UNIVERSAL Banking Visit Us at Management - Umakant.info

A project on “Universal Banking”
Executive Summary
The latest mantra is Universal Banking, which is combination of

Commercial & Investment Banking.
The concept of U.B. is mainly popular in Germany, USA & UK,
Barclays Bank, Chase Manhattan and Citicorp are some of the
examples of it.
Universal banking is the solution to FIs problems.
The merger of ICICI and ICICI bank is probably the largest merger
seen in corporate India Industry, which has redefine banking in the
highly competitive era of globalization and liberalization
Post merger, the new entity- ICICI Bank is the first Universal Bank in
India and the second largest commercial bank in the country after SBI.
Financial Institutions & Insurance Companies are now merging ahead

to capture new business areas and leading towards Universal Banking.
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INTRODUCTION TO UNIVERSAL BANKING
Since the early 1990s, structural and functional changes of

profound magnitude came to be witnessed in global banking systems.
Large-scale mergers, amalgamations and acquisitions among banks
and financial institutions resulted in the growth in size and competitive
strengths of the merged entities. There thus emerged new financial
conglomerates that could maximize economies of scale and scope by
'bundling' the production of financial services. This heralded the advent
of a new financial service organization, i.e. Universal Banking, bridging
the gap between banking and financial-service-providing institutions.
Universal Banks entertain, in addition to normal banking functions,
other services that are traditionally non-banking in character such as
investment-financing, insurance, mortgage-financing, securitisation,
etc. Parallelly, in contrast to this phenomenon, non-banking companies
too entered upon banking business. Universal banking usually takes
one of the three forms i.e. in-house, through separately capitalized
subsidiaries, or through a holding company structure. Three well-known
countries in which these structures prevail are Sweden and Germany,
the UK and the US.
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HISTORY OF UNIVERSAL BANKING IN INDIA
Historically, India followed a very compartmentalized financial

intermediaries allowed to operate strictly in their own respectively fields.
However, in the 1980s banks were allowed to undertake various non-
traditional activities through subsidiaries. This trend got momentum in
the early 1990s i.e., after initiation of economic reforms with banks
allowed to undertake certain activities, such as, hire-purchase and
leasing in –house. While this in a way represented a gradual move
towards universal banking, the current debate about universal banking
in India started with the demand from the DFIs that they should be
allowed to undertake banking activity in-house. In the wake of this
demand, the Reserve Bank of India constituted in December 1997, a
working group under the chairmanship of Shri S.H. Khan, the Chairman
& the Managing Director of IDBI (hereafter referred to as Khan Working
Group-KWG). The KWG, which submitted its report in May 1998,
recommended a progressive move towards universal banking. The
Second Narsinham Committee appointed by Government in 1998 also
echoed the same sentiment. In January 1999, the Reserve Bank issued
a Discussion Paper setting out issues arising out of recommendations
of the KWG and the Second Narsinham Committee. Since then a
debate has been going on about universal banking in general and
conversion of DFIs into universal banks in particular. With the opening
up of the insurance sector to the private participation, the debate has
gone beyond the narrow concept of universal banking.
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DEFINITION AND CONCEPTS
The term ‘universal bank’ has different meanings, but usually it

refers to the combination of commercial banking (collecting deposits &
making loans) and investment banking i.e. issuing, underwriting and
trading in securities, this is the narrow definition of universal banking. In
a very broad sense, the term ‘universal bank’ refers to those banks that
offer a wide range of financial services, such as, commercial banking &
investment banking and other activities especially insurance. It is a
multi-purpose and multi-functional financial supermarket providing both
banking and financial services through a single window. According to
World Bank the concept is explained as follows - "In universal banking,
large banks operate extensive networks 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."
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Universal Banking (UB) usually takes one of the three forms, i.e.,
in-house, through separately capitalized subsidiaries, or through a
holding a capital structure. Three well-known countries in which these
structures prevail are Sweden and Germany, the UK & US. Universal in
its fullest or purest form would allow a banking corporate to engage ‘in-
house’ in any activity associated with banking, insurance, securities,
etc. However, there are very few countries, such as, Sweden and Hong
Kong, which allow universal banking in its purest form. In Germany,
banking and investment activities are combined, but separate
subsidiaries are required for certain other activities. Under German
banking statutes, all activities could be carried out within the structure
of the parent bank except insurance, mortgage banking and mutual
funds, which require legally, separate subsidiaries. In the UK, a broad
range of financial activities is allowed to be conducted through separate
subsidiaries of the bank. The third model, which is found in the US,
generally requires a holding company structure and separately
capitalized subsidiaries.
In certain countries these type of universal banking are successfully

functioning. Universal banking is nothing but broad based bank where
you can do commercial banking, investment, insurance, and other
financial business. It is largely found in different countries in different
forms. Like:-
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Broad Outline of Universal banking
Banking Guarantee Insurance other

Business related securities securities
Business
All functions are under one roof
A] In Germany
Banking and Guarantee related securities
“Others” Insurance Guarantee

Securities
Associate Associate Associate

Institution Institution Institution
B] In Britain
Banking Other Financial Insurance

Business Business Affairs Business
Affairs
Associated Associated Associated

Institution Institution Instution
C] In America
Capacity Holding
Company
Banking Guarantee Related Insurance

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Securities Services
Associated Associated Associated

Institution Institution Institution
Basically it is a holding company and three subsidiary

companies have formed. According to Glass Steegal Rules in 1933
commercial banking have been separated by investment banking.
Recently this rule has been modified.
Therefore banking can also work together with investment

banking.
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PRACTICE OF UNIVERSAL BANKING IN SELECTED COUNTRIES
1)The traditional home of universal banking is central and northern

Europe, in particular, Germany, Austria, Switzerland and Scandinavian
countries. Universal banking in countries like Germany, Austria and
Switzerland evolved in response to a combination of environmental
factors besides regulation. The direct involvement of German banks in
industry through equity holdings was the result partly of banks
converting their loans into equity stakes in companies experiencing
financial pressures. A combination of environmental factors and unique
historical events enabled banks in different European countries to
establish themselves in particular segments of the corporate financing
market.
2)While countries like Germany and Switzerland never imposed any

restriction on combining commercial and investment banking activities,
the U.S. passed the Banking Act, 1933(Glass-Steagall Act has come to
mean those sections of the Banking Act, 1933 that refer to bank’s
securities operations), whereby banks were prohibited from combining
investment and commercial banking activities. The Glass-Steagall Act
was enacted to remedy the speculative abuses that infected
commercial banking. The legal provisions of the Banking Act,
1933(Glass-Steagall Act) established a distinct separation between
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commercial banking and investment banking and made it almost

impossible for the same organization to combine these activities.
3)The competition in the banking industry has intensified following

financial deregulation and innovations and introduction of new
information technologies.
4)The restrictions on banks engaged in securities business have been

relaxed considerably worldwide during the last two decades. Three
groups of countries can be distinguished. While countries, such as
Germany, the Netherlands, and several Nordic countries, have
imposed very little restriction on the combination of traditional banking
and securities business, Canada and most European countries have
entirely removed barriers to acquisition of securities firms and hence
access to stock exchanges [Borio and Filosa, 1994]. Even in the U.S.,
where commercial and investment banking have been legally
separated, market participants have tried to take advantage of some of
the loopholes in the Glass-Steagall Act. For example, taking advantage
of practices and institutional structure as well.
5)Universal banking usually takes one of three forms, i.e., in-house,

through separately Capitalized subsidiaries, or through a holding
company structure. Universal banking in its fullest or purest form would
allow a banking corporation to engage ‘in-house’ in any activity
associated with banking, insurance, securities. Three well-known
countries in which these three structures prevail are Germany, the
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U.K. and the U.S. In Germany, banking and investment activities are
combined, but separate Subsidiaries.
Statement 1: Universal Banking Practices in Select Countries
Type of Features Countries Position in India

Universal Practicing
Banking
(1) (2) (3) (4)
I. Narrow Combination of In India, presently

