point to two striking differences in the structure of German and Swiss banks' earnings. First, German institutions, as a whole, resemble more closely traditional commercial banks than their Swiss counterparts. In Germany, the average ratio of commission income to net revenue is much lower than in Switzerland. The relatively high Swiss ratio reflects the important role played by Swiss banks in underwriting, securities trading, and portfolio management. Second, in Germany, that ratio displays a much smaller variability across the various banking groups than in Switzerland. In Germany it fluctuates between 12 to 30 percent as compared to a range of 9 to 80 percent in Switzerland. Thus, while German banks, on average, are less universal than their Swiss counterparts, universal banking in Germany is more evenly spread across the various groups of financial institutions than in Switzerland.

15. Are the Objections to Universal Banking Justified? There are four major objections to universal banking. In his study of the Glass-Steagall Act, George Benston (1990) reviews critically these objections. In his view, the case for separation of commercial and investment banking rests on weak foundations 1. Riskiness and Lender-of-Last Resort Problems As a result of the recent collapse of the real estate market, many Swiss banks are compelled to make provisions against bad mortgage loans. . If large institutions run into solvency problems, central banks may be confronted with the dilemma of "too big to fail." 2. Conflicts of Interest If universal bank attempts to hide blunders in underwriting by shifting unsaleable securities to its trust department, its customers are likely to be confronted with relatively low returns on their portfolio investments. Competitors, including specialized banks, have an incentive to bid away customers from the low-performing universal institution. Thus, market forces tend to induce universal banks to eradicate conflict-of-interest problems. 3. Concentration of Power The intensification of competition and the regulatory changes mentioned earlier have curbed the power of the big Swiss banks.

16. The Future of Universal Banking The German and Swiss experiences suggest that three factors will determine future growth of universal banking. First, they are able to exploit economies of scale and scope in banking. These economies are especially important for banks operating on a global scale and catering to customers with a need for highly sophisticated financial services. Second, although universal banks have expanded their sphere of influence, the smaller specialized institutions have not disappeared. Third, No single type of universal banking system exists. We have shown that the German and Swiss universal banking systems differ substantially in this regard.

17. TABLE 1Banking Structure in Germany and Switzerland, 1991

19. Sources: Deutsche Bundesbank (1992a: Tables 13, 22a; 1992b:42-47), and Swiss National Bank (1992: Tables III, 1, 1; 40.0-40-8).

20. UNIVERSAL BANKING IN INDIA • Indian Scenario • Commercial banks: . Ever since the process of liberalization hit the Indian shores, the banking sector saw the emergence of new-generation private sector banks. . Off late, commercial banks in India have been permitted to undertake a range of in-house financial services. Some banks have even setup their own subsidiaries for their investment activities. Subsidiaries include in the area of merchant banking, factoring, credit cards, housing finance etc. • 2. Financial Institutions • DFIs were traditionally engaged in long term financing, as their main objective was to take care of the investment needs of industries and to contribute to a better industrial climate. • Indian Perspective on Universal Banking • The following are the issues which are key in Indian context. • i. Regulatory burden • ii. Regulatory requirements • iii. Distinction between maturity and duration • iv. Optimum Transition path

21. Regulatory burden: . DFIs in India are governed by separate Acts and banks are regulated by RBI and Banking Regulation Act. In India there is an urgent need to reduce the regulatory burden, particularly for banks vis-à-vis mutual funds and insurance companies, if the banks are expected to compete in free market place. • ii. Regulatory requirements • Salient operational and regulatory issues of RBI to be addressed by the FI’s for conversion into a universal bank • a)     Reserve requirements. Compliance with the cash reserve ratio and statutory liquidity ratio requirements (under Section 42 of   RBI Act, 1934, and Section 24 of the Banking Regulation Act, 1949, respectively) would be mandatory for an FI after its conversion into a universal bank. •   b)     Permissible activities. Any activity of an FI currently undertaken but not permissible for a bank under Section 6(1) of the B. R. Act, 1949, may have to be stopped or divested after its conversion into a universal bank.. •   c)     Disposal of non-banking assets. Any immovable property, howsoever acquired by an FI, would, after its conversion into a universal bank, be required to be disposed of within the maximum period of 7 years from the date of acquisition, in terms of   Section 9 of the B. R. Act. •   d)    Composition of the Board. Changing the composition of the Board of Directors might become necessary for some of the FIs after their conversion into a universal bank, to ensure compliance with the provisions of Section 10(A) of the B. R. Act, which requires at least 51% of the total number of directors to have special knowledge and experience.  