Universal commercial there are no
Banking banking and restrictions on banks’
investment bank- investments in
ing, i.e., issuing, preference
underwriting, shares/non-
investing and convertible
trading securities. debentures/bonds of
private corporate
a) In-house Australia, Austria,
bodies. Banks are
Denmark, Finland,
also allowed to invest
France, Germany,
in corporate stocks.
Hong Kong@,
However, such
Pakistan#, Poland,
investments are
Sweden,
restricted to 5 per
Switzerland
cent of incremental
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b) Through Brazil, Canada, deposit of the

conglomerate China, Japan@@, previous year. Banks
route (By Korea, Mexico, are also allowed to
setting up Netherlands, New underwrite, subject to
subsidiaries) Zealand, Norway$, the limit of 15 per
Thailand, U.K. cent of the issue size.
In case there are
c) Permitted to Chile*, Belgium
devolvement and the
some extent
aforementioned 5 per
cent limit is
exceeded, banks are
required to offload
the excess holdings.
Banks are also
allowed to own 100
per cent investment
banks and undertake
mutual fund activity
through separate
entities.
Like-wise, DFIs
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d) Not permitted In U.S., banks are which have

permitted to deal traditionally been
in government engaged in the
securities; stock medium to long-term
brokerage financing have
activities are also recently started
generally undertaking short-
permitted; term lending
however, including working
corporate capital finance. They
securities have also been
underwriting and allowed to accept
dealing activities short to medium-term
must be deposits in the form
conducted through of term deposits and
specially CDs, albeit within
authorised limits. DFIs have
affiliates, which also set up
must limit such subsidiaries for
activities to 10 per undertaking banking
cent of gross and various other
revenues. activities. For
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instance, IDBI and

ICICI have already
set up banking
subsidiaries and
mutual funds,
besides setting up
subsidiaries in the
field of investor
services, stock
broking registrars’
services. IFCI has
also set up
subsidiaries for
undertaking
merchant banking,
stock broking,
providing registrars’
services, etc.
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Unit Trust of India,

which has
characteristics of
both a mutual fund,
and Development
Financial Institution
under a statute, also
has a banking
subsidiary. HDFC, a
non-banking financial
company (NBFC) has
also set up a
commercial bank.
@ Except for limitation on shareholding in certain listed companies and

subject to limits based on the capital of the bank.
# Except for some specifically disallowed securities.
@ Except for equity brokerage for the time being.
@
$ Stock brokerage activities need no longer be conducted in separate
subsidiaries.
* Certain activities through subsidiaries.
Statement 1: Universal Banking Practices in Select

Countries (Concld.)
Type of Features Countries Position in India
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Universal Practicing
Banking
(1) (2) (3) (4)
II. Broad Combination of

Universal commercial
Banking
banking,
investment
banking and
various other
activities
including
insurance.
a) In-house Hongkong**, Presently

Poland, Sweden insurance business
Australia, Austria, in India is allowed
Belgium, Brazil, only by LIC, GIC
Canada, China, and its
Den- mark, France, subsidiaries.
b) Through
Germany, Mexico,
conglomerat
Netherlands, New
e route (By
Zealand, Norway,
setting up
Portugal,
subsidiaries).
Singapore##,
Thailand, Spain,
Switzerland, U.K.
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c) Permitted to Italy***
some extent
d) Not permitted Chile, Japan,

Korea, Pakistan,
Panama, Peru,
U.S.$$
** Subject to limits based on the capital of the bank.

## Locally incorporated banks may own insurance company with MAS’s
approval.
*** Limited to 10 per cent of own funds for each insurance company and
20 per cent aggregate investment in insurance companies.
$$ Allowed through a separate holding company.
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ADVANTAGES AND LIMITATIONS OF UNIVERSAL BANKING
 Advantages
 Greater economic efficiency

The main argument in favour of universal banking is that it
results in greater economic efficiency in the form of lower cost, higher
output and better products. This logic stems from the reason that when
sector participants are free to choose the size and product-mix of their
operations, they are likely to configure their activities in a manner that
would optimize the use of their resources and circumstances. In
particular, the following advantages are often cited in favour of
universal banking.
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 Economies of scale
It means lower average costs, which arise when larger
volume of operations are performed for a given level of overhead on
investment. Economies of scope arise in multi-product firms because
costs of offering various activities by different units are greater than the
costs when they are offered together. Economies of scale and scope
have been given as the rationale for combining the activities. A larger
size and range of operations allow better utilisation of resources/inputs.
It is sometimes argued that acquisition of some information
technologies becomes profitable only beyond certain production scales.
Larger scale could also avoid the wasteful duplication of marketing,
research and development and information-gathering efforts [ Borio and
Filosa, 1994].
 Easy handling of business cycles
Due to various shifts in business cycles, the demand for

products also varies at different points of time. It is generally held that
universal banks could easily handle such situations by shifting the
resources within the organization as compared to specialized banks.
Specialized firms are also subject to substantial risks of failure,
Because their operations are not well diversified. Proponents of
universal banking thus argue that specialized banking system can
present considerable risks and costs to the economy. By offering a
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broader set of financial products than what a specialized bank provides,

it has been argued that a universal bank is able to establish long-term
relationship with the customers and provide them with a package of
financial services through a single window. It is important to note that
this benefit stems from the very nature/purpose of universal banking.
 limitations
 Failure Risk System

The larger the banks, the greater the effects of their failure
on the system. 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 increased systemic risk.
 Risk of increase in Monopoly power

Historically, an important reason for limiting combinations of
activities has been the fear that such institutions, by virtue of their sheer
size, would gain monopoly power in the market, which can have
significant undesirable consequences for economic efficiency [Borio
and Filosa, 1994]. Two kinds of concentration should be distinguished,
viz., the dominance of universal banks over non-financial companies
and concentration in the market for financial services. The critics of
universal banks blame universal banking for fostering cartels and
enhancing the power of large non-banking firms.
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 Bureaucratic and inflexible

Some critics have also observed that universal banks tend
to be bureaucratic an inflexible and hence they tend to work primarily
with large established customers and ignore or discourage smaller and
newly established businesses. Universal banks could use such
practices as limit pricing or predatory pricing to prevent smaller
specialized banks from serving the market. This argument mainly
stems from the economies of scale and scope.
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 industry, trade and agriculture. Consequent to the
liberalization and deregulation of financial sector, there has been
blurring of distinction between the commercial and investment banking.
Reserve Bank of India constituted on December 8, 1997, a
Working Group under the Chairmanship of Shri S.H. Khan to bring
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about greater clarity in the respective roles of banks and financial

institutions for greater harmonization of facilities and obligations. Also
report of the Committee on Banking Sector Reforms or Narasimham
Committee (NC) has major bearing on the issues considered by the
Khan 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-
case approach towards allowing Domestic financial institutions to
become the universal 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 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 the proposed period.
KHAN COMMITTEE ON UNIVERSAL BANKING & FIs
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The khan committee on harmonizing the role and operations of

development financial institutions and banks submitted its report on
April 24, 1998 with following recommendations: -
 Give banking license to DFIs

 Merge banks with banks, DFIs
 Bring down CRR progressively
 Phase out SLR
 Redefine priority sector
 Set up a super regulator to coordinate regulators’ activities
 Develop risk-based supervisory framework
 Usher in legal reforms in debt recovery
 State level FIs be allowed to go public and come under RBI
 DFIs be permitted to have wholly-owned banking subsidiaries
 Remove cap on FIs’ resources mobilization
 Grant authorized dealers’ license to DFIs
 Set up a standing committee to coordinate lending policies
SOME CONCEPTS…
 About Universal Banking
Universal banking refers to elimination of the distinction between

the development financial institutions and the banks and market
segmentation that presently exists between them.
 About Harmonization Of Role Of Banks And DFIs
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Harmonization means the introduction of universal banking in

a limited sense, wherein the DFIs could become banks and
intermediate in the short-term end of the financial market (say finance
for working capital) and commercial banks could enter the long-term
end of the financial market (say project financing). In other words, the
harmonization allows the DFIs and banks to move freely to the other
end than where they are presently placed.
 About The Main Areas Of Operations Of Dfis And Banks