22.   e)    Prohibition on floating charge of assets. The floating charge, if created by an FI, over its assets, would require, after its conversion into a universal bank, ratification by the Reserve Bank of India under Section 14(A) of the B. R. Act, since a banking company is not allowed to create a floating charge on the undertaking or any property of the company unless duly certified by RBI as required under the Section.   f)     Nature of subsidiaries. If any of the existing subsidiaries of an FI is engaged in an activity not permitted under Section 6(1) of the B R Act , then on conversion of the FI into a universal bank, delinking of such subsidiary / activity from the operations of the universal bank would become necessary since Section 19 of the Act permits   a bank to have subsidiaries only for one or more of the activities permitted under Section 6(1) of B. R. Act.   g)     Restriction on investments. An FI with equity investment in companies in excess of 30 per cent of the paid up share capital of that company or 30 per cent of its own paid-up share capital and reserves, whichever is less, on its conversion into a universal bank, would need to divest such excess holdings to secure compliance with the provisions of Section 19(2) of the B. R. Act, which prohibits a bank from holding shares in a company in excess of these limits.   h)    Connected lending. Section 20 of the B. R. Act prohibits grant of loans and advances by a bank on security of its own shares or grant of loans or advances on behalf of any of its directors or to any firm in which its director/manager or employee or guarantor is interested.   The compliance with these provisions would be mandatory after conversion of an FI to a universal bank. 

23.   i)   Licensing. An FI converting into a universal bank would be required to obtain a banking licence from RBI under Section 22 of the B. R. Act, for carrying on banking business in India, after complying with the applicable conditions.     j)    Branch network An FI, after its conversion into a bank, would also be required to comply with extant branch licensing policy of RBI   under which the new banks are required to allot at least 25 per cent of their total number of branches in semi-urban and rural areas.   k)    Assets in India. An FI after its conversion into a universal bank, will be required to ensure that at the close of business on the last Friday of every quarter, its total assets held in India are not less than 75 per cent of its total demand and time liabilities in India, as required of a bank under Section 25 of the B R Act.   l)    Format of annual reports. After converting into a universal bank, an FI will be required to publish its annual balance sheet and profit and loss account in the forms set out in the Third Schedule to the B R Act, as prescribed for a banking company under Section 29 and Section 30 of the B. R. Act.      m)    Managerial remuneration of the Chief Executive Officers. On conversion into a universal bank, the appointment and remuneration of the existing Chief Executive Officers may have to be reviewed with the approval of RBI in terms of the provisions of Section 35 B of the B. R. Act. The Section stipulates fixation of remuneration of the Chairman and Managing Director of a bank by Reserve Bank of India taking into account the profitability, net NPAs and other financial parameters. Under the Section, prior approval of RBI would also be required for appointment of Chairman and Managing Director.     n)      Deposit insurance. An FI, on conversion into a universal bank, would also be required to comply with the requirement of compulsory deposit insurance from DICGC up to a maximum of Rs.1 lakh per account, as applicable to the banks.

24.   o)       Authorized Dealer's License. Some of the FIs at present hold restricted AD licence from RBI, Exchange Control Department to enable them to undertake transactions necessary for or incidental to their prescribed functions.   On conversion into a universal bank, the new bank would normally be eligible for full-fledged authorised dealer licence and would also attract the full rigour of the Exchange Control Regulations applicable to the banks at present, including prohibition on raising resources through external commercial borrowings.   p)     Priority sector lending. On conversion of an FI to a universal bank, the obligation for lending to "priority sector" up to a prescribed percentage of their 'net bank credit' would also become applicable to it . Prudential norms. After conversion of an FI in to a bank, the extant prudential norms of RBI for the all-India financial institutions would no longer be applicable but the norms as applicable to banks would be attracted and will need to be fully complied with.   iii. Distinction between Maturity and Duration The interim report of S H Khan committee has argued that the distinction between commercial and investment banking have become increasingly blurred with banks providing both working capital and term loans to corporates but DFIs can provide only term loans as they cannot accept short term deposits. The committee further argued that DFIs should be given banking licenses eventually and until then they should be allowed to establish 100 percent banking subsidiaries while they continue to play their present role. iv. Optimal Transition path . The S H Khan working group and the discussion paper on the subject prepared by RBI eventually felt that DFIs should transform themselves into commercial banks but in a phased manner.