Presently And How
Universalisation Will Change That Role In Future.
DFIs are specialist institutions catering to different sectors,

appraising projects from technical and financial parameters and finance
long-term investment requirements. This specialization has given edge
to DFIs in terms of project appraisal. On the other hand, the banks
meet the short term investment and production requirements and they
have developed expertise in providing working capital finance to
industry, exports, imports, small industry, agriculture etc. They can take
as intermediates in a big way at the other end of their markets where
they are less dominant presently. Some of them may even diversify into
insurance and other related areas.
 About Requirement Of Cost Considerations In Universalisation
Cost of funds differentiates the DFIs from banks, as DFIs incur

higher costs for mobilizing long-term finance. Banks do not normally
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mobilize substantial deposit resources with maturities in excess of 5

years, which limits their capacity to extend long-term loans. This has
resulted in participation type of relationship in financing by banks and
DFIs.
 About The Areas Of Conflict arising Between Banks And DfIs
There are conflicts relating to securities for the loans sanctioned

by the banks and DFIs. While the DFIs have first charge over block
assets, the banks have first charge on current assets, which place both
the banks and DFIs in different positions.
Another area of conflict is extension of refinance by DFIs to banks

to supplement banks’ long-term resources. But due to higher cost of
their funds, the DFIs find it a losing proposition.
 About The Committee Which Recommended Universal Banking

& What It
Suggested
The SH Khan Committee suggested the concept of Universal

Banking. It also suggested to give banking licence to DFIs, merging
banks with banks or DFIs, bring down CRR progressively, phase out
SLR, redefine priority sector, set up a super regulator to coordinate
regulators’ activities, develop risk-based supervisory framework, usher
in legal reforms in debt recovery, allow State level FIs to go public and
come under RBI, permit DFIs to have wholly-owned banking
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subsidiaries, remove cap on FIs’ resources mobilization, grant

authorized dealers’ licence to DFIs, set up a standing committee to
coordinate lending policies etc.
 About The Likely Gains From Universalisation
The universalisation is expected to result in expansion of banks

and diversification into new financial and Para-banking services. The
business focus of the banks would emerge on profit lines. This may at
the same time result in reluctance on their part to enter the smaller end
of retail banking particularly, the small borrowers in rural areas, who
may find it difficult to access the banking services, since they do not
contribute substantially to Banks’ Business Volumes Or Profits.
 About The Apprehensions Of Universalisation
The financial services may not become the privilege of elitist. If the
reforms with a human face are what we want, the universal banking
has to make adjustments and ensure that financial services are
available to all at affordable costs.
NEED OFUNIVERSAL BANKING IN INDIA
The phenomenon of universal banking—as different from

narrow banking—is suddenly in the news. With the second
Narasimham Committee (1998) and the Khan Committee (1998)
reports recommending consolidation of the banking industry through
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mergers and integration of financial activities, the stage seems to be

set for a debate on the entire issue.
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. After the banking crisis of the 1930s, the US banned all
forms of universal banking through what is known as the Glass-Steagal
Act of 1933. This prohibited commercial banks from investment banking
activities, taking equity positions in borrowing firms, selling insurance
products etc. The idea was to mitigate risky behaviour by restricting
commercial banks to their traditional activity of accepting deposits and
lending.
However, universal banking has been prevalent in different
forms in many European countries, such as Germany, Switzerland,
France, Italy etc. For example, in these countries, commercial banks
have been selling insurance products, which have been referred to as
Bancassurance and an Allfinanz.
Research on the effects of universal banking has been
inconclusive as there is no clear-cut evidence in favour of or against it
anywhere. 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. Hence it becomes all the
more imperative to know whether we need universal banks in India.
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And whether it is a more efficient than the traditional narrow banking.

What are the benefits to banks from universal banking? The standard
argument given everywhere—also by the various Reserve Bank
committees and reports—in favour of universal banking is that it
enables banks to exploit economies of scale and scope. What it means
is that 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. So, it entails less
cost in performing all the functions by one entity instead of separate
specialized bodies. A bank possesses information on the risk
characteristics of its clients, which it can use to pursue other activities
with the same clients. This again saves cost compared to the case of
different entities catering to the different needs of the same clients. A
bank has an existing network of branches, which can act as shops for
selling products like insurance. This way a big bank can reach the
remotest client without having to take recourse to any agent.
Many financial services are inter-linked activities, e.g. insurance
and lending. A bank can use its instruments in one activity to exploit the
other, e.g., in the case of project lending to the same firm, which has
purchased insurance from banking. Now, let us turn to the benefits
accruing to the customers. The idea of ‘one-stop-shopping’ saves a lot
of transaction costs and increases the speed of economic activity.
Another manifestation of universal banking is a bank holding stakes in
a firm. 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
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better position to monitor the firm’s activities. This is useful from the
investors point of view. Of course, all these benefits have to be
weighed out against the problems. The obvious drawback is that
universal banking leads to a loss in economies of specialization. Then
there is the problem of the bank indulging in too many risky activities.
To account for this, appropriate regulation can be devised, which will
ultimately benefit all the participants in the market, including the banks
themselves.
In spite of the associated problems, there seems to be a lot of interest
expressed by banks and financial institutions in universal banking. In
India, too, a lot of opportunities are there to be exploited. Banks,
especially the financial institutions, are aware of it. And most of the
groups have plans to diversify in a big way.
Even though there might not be profits forthcoming in the short
run due to the switching cost incurred in moving to new business. The
long-run prospects, however, are very encouraging. At present, only an’
arms-length’ relationship between a bank and an insurance entity has
been allowed by the regulatory authority, i.e. the Insurance Regulatory
and Development Authority (Irda). Which means 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, which they are lobbying to
avoid. Even then, some groups like the HDFC (commercial banking
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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 universal
banking.
All these can be seen as steps towards an ultimate culmination of
financial intermediation in India into universal banking.
UNIVERSAL BANKING: SOLUTION TO FIs PROBLEMS
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The financial institutions (FIs) such as ICICI, IDBI are reported

to be exploring possibilities of conversion into universal banks as a
solution for their problems. This follows the recommendation of the
S.H.Khan Working Group. The FIS come into existence, in pursuance
of the earlier policy of the State arranging funds for institutions set up
for providing long-term finance. In the earlier period, FIS had access to
the Long Term Operation Fund (LTO) set up the RBI out of its
surpluses. With the initiation of reforms in 1996,the RBI discontinued
the LTO. The term lending institutions, which had depended on LTO
funds were left without funds. Added to this were the series of adverse
developments in the industrial sector in India, partly as a result of
opening up the economy. Many corporate become sick, as they were
unprepared for strong competitive environment. Thus the FIs had also
indulged in a liberal splurge of debt financing, in the optimistic
expectation that liberalization would mean an improvement in prospects
for industries. Thereafter FIs faced by a surge of NPAs.
The problem of easier access to resources has been one of

the driver’s behind the suggestion to make FIs universal banks. As
UBs, FIs will it is expected, be able to access deposits from a wider
depositor base. UB is term usually used to cover category of institutions
which do various banking businesses including investment banking,
securities trading, besides payment and settlement functions and also
insurance. The emphasis of the Khan Working Group on UB is however
more in the direction of converting the FIs to commercial banks.
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The RBI has rightly adopted a cautious approach to this

problem and its solution. The conversion of FIs to commercial banks is
not by itself a panacea. Conversion also implies that the banks will
have to be subject to the statutory requirement such as SLR and
CRR.RBI may give some relaxation in statutory requirement in case of
new entrant FIs/Ubs.One more way is to asset reconstruction device to
sell NPAsof the FIs and to generate funds. Assect Reconstruction
Committees (ARCs) where recommended for commercial banks by the
M.S.Verma Committee. Is balance sheets are heavily burdened with
accumulated NPAs, therefore first they will have to sale these impaired
assets through reconstruction cos. Conversion to UB is not a remedy
for this fundamental problem. One suggestion is that FIs to be merged
with commercial banks. But current level of NPAs of FIs will put
additional burden.
APPROACH TO UNIVERSAL BANKING
The Narsimham Committee II suggested that Development

Financial Institutions (DFIs) should convert ultimately into either
commercial banks or non-bank finance companies. The Khan Working
Group held the view that DFIS should be allowed to become banks at
the earliest. The RBI released a 'Discussion Paper' (DP) in January
1999 for wider public debate. The feedback on the discussion paper
indicated that while the universal banking is desirable from the point of
view of efficiency of resource use, there is need for caution in moving
- 31 -
towards such a system by banks and DFIs. Major areas requiring

attention are the status of financial sector reforms, the state of
preparedness of the concerned institutions, the evolution of the
regulatory regime and above all a viable transition path for institutions,
which are desirous of moving in the direction of universal banking. It is
proposed to adopt the following broad approach for considering
proposals in this area. The principle of "Universal Banking" is a
desirable goal and some progress has already been made by
permitting banks to diversify into investments and long-term financing
and the DFIs to lend for working capital, etc. However, banks have
certain special characteristics and as such any dilution of RBI's
prudential and supervisory norms for conduct of banking business
would be inadvisable. Further, any conglomerate, in which a bank is
present, should be subject to a consolidated approach to supervision
and regulation.
Though the DFIs would continue to have a special role in the
Indian financial System, until the debt market demonstrates substantial
improvements in terms of liquidity and depth, any DFI, which wishes to
do so, should have the option to transform into bank (which it can
exercise), provided the prudential norms as applicable to banks are
fully satisfied. To this end, a DFI would need to prepare a transition
path in order to fully comply with the regulatory requirement of a bank.
The DFI concerned may consult RBI for such transition arrangements.
Reserve Bank will consider such requests on a case-by-case basis.
The regulatory framework of RBI in respect of DFIs would need to be
strengthened if they are given greater access to short-term resources
- 32 -
for meeting their Financing requirements, which is necessary. In due

course, and in the light of evolution of the financial system,
Narasimham Committee's recommendation that, ultimately there should
be only banks and Restructured NBFCs can be operationalised.
- 33 -
RBI Guidelines for Existing Banks/FIs for Conversion into

Universal Banks.
 Salient operational and regulatory issues to be addressed by

the FIs For the conversion into Universal bank are: -
 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
 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.
 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
- 34 -
within the maximum period of 7 years from the date of acquisition, in

terms of Section 9 of the B. R. Act.
 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
 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.
 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
- 35 -
subsidiaries only for one or more of the activities permitted under

Section 6(1) of B. R. Act.
 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.
 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.
 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.
- 36 -
 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 east 25 per cent of their total number
of branches in semi-urban and rural areas.
 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.
 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 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.
 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
- 37 -
parameters. Under the Section, prior approval of RBI would also be

required for appointment of Chairman and Managing Director.
 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.
 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 authorized 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.
 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
- 38 -
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.
UNIVERSAL BANKING - CURRENT POSITION IN INDIA
Universal banking
Narrow Broad
Universal Universal
Banking Banking
Downstream Upstream Downstream

Upstream
Linkages Linkages Linkages
Linkages
- 39 -
(The process started (the process started (the process

started in (Not yet allo-
in the 1980s but gained in 1990s with IDBI, 2000 with banks &
-wed; legislative
Momentum in 1990s ICICI and UTI allowed DFIs allowed to
changes are reqd
when commercial banks to set up banking subsi- enter into
to be introduced started
undertaking many -diaries). Insurance
before this could
non-traditional activities) business).
Take place. LIC
has reportedly
expressed its
intention to set or buy commercial bank.
- 40 -
In India, the financial system has traditionally been

compartmentalized with three main types of financial
intermediaries operating being commercial banks, DFIs and
investment institutions (two insurance instutions, viz., LIC and GIC
and one mutual fund, viz., UTI). All these institutions were
required to confine their operations strictly to their own areas,
barring commercial banks, which were allowed to undertake some
investment/merchant banking activity & project finance within
prescribed limits. However, in the 1980s & the 1990s many
significant changes took place, which increasingly blurred the
distinctions between commercial banks and DFIs. In 1983, the
Banking Regulation Act was amended and banks were allowed to
undertake leasing activity through separate subsidiaries. In the late
1980s, commercial banks were allowed to set up subsidiaries for
undertaking other non-traditional activities. Accordingly, many
commercial banks were allowed to setup subsidiaries in the field of
investment banking, mutual funds, factoring, hire purchases, etc.,
either wholly owned or jointly in collaboration with other
banks/DFIs. In the mid-1990s,all restrictions on project finance
activity by commercial banks were removed. Banks were allowed
to undertake hire purchase & leasing activities in-house. Major
DFIs, such as , IDBI,ICICI and IFCI also setup subsidiaries in
various fields, including commercial banking. They were also
allowed to accept deposits within limits and subject to some
conditions. DFIs , which traditionally extended only long term
project finance have, of late, also started extending short-term
- 41 -
loans including working capital. Recently, banks and DFIs have

also been allowed to undertake insurance business. It may , thus,
be seen from the above that the practice of universal banking is
already prevalent in India. It started with universal banking in a
narrow sense by allowing downstream linkages later followed by
upstream linkages. Recently, the practice of universal banking in a
broad sense with downstream linkages has also been allowed.
However, upstream linkages under broad universal banking have
yet to take place.
- 42 -
UNIVERSAL BANKING CONCEPT IN FOREIGN COUNTRIES
 BACKGROUND
A universal bank is a ‘one-stop’ supplier of all financial

products and services such as deposits, short-term and long-term
loans, insurance, investment banking, etc. Global experience with
universal banking has been varied. After the banking crisis of
1930s, the US banned all forms of universal banking through what
is known as the Glass-Steagal Act of 1933. This prohibited
commercial banks from investment banking activities, taking equity
positions in borrowing firms, selling insurance products etc. The
idea was to discourage risky behaviour by restricting commercial
banks to their traditional activity of accepting deposits and lending.
However, universal banking has been prevalent in different forms
in many European countries, such as Germany, Switzerland,
France, Italy, etc. Banks like ABN-AMRO, BNP Paribas, and
Deutsche Bank have been universal banks for a long time.
Nevertheless, the United States once again started moving
cautiously towards universal banking through the Gramm-Leach-
Bliley Act of 1999 which rolled back many of the earlier restrictions.
This resulted in the grand merger of Citicorp (banking group) with
Travelers (insurance group).
- 43 -
EXAMPLES OF UNIVERSAL BANKING IN FOREIGN

COUNTRIES
IN USA: -
1] Chase Manhattan Bank: the reorganization of a universal

bank
Chase Manhattan Bank, founded in 1877 in New York, is one

of the large money center banks and , right from the beginning has
followed a universal banking strategy, seeking to cover all the
segments of financial intermediation: commercial banking,
wholesale banking , money markets, capital markets, and foreign
markets. A major part of Chase Manhattan’s business is
concentrated in lending to large corporations and governments,
both in United States and abroad.
After a decade of meteoric growth during 1960s, Chase

Manhattan’s performance started to fall off in the 1970s for
external & internal reasons.
- 44 -
One of the external reasons was the ground lost in the North
American bond market in the strong advance by other specialized
banks such as Salomon Brothers or Citicorp. One of the main
internal reasons was the lack of consistent strategic vision in the
bank, whose efforts were divided into different businesses.
These circumstances alarmed the bank shareholders and

financial community. As a result of the combination of factors and
increasing competition, Chase’s return on assets fell below 0.5 %
in the first half of the 1970s. In a way, the situation of Chase
Manhattan reflects the consequences of dramatic changes that
took place in the financial system during 1970s – particularly
intense in USA- & the considerable difficulties experienced at that
time by the universal banks (which they continue to experience to
adapt to new situation)
The year 1982 was particularly bad one for Chase

Manhattan reflects the consequences of the dramatic changes.
The reason was the occurrence of three financial fiascos within a
very short : two loans operations to brokerage companies on North
American Public debt market ($ 117 million and $42 million,
respectively ) and investment in a bank that failed as a result of
energy crisis ($ 161 million).
The perception of the urgent need for a change led to Chase’s

senior management to implement a new action plan in 1985. the
purpose of this plan was to strengthen its presence in commercial
- 45 -
and wholesale banking in the united states, leaving the

international market somewhat to one side. To this end, the bank’s
executive committee took a series of steps, two of which we
consider particularly important.
First was the purchase of a bank, First Lincoln Corporation of

Rochester, New York, with 172 branches, and the purchase of six
savings and loan associations, which Chase immediately turned
into commercial banks. The purpose of these actions was to
increase market share in the commercial banking and medium-
sized company loans segments. The second measure was to
reorganize the bank into three main areas: retail banking,
investment banking, and institutional banking (including relations
with financial institutions, cash management, portfolio
management, and leasing).
However these efforts failed to achieve the hoped-for

results. In 1990, the bank’s pretax income was so low that Chase’s
share price on the New York Stock exchange fell to an all-time low.
Rumours of a hostile take-over bid or the advisability of a merger
with chemical or Manufacturers Hanover were rife in 1990.
However, with the change of executive management in 1991, the
bank started to climb out of its trough.
This new period opened with three major decisions. The

first was the alienation of those business units that were clearly
unprofitable or in which Chase had no particular expertise which
- 46 -
include discontinuation of commercial banking in Europe, which

Chase had found unprofitable and fiercely competitive.
The second decision was to consolidate several business

units that were clearly important for Chase: the retail banking
division, which accounted for 50 per cent of the bank’s total
revenues in 1989, and cash management, portfolio management
and safekeeping services. The third decision, which was closely
related to the other two, was reorganization of its business into
three units, from which all of the banks were coordinate:
a) A commercial banking and retail-banking unit concentrated on

the east coast, seeking to operate with private households and
small & medium-sized companies;
b) A retail financial products unit for the entire Unite States,

including credit cards, investment products, mortgages, and
financing consumer durables such as automobiles;
c) A general financial services unit, mainly targeting North

American companies and chase customers. This unit was
concerned with risk management, portfolio management and
international corporate banking.
Chase’s merger with Chemical Banking will allow the new bank to
cut down on costs & gain market share in some businesses.
2] Citicorp: a global universal bank
- 47 -
Citicorp: First National City Corporation, Citicorp, is the name

of the holding company of a group of financial institutions operating
in various segments of the financial industry. This bank was
formed in 1812 and its original name was City Bank of New York.
In 1955, it merged with first National Bank of New York, thus
marking the birth of Citicorp.
By the close of the nineteenth century, it was already the

largest bank in the United States, with a tradition of innovation and
service acknowledged by corporate customers an rival banks alike.
Before the Great Depression of the 1930s, Citibank had started on
a major diversification of business, entering the capital market,
investment banking, and international banking businesses.
However, this diversification process came to a stop when
Congress approved the Glass-Stegal Act.
After the Second World War, innovation in Citicorp, as in

the other large American Banks dropped off considerably. The
main reason for this was that the package of regulatory majors
approved in the early 1930s considerably limited the banks
penetration into new businesses. In fact, this restriction was one of
the reasons that Citicorp started to promote its international
banking business in the early 1960s, under the influence of its
CEO, George Moore. Moore’s vision consisted of two clear
principles. First, give the best possible service to the American
Companies that were starting to expand abroad, particularly in
- 48 -
Europe. The aim was to make Citicorp the naturals choice for
those American companies with business abroad. The second
principle was to recruit young professionals with significant
entrepreneurial and innovative potential as a key to developing
financial services that the large companies might need.
As a result of this expansion in its financial businesses, the

bank started to redefine its mission: from being a mere financial
intermediary, the bank wished to become an organization that
offered all the financial services that another, non-financial
organization could possibly need. This vision of banking would
probably be shared nowadays by all banks with a vocation in
universal banking. However, in the early 1960s, this vision was far
from common. Bank redefined its mission from being a mere
financial intermediary, to become an organization that offered all
financial services to non-financial organization. The expansion of
Citicorp in U.S. and rest of the world was based on 3 critical
actions –
1) Creation of a holding co in 1967, to guarantee that each of

the bank’s businesses had the decentralization.
2) Consolidation of a strong retail banking sales network in US
and rest of the world, to provide all types of financial services to
household and private individuals,
3) Penetration of financial markets particularly in exchange
market
- 49 -
4) Major investment in information technologies.
George Moore stepped down in 1967 and was succeeded by

Walter Wriston, who was CEO until 1984. Wriston consolidated
this strategy under the general formulation, the five I’s: institutional
banking, individual banking, investment banking, information
technology, & finally insurance. John Reed succeeded Wriston in
1984. Until then, Reed had been chairman of retail banking unit.
Then he decided to enlarge the retail-banking unit, in which he had
worked previously, and which was profitable and less risky for
Citicorp. In early 1990s, Citicorp was the US universal bank that
offered the most financial services. In credit cards, Citicorp was the
top US bank and the second largest institution, after American
Express.
Citicorp’s clout in the financial services world is undeniable.

Citicorp can adequately manage its different businesses in so
many geographical markets with the same efficiency as a local
specialist.
- 50 -
IN UNITED KINGDOM
1.BARCLAYS BANK
1.Goldsmith bankers
Barclay’s origins can be traced back to a modest business founded
more than 300 years ago in the heart of London's financial district.
In the late 17th century, the streets of the City of London may not
have been paved with gold, but they were filled with goldsmith-
bankers. They provided monarchs and merchants with the money
they needed to fund their ventures around the world.
John Freame and his partner Thomas Gould in Lombard Street

founded one such business in 1690. The name Barclay became
associated with the company in 1736, when James Barclay - who
had married John Freame's daughter - became a partner.
2. A new joint-stock bank

Private banking businesses were commonplace in the 18th
century, keeping their clients' gold deposits secure and lending to
credit-worthy merchants. In 1896, 20 of them formed a new joint-
stock bank.
A web of family, business and religious relationships already
connected the leading partners of the new bank, which was named
Barclay and Company. The company became known as the
Quaker Bank, because this was the family tradition of the founding
families.
- 51 -
3. Domestic growth
The new bank had 182 branches, mainly in the East and South
East, and deposits of £26 million - a substantial sum of money in
those days. It expanded its branch network rapidly by taking over
other banks, including Bolithos in Cornwall and the South West in
1905 and United Counties Bank in the Midlands in 1916.
In 1918 the company amalgamated with the London, Provincial
and South Western Bank to become one of the UK's 'big five'
banks. By 1926 the bank had 1,837 outlets.
Barclays acquired Martins Bank in 1969, the largest UK bank to

have its head office outside London. And in 2000 it took over The
Woolwich, a leading mortgage bank and former building society
founded in 1847.
4. International growth
The development of today's global business began in earnest in
1925, with the merger of three banks - the Colonial Bank, the
Anglo Egyptian Bank and the National Bank of South Africa to form
Barclays international operations. This added businesses in much
of Africa, the Middle East and the West Indies.
In 1981, Barclays became the first foreign bank to file with the US
Securities and Exchange Commission and raise long-term capital
on the New York market. In 1986 it became the first British bank to
- 52 -
have its shares listed on the Tokyo and New York stock
exchanges.
Barclays' global expansion was given added impetus in 1986
with the creation of an investment banking operation. This has
developed into Barclays Capital, a major division of the bank that
now manages larger corporate and institutional business.
In 1995 Barclays purchased the fund manager Wells Fargo
Nikko Investment Advisers. The business was integrated with BZW
Investment Management to form Barclays Global Investors.
5. Recent Developments
Innovation has proceeded apace. The telephone banking service
Barclaycall was introduced in 1994 and on-line PC banking in
1997, whilst customized services have also developed with the
introduction of Barclays Private Bank and Premier Banking. In
2001 Barclays formed a strategic alliance with Legal & General to
sell life pensions and investment products throughout its UK
network. Barclays has recently set itself the goal of becoming the
employer of choice' and has led the way in the implementation of
equal opportunities policies.
INTRODUCTION TO ICICI BANK
The Industrial Credit and Investment Corporation of India

limited (ICICI) was formed in 1955 at the initiative of the World
- 53 -
Bank, the government of India and representatives of Indian

industry. The principal objective was to create a development
financial institution for providing medium-term and long-term
project financing to Indian businesses. Until the late 1980s, ICICI
primarily focused its activities on project finance, providing long-
term funds to a variety of industrial projects. ICICI typically
obtained funds for these activities through a variety of government-
sponsored and government-assisted programs designed to
facilitate industrial development in India. Today ICICI is one of the
largest financial institutions in India. It provides a wide range of
products and services aimed at fulfilling the banking and financial
needs of India's corporate and retail sectors. ICICI became the first
Indian company to get listed on the NYSE on September 22, 1999.
The Company's vision is to transform into a 'Universal Bank'
by offering a wide range of products and services to corporate and
retail customers in India through a number of business operations,
subsidiaries and affiliates.
- 54 -
HISTORY OF ICICI BANK
1955 : The Industrial Credit and Investment Corporation of India

Limited (ICICI) incorporated at the initiative of the World Bank, the
Government of India and representatives of Indian industry, with
the objective of creating a development financial institution for
providing medium-term and long-term project financing to Indian
businesses. Mr.A.Ramaswami Mudaliar elected as the first
Chairman of ICICI Limited ICICI emerges as the major source of
foreign currency loans to Indian industry. Besides funding from the
World Bank and other multi-lateral agencies, ICICI also among the
first Indian companies to raise funds from International markets.
1956 : ICICI declared its first Dividend at 3.5%.
1958 : Mr.G.L.Mehta was appointed the 2nd Chairman of ICICI
Ltd.
1960 : ICICI building at 163, Backbay Reclamation was
inaugurated.
1961 : The first West German loan of DM 5 million from
Kredianstalt was obtained
by ICICI.
1967 : ICICI made its first debenture issue for Rs.6 crore, which
was oversubscribed.
- 55 -
1969 : First two regional offices in Calcutta and Madras were

opened.
1972 : Second entity in India to set-up merchant banking services.
Mr. H. T. Parekh appointed as the third Chairman of ICICI.
1977 : ICICI sponsors the formation of Housing Development
Finance Corporation.
Managed its first equity public issue
1978 : Mr. James Raj appointed as the fourth Chairman of ICICI.
1979 : Mr.Siddharth Mehta appointed as the fifth Chairman of
ICICI.
1982 : Becomes the first ever Indian borrower to raise European
Currency Units.
ICICI commences leasing business.
1984 : Mr. S. Nadkarni appointed as the sixth Chairman of ICICI.
1985 : Mr.N.Vaghul appointed as the seventh Chairman and
Managing Director of
ICICI.
1986: ICICI first Indian Institution to receive ADB Loans. First
public issue by an Indian entity in the Swiss Capital Markets.
ICICI along with UTI sets up Credit Rating Information Services of
India Limited, (CRISIL) India's first professional credit rating
agency. ICICI promotes Shipping Credit and Investment Company
of India Limited. (SCIC) .The Corporation made a public issue of
Swiss Franc 75 million in Switzerland, the first public issue by any
Indian equity in the Swiss Capital Market.
- 56 -
1987:ICICI signed a loan agreement for Sterling Pound 10 million

with Commonwealth Development Corporation (CDC), the first
loan by CDC for financing projects in India.
1988: ICICI promotes TDICI - India's first venture capital
company.
1993: ICICI sets-up ICICI Securities and Finance Company
Limited in joint venture with J. P. Morgan. ICICI sets up ICICI
Asset Management Company.
1994: ICICI sets up ICICI Bank.
1996: ICICI becomes the first company in the Indian financial
sector to raise GDR.ICICI announces merger with SCICI.
Mr.K.V.Kamath appointed the Managing Director and CEO of ICICI
Ltd
1997: ICICI was the first intermediary to move away from single
prime rate to three-tier prime rates structure and introduced yield-
curve based pricing. The name "The Industrial Credit and
Investment Corporation of India Limited "was changed to "ICICI
Limited". ICICI announces takeover of ITC Classic Finance.
1998: Introduced the new logo symbolizing a common corporate
identity for the ICICI Group. ICICI announces takeover of
Anagram Finance.
1999: ICICI launches retail finance - car loans, house loans and
loans for consumer Durables. ICICI becomes the first Indian
Company to list on the NYSE through an Issue of American
Depositary Shares.
- 57 -
2000: ICICI Bank becomes the first commercial bank from India to
list its stock on NYSE. ICICI Bank announces merger with Bank of
Madura.
2001: The Boards of ICICI Ltd and ICICI Bank approved the
merger of ICICI with ICICI Bank.
2002: Moodys assign higher than sovereign rating to ICICI.
Merger of ICICI Limited, ICICI Capital Services Ltd and ICICI
Personal Financial Services Limited with ICICI Bank
SWOT ANALYSIS OF ICICI BANK
 STRENGTHS:
ICICI's distribution network is a major strength of the
company. It has physical presence across 42 cities. It also has a
strong network of marketing agents, ATMs and call centers.
ICICI offers a wide range of products and services to its corporate
and retail customers. This has increased its market share and
enabled it to move a step ahead to achieve its vision of being a
Universal Bank.
 WEAKNESSES:
The company has a large amount of non-performing loans.
- 58 -
 OPPORTUNITIES:
The signs of Indian economy reviving has created a lot of

opportunities for the company. The industrial production has gone
up by 8% and this is expected to favor the company.
The revival in the economy will reduce the NPAs and could
result in growth of credit.
 THREATS:
Increased competition from foreign banks which have begun to

foray into financial services segment will pose a threat to the
company's market share and hence its bottom line.
MERGER OF ICICI & ICICI BANK
The merger is a culmination of a dream, which began five

years ago. This process was initiated in 1996. The time when
SCICI merged with ICICI, in 1997-98 ICICI acquired ITC classic
and Anagram finance by way of acquisition, in 2000, ICICI bank
- 59 -
gobbled up Bank of Madura. Reverse merger of ICICI’s MD & CEO

K.V. Kamath started articulating on it in 1996. At first, it seemed
impossibility latter, it looked imperative.
On 25the of October India’s first true-blue universal bank was
born, as ICICI reverse- merged into its sibling ICICI Bank to create
a Rs. 95,000 crore asset base monolith, only second after SBI that
has the asset base of 3,16,000 crore. HDFC Bank is left at third
place with asset size of Rs. 19000 crore. Earlier the reverse
merger looked like a bailout strategy for Non Performing Assets
(NPA) ridden ICICI, but later the merger seemed justified because
of possibility of numerous benefits through size and diverse
portfolio of products of two entities. Swap ration for merger is
decided to be two shares of ICICI for one share of ICICI Bank.
Merged entity would become fully operational from 31 st March

2002. ICICI requires this five-month to meet all regulatory
requirements.
The other interesting aspect of reverse merger is its

methodology. ICICI Bank has adopted the “purchase method” of
accounting principles (GAAP) for the merger, unique in India.
ICICI’s assets and liabilities will be “fair valued” for the purpose of
incorporation in the accounts of ICICI Bank on the appointed date.
This accounting practice is opportunity for ICICI to bring down its
level of NPA.
- 60 -
The new entity will have the capital adequacy ratio of 11.25 per
cent with Tier I capital contributing 7.5 per cent and Tier II 3.75 per
cent.
Merged entity will have following features: -
a) Strong retail franchise will be able to access low- cost

savings bank and current account.
b) Funding cost will be reduced.
c) Leverage on its large capital base, products suite, extensive
corporate and retail customer relationship, technology enabled
distribution system & vast talent pool.
d) Retail segment will be a key driver for growth.
e) Reduction in the cost to income ratio due to scale of
operations will provide competitive age.
f) It will reduce the pressure on the capital adequacy front.
g) Long term of the merger would offset the temporary hiccups.
h) The benefits of leveraging and cross selling will set off the
cost of carrying the reserves.
i) Creation of an asset reconstruction companies (ARC) to
manage NPAs.
j) Merger has been completed without seeking concessions on
the reserve requirements; this is an important aspect of reverse
merger.
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 BENEFITS FROM MERGER
1) Biggest benefit that would accrue to the merged entity is

operational and economic efficiency. Both ICICI and ICICI Bank
operate through different premises in a city. Merger would facilitate
use of common infrastructure and computer network to carry out
their operations. It would drastically reduce duplication of functions
and operational costs and improve efficiency. ICICI, being a
financial institution, takes care of long term fund requirement of
corporate while ICICI Bank gives short term loan for financing the
working capital requirement of corporate and individuals. Now
under one roof ICICI will be able to do project finance investment
banking, housing finance and consumer loans.
2) Merged entity would have a network of 396 existing

branches and extension counter,140 existing retail finance offices
and centers of ICICI. Such a huge distribution network would help
it to reach a large number of corporate and retail customers. With
cross-selling ICICI would be able to increase its revenues. Profits
are expected to improve by at least 3% because of better
utilization of funds and economies of scales in operation. With
merger ICICI will become a single shop for all type of finances and
can leverage better its credit appraisal skills and infrastructure.
3) Indian commercial banks, like ICICI Bank, have access to

cheaper deposits from general public. As they have idle funds they
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invest these funds into government securities over the required

Statutory Liquidity Ratio(SLR). SLR investments earn average
return of 8.5% only. These banks can earn higher return if they
finance long term requirements of corporate with these funds. On
the other hand financial institutions like ICICI have shortage of
funds and are saddled by poor asset quality. So weakness of both
ICICI and ICICI Bank have become the strength for both the
entities after merger.
4) Problem with financial institutions these days is that due to

slack capital market and high level of poor assets, they can not
raise funds. Merger with banks would provide them with access to
cheaper funds and retail deposits. It is not possible for government
to recapitalise sick financial institutions all the times. Merger is the
right move towards improving the financial health of them. ICICI
has the NPA of 5.1%, achieved after accelerated provisioning of
Rs. 813 crore in addition to a normal provisioning of Rs. 276 crore.
On the other hand ICICI Bank has the NPA as low as 1.41%. With
merger total NPA level of merged entity would come down
substantially.
5) Asset based of Rs. 95000 crore.
6) Talent pool of 8275 employees.
ISSUES BEHIND THE MERGER
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Undoubtedly the most significant event of the past few

months was the merger of ICICI with its progeny, ICICI Bank. It is
easily the largest merger seen in corporate India and has the
potential to seriously shake up India’s banking industry.
The merger has been on the cards of a while, and it was

more a question of “when” rather than “if”. Investors have been
prepared for this, a fact what is probably a major but not the only
reason for ICICI Bank’s relatively lower valuation compared to
HDFC Bank.
The rationale for the union goes something like this. ICICI was
a leftover of an era when the government provided financial
institution low-cost funds and ensured the monopoly over big-ticket
lending. This allowed them to fix interest rates at very high levels.
But this changed in the nineties and ICICI along with other
financial institutions faced competition from bank and other
financial entities. Banks have access to cheap funds and can lend
at cheaper rates. So a major reason for the merger is to allow
ICICI access to these low cost deposits.
From the point of view of ICICI Bank, the management feels

that they will gain due to increased size and scale. In fact, a lot is
being made of the fact that the merged entity is now second only
to State Bank of India.
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Further, the management believes they will be able to better

utilize synergies between the two companies. Earlier, ICICI’s
presence in areas such as consumer lending meant that ICICI
Bank could not offer similar products. Moreover, ICICI Bank will
also gain due to ICICI’s strong corporate relationships and access
to the vast talent pool of ICICI and its subsidiaries.
All these reasons have some merit, but from the investor’s point
of view, it remains to be seen whether this will lead to greater
shareholder value, or not. Hence, from an investor’s point of view,
one can expect short-term hiccups and it might be more prudent
to wait and watch, rather than jump into the scrip right now.
The reverse merger between ICICI and ICICI Bank will be

smooth because ICICI is in the strange position of being both, a
government organization and not one at the same time. It is still
recognized as a “specified financial institutions” under Section 4A
of the Companies Act. This entitles it to several privileges such as
being recognized as a “permitted security” for investment by trusts
and others, preferential treatment in terms of risk weightage
attached to its bonds, and protection from disclosure norms. At the
same time, there are no checks on its investment decisions and no
control on salaries. This is why ICICI can pay Rs. 1 crore to CEO
K.V. Kamath while the Industrial Development Bank of India (IDBI)
chief has to settle for a small fraction of that amount. The anomaly
arises because though government shareholding in ICICI has
fallen much below 51 percent (which allows it to claim to be a non-
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government concern when it suits its purpose), it is yet to be

denotified under Section 4A.
But the same is not true of other financial institutions (FIS)

that will also have to go the ICICI way into universal banking. All
FIS will have to do that as their access to cheap funds has been
cut off. Their spreads have narrowed; they can only survive by
accessing the cheap deposit bases of banks. But the merger of an
IDBI or an IFCI with a bank is not going to be easy. If one were to
look at a new private sector bank, the salaries there would want an
IDBI, loaded with more than its fair share of NPAS. An older,
nationalized bank would bring to the table its quota of NAPS too,
not to talk about a slothful staff and union problems.
One can never accuse the ICICI management of not being
aggressive enough. But while its belligerent expansion has kept it
in the headlines, it has often failed to carry other stakeholders
along. This time round its “ Agenda for the new millennium”- the
much-hyped conversion to universal bank seems to have run into
rough weather. It is obvious that ICICI’s investors are unhappy
about the merger ratio and intend to fight for their rights. Several
cases have already been filed in the Bombay High Court and the
Investor Grievances Forum is also lobbying hard with institutions
and bureaucrats against the merger ratio.
Ignoring the interests of other stakeholders is typical of

ICICI’s management and has frequently landed it is trouble. It has
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been sued several times for trying to ram through restructuring

proposals which protects its own lending at the cost of others. A
recent example is that of Arvind Mills, where a group of secured
foreign lenders, led by Commerz Bank have filed civil and criminal
charges against ICICI. The merger of ICICI with ICICI Bank seems
to be following a similar trajectory. Although it is clear that ICICI
has no future as a development financial institution, it will only
succeed as a universal bank it is controls costs and reduces non-
performing assets. There are no efforts in these two directions.
Moreover it is in such a hurry to become a universal bank before
the end of this financial year that it failed to take adequate notice of
one important factor-the dissatisfaction of 23 per cent of its
shareholders, who rejected the merger ratio at the Court convened
meeting of January 30.
Let us examine the merger of ICICI with ICICI bank.

Firstly, it is curious that of the three valuation methods recognized
by SEBI, ICICI has chosen one that hurts its own shareholders the
most. ICICI is indeed saddled with large NPAs, but that did not
stop the management from collecting fat pay packets every year.
Moreover, the goodwill it commands as a development financial
institution, which is reorganized under section 4A of the
Companies Act, has been ignored, as also the fact that it has
frequently been able to raise large sums of money through what
are dangerously termed ‘ safety bonds’. Had these been factored
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in, it may have changed the merger ratio and also benefited ICICI’s
other institutional shareholders.
POST MERGER INTERNATIONAL STRATEGY
ICICI Bank has formulated its post-merger international

strategy. In phase-I the bank intends to have a presence in 10
countries. The country managers to head the various operations
have been identified. Post merger, the new entity-ICICI Bank-will
be the second largest commercial bank in the country after SBI.
The bank will be bigger that Bank of Baroda and Bank of India,
which also have a large international presence.
Based on an analysis of business potential in various
geographies, ICICI Bank has identified key target markets in
Phase-I for retail & corporate banking. These are the US &
Canada in North America, the UK in Europe, Saudi Arabia Kuwait,
United Arab Emirates, Qatar, Oman and Bahrain in the Gulf and
Singapore in East Asia. In each of the regions a country manager
will be in charge of ICICI Bank’s entire operations.
A team comprising executives deputed from ICICI Bank as
well as those recruited locally will support the country manager.
The profile of the team members will depend on the specific local
banking and home products being offered in that region. The
country manager will be responsible for obtaining regulatory
approval for branch approval, achieving business targets,
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managing local alliances, distribution of home country products

and developing marketing and operating local banking products.
Lalitha Gupte will be in charge of the international business
division, while Bhargav Dasgupta, international banking head will
be responsible for the international banking business. Nimesh
Shan, who is head in Dubai, has been appointed as the country
manager for the UAE. He also has the responsibility for business
generation from other GCC countries. Sonjoy Chatterjee, who
heads the representative office in the UK, has been appointed as
the country manager for the UK. In North America, M Madhav
Kalyan has been appointed as the country manager for the US
and will be based in New York. He will also be responsible for
ICICI Bank’s business in Canada until a country manager is
identified.
In East Asia, Suvek Namkiar will be the country manager
for Singapore. ICICI Bank also plans to provide consulting/training
& other services to banks & other amenities internationally. A
separate group, Internationally Banking Advisory Group, will be
formed initially within the International Business Group.
- 69 -
INTERNATIONAL RESTRUCTURING - FOR LIFE AFTER

MERGER
ICICI on 12th March 2002, announced an internal restructuring

of portfolios across the organization, wherein CEO K.V. Kamath,
after taking over as MD & CEO of the merged entity, ICICI Bank,
will look into technology organizational excellence – the division
responsible for institutionalization of quality initiatives. Sanjiv
Kerkar, heading ICICI Lombard General Insurance, will head
organizational excellence and Girish Nayak will head the
technology management group. Both will report to Mr. Kamath.
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Sandeep Bakshi will take over as the new MD of ICICI

Lombard, replacing Mr. Kerkar. This will be effective from the date
of merger. Mr. Bakshi is heading the northern & eastern regions for
growth client group. Mr. N. Vaghul, who was recently inducted in
to the bank board , will take over as Chairman of the ICICI Bank
following RBI approval.
ICICI has also announced the internal structure of the new

bank. Lalita Gupte, will take over as joint MD in charge of
international banking, while H.N. Sinor will be the joint MD in
charge of domestic banking. Among others S Mukherjee, will be
in charge of project finance, Kalpana Morparia will head the
corporate center, Nachiket Mor will head wholesale banking
and Chanda Kochar will be in charge of retail banking.
The business process outsourcing (BPO) group, which would

be a division within the international business group, would be
hived off into the separate company to be headed by Ananda
Mukherji. BPO’s primary focus will be to leverage skills that ICICI
has developed.
The senior general managers are Balaji Swaminathan –

heading the finance group; P.H. Ravikumar will head the agri-
business group and small & medium enterprises; Ramni Nirula
will look after corporate banking. The domestic banking division
will be split in to retail banking group (RBG) & wholesale banking
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group. Retail banking will aim at being the largest business

powerhouse through the distribution of a range of products like
mutual funds and insurance policies.
The RBG itself will split into 6 divisions – retail asset group to
be headed by V. Vaidynathan, retail channel and liabilities group
to be headed by Amitabh Chaturvedi , retail operations group
and rural & micro banking group to be headed by M.N. Gopinath,
retail strategy and new product group to report to Mohan
Shenoi,retail channel infrastructure group to be looked after by
O.P. Srivastava and retail technological group to be headed by
Pravir Vohra. Auto finance, mortgage, personal loans and credit
cards will come under retail asset group.
The wholesale banking division will comprise of 6 groups.

The corporate solution group (CSG) and the Government solution
group(GSG) , corporate operations and technology group will be
headed by Madhabi Puri Buch.
Vishakha Mulye will head structured product & Portfolio

management group.
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ICICI BANK- ONE YEAR AFTER UNIVERSAL BANKING
Conversion to Universal Bank by ICICI did not happen

overnight. ICICI CEO Kamath's predecessor Narayan Vaghul
started the process of strategic diversification. Kamath hastened
the process and in the last 5 years pushed ICICI towards setting
up a portfolio of subsidiaries and associated companies. With a
capital base of Rs.728 crore ICICI Bank was set up in 1994. With
aggressive marketing and infrastructure of 400 branches and over
600 ATM's the bank grew rapidly. The intent to become
international player was very clear when both ICICI and ICICI Bank
got listed on the New York Stock Exchange (NYSE). ICICI has
also forayed into insurance. To become Universal Bank ICICI had
accelerated provisioning of Rs.813 crore in additional to the normal
provisioning of Rs.276 crore to bring down the NPA to the more
acceptable 5.1 percent.
 Impact Of The Merger
The merger of ICICI and two of its subsidiaries with ICICI

bank has combined two organizations with complementary
strengths and products & similar processes & operating
architecture. The merger has combined the large capital base of
ICICI with the strong deposit raising capability of ICICI Bank, giving
ICICI bank approved ability to increase its market share in banking
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fees and commissions, while lowering the overall cost of funding

through access to lower-cost retail deposits. ICICI Bank would now
able to leverage the strong corporate relationships that ICICI has
built, seamlessly providing the whole range of financial products
and services to corporate clients. The merger has also resulted in
the integration of retail finance operations of ICICI, and its two
merging subsidiaries, and ICICI into one entity, creating an optimal
structure for the retail business and allowing full range of asset and
liability products to be offered to all retail customers.
 Challenges Faced On Account Of Merger
The merger itself posed many challenges i.e. of raising large

incremental resources, deploying them to meet regulatory norms,
steering through statutory processes and obtaining regulatory and
shareholders approvals.
 Present Goals And Targets of ICICI Bank
1. To leverage the strengths of the merged entity to deliver

value to our stakeholders.
2. To focus on maximizing economic value of assets through

innovative solutions and aggressive recovery actions.
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3. To adopt global best practices to deliver financial solutions to

their customers to convert India-linked banking opportunities in the
selected international markets.
4. To capitalize on new business opportunities, leverage their

brand & distribution capability, proactively adopt technology and
develop human capital.
 Comments/ Views On Present Position Of The ICICI Bank
Presently ICICI has established as a full-fledged Universal

bank and has by passed all the teething problems. As a first
Universal bank in the Country, our bank is now marching ahead
towards its predetermined goals and ready to capture global
business too.
ISSUES &CHALLENGES IN UNIVERSAL BANKING
1. Challenges in Universal Banking
There are certain challenges, which need to be effectively

met by the universal banks. Such challenges need to build
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effective supervisory infrastructure, volatility of prices in the stock

market, comprehending the nature and complexity of new financial
instruments, complex financial structures, determining the precise
nature of risks associated with the use of particular financial
structure and transactions, increased risk resulting from
asymmetrical information sharing between banks and regulators
among others. Moreover norms stipulated by RBI treat DFIs at par
with the existing commercial banks. Thus all Universal banks have
to maintain the CRR and the SLR requirement on the same lines
as the commercial banks. Also they have to fulfill the priority sector
lending norms applicable to the commercial banks. These are the
major hurdles as perceived by the institutions, as it is very difficult
to fulfill such norms without hurting the bottom-line. There are
certain challenges, which need to be effectively met by the
universal banks. Such challenges include weak supervisory
infrastructure, volatility of prices in the stock market,
comprehending the nature and complexity of new financial
instruments, complex financial structures, determining the precise
nature of risks associated with the use of particular financial
structure and transactions, increased risk resulting from
asymmetrical information sharing between banks and regulators
among others.
- 76 -
2. Issues of concern for Universal Banking:
 Deployment of capital:
If a bank were to own a 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. The bank will have
greater authority to intercede in the management of the firm as
dividend and interest payment performance deteriorates.
 Unhealthy concentration of power:
In many countries such a risk prevails in specialized

institutions, particularly when they are government sponsored.
Indeed public choice theory suggests that because Universal
Banks serve diverse interest, they may find it difficult to combine
as a political coalition – even this is difficult when number of
members in a coalition is large.
 Impartial Investment Advice:
There is a lengthy list of problems, involving potential conflicts

between the bank’s commercial and investment banking roles. For
example there may be possible conflict between the investment
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banker’s promotional role and commercial bankers obligation to

provide disinterested advice. Or where a Universal Bank’s
securities department advises a bank customer to issue new
securities to repay its bank loans. But a specialized bank that
wants an unprofitable loan repaid also can suggest that the
customer issues securities to do so.
CURRENT ISSUES
 UNIVERSAL BANKING- Rising Popularity
As competition intensifies banks are likely to morph into financial

supermarkets. Leading the pack is Universal banks, which offer a
wide gamut of services targeted at a broader customer base. Their
services range from commercial banking and investment banking
to insurance and mobile banking.
The popularity of universal banks has been on the rise. Few