25. The 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. In India Development financial institutions (DFIs) and refinancing institutions (RFIs) were meeting specific sect oral needs and also providing long-term resources at concessional terms, while the commercial banks in general, by and large, confined themselves to the core banking functions of accepting deposits and providing working capital finance to industry, trade and agriculture. Consequent to the liberalisation and deregulation of financial sector, there has been blurring of distinction between the commercial banking and investment banking. 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 smooth conversion into a universal bank over a specified time frame. The plan should specifically provide for full compliance with prudential norms as applicable to banks over the proposed period. IS UNIVERSAL BANKING GOOD OR BAD FOR THE COUNTRY? Universal banking brings about convergence of financial services under one roof. The initial impetus to the concept worldwide was the need to bring down the intermediation costs. Universal banking, which may result in changed priorities of FIs, will seriously hinder our efforts to build a manufacturing sector that can compete with the best on its own terms.

26. UNIVERSAL BANKING: THE MEANS AND THE ENDS ARE CONTROVERSIAL Universal banking is about to become a reality. As a financial intermediary, banks accepted deposits which they lent and the difference between the interest earned (from the borrowers) and that paid (on deposits) called the spread has traditionally formed the major part of their income. To fund their long-term lending activities, DFIs looked to the government for cheap funds and tax breaks. Part of the SLR securities which banks have been compelled to buy were instruments issued by one of the DFIs. Banks meet their funding requirements by accepting deposits of less than three year duration. At a larger level there is always the need for setting up a level playing field for all-former DFIs which have converted to universal banks as well the more established banks. WHAT UNIVERSAL BANKING CAN RESULT FOR INDIA With official committees recommending a move towards universal banking, DFIs, led by ICICI, are getting set to storm the banking arena. With universal banking, banks will offer a wide range of financial services, beyond solely commercial banking or investment banking. Advantages: it results in greater economic efficiency It enables asset diversification It offers reasonable protection from economic cycles

27. In India, banks have traditionally been prime lenders for working capital loans and DFIs financed term loans. Now, with DFIs told to move towards universal banking, banks have been allowed to diversify into investments and long-term financing, and DFIs will lend for working capital. RBI has mentioned that DFIs would need to prepare a transition path in order to fully comply with the regulatory requirement of a bank and such requests will be considered on ‘case by case’ basis.

28. SBI and LIC can be considered universal banks. SBI deals with MFs and investment banking, and its insurance initiative with Cardiff SA brings it closer to the universal bank objective. And LIC's move to acquire a stake in Corporation Bank makes it a serious candidate. ICICI has begun reducing the number of its subsidiaries, and is planning to merge with ICICI Bank, in a bid to turn into a universal bank in 12-18 months. THE ROAD AHEAD TO INDIA The choice between universal and specialized banking may affect interest rates, underwriting costs, and the efficiency of secondary markets in securities. Furthermore, the presence or absence of formal bank relationships may affect the quality of investments undertaken, strategic decision-making, and even the competitiveness of industry. A universal bank is a one-stop supplier for all financial products and activities, like deposits, short-term and long-term loans, insurance, investment banking etc. Global experience with universal banking has been varied. Universal banking has been prevalent in different forms in many European countries, such as Germany, Switzerland, France, Italy etc. Nevertheless, the United States has once again started moving cautiously towards universal banking through the Gramm-Leach-Bliley Act of 1999 which rolled back many of the earlier restrictions. Some recent phenomenon, like the merger between Citicorp (banking group) and Travelers (insurance group) confirmed the fact that universal banking is here to stay. a bank can reduce average costs and thereby improve spreads if it expands its scale of operations and diversifies its activities. By diversifying, the bank can use its existing expertise in one type of financial service in providing the other types.

29. A bank’s equity holding in a borrower firm acts as a signal for other investors on the health of the firm, since the lending bank is in a better position to monitor the firm’s activities. This is useful from the investors point of view. that commercial banks can enter insurance business either by acting as agents or by setting up joint ventures with insurance companies. And the RBI allows banks to only marginally invest in equity (5 per cent of their outstanding credit). 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 bank. Do Universal Banks Increase the Risk of Financial Instability? Universal banks are said to be particularly vulnerable, because of their close ties to business, particularly their role in underwriting and distributing securities. If one or several universal banks were to collapse, it might lead to a systematic financial crisis, possibly including a risk to the economy's payments system. . Although, compared to commercial banking alone, returns from combined commercial and investment banking (and other activities, such as mortgage banking, insurance, and real estate investment) would be significantly higher, and risk would be slightly higher.

30. Do Universal or Specialized Banks Enhance Economic Development More? Some legislators and government officials believe that they can enhance economic development by directing resources towards specific goals. Will Universal Banks Deploy Capital as Efficiently as the Stock Market? Critics of universal banking worry that such institutions will injure stock markets, because when universal banks trade and hold equity securities, they are sometimes said to discourage the development of an active stock exchange and independent stock brokers and dealers.Universal banks also have certain advantages in restructuring firms. The transactions cost of takeovers and mergers are high in a stock market system. and might well be lower with a universal bank If, instead [of being restricted to loans], a bank were to own the full range of classes of both the firm's debt and equity, the bank could gain the control necessary to effect reorganization much more economically. Will Universal Banks Crowd Out Other Financial Institutions? Economies of scale and scope and efficiency indicate some advantage for universal banks over specialized banks. Will Universal Banks Reduce Consumer Choice? Universal banks have neither significant economies of scale or scope nor great political power. Second, even if universal banks were to dominate financial markets, consumers could still patronize one bank for loans, another for underwriting, and a third for securities trading. Consequently, consumers' choices would not necessarily decline.

31. Can Universal Banks Give Impartial Investment Advice? • Many of the possible conflicts specified either do not disadvantage consumers or would occur only if the bank were operated contrary to the interests of its shareholders. • FINDINGS • After considering issues of financial stability, economic development, competition among financial institutions, concentration of economic and political power, consumer choice, and conflicts of interest, I find that universal banking can provide considerable benefits and would pose few problems for the economy. • Considerations Though, the above research results in Universal Banking being beneficial for India customers offering various advantages, still, caution must be applied in implementing Universal banking because of the following considerations: • Dis-intermediation (i.e. replacement of traditional bank intermediation between savers and borrowers by a capital market process) . • 2. There is an ample room for financial deepening (by banks & DFIs) since loan market will continue to grow. • 3. DFIs as a folder of equity in most of the projects promoted in the past have never used the tool advantageously. • 4. DFIs are now only moving into working capital finance, an area in which they need to gain lot of expertise and this involves creation of network of services (including branches) in all fields like remittances, collections etc.

32. 5. Reforms in the Indian capital market are still in the half way stage. The priority will be to ensure branch expansions, financial deepening of credit markets, and creation of an efficient credit delivery mechanism that can compete with the capital market. RecommendationsThe following are the steps suggested for successful implementation of Universal Banking in India: a. Equalise the net regulatory burden across the financial system (including banks, DFIs, mutual funds, NBFCs and Insurance companies). b. Lower the regulatory burden on the over regulated entities. c. Promote and encourage strong competition. d. Do not allow the merger of a weak bank with a viably strong DFI or vice-versa. e. DFIs should be permitted to set up a 100 percent owned banking subsidiaries. f. Need is felt to re-examine the minimum level of SLR requirement in order to meet the best of international standards.

33. CONCLUSION: India’s financial sector is relatively bank-oriented, and banks are the primary supplier of financial services. With the regulatory allowance for universal banking, Indian banks continue to expand its coverage of financial services in response to customer demand and profitability concerns. It is believed that the concept of financial supermarkets could play a significant role in future given that an increasing number of transnational companies have been set up in the region and also by the opening of Indian Banking sector to foreign players. Thank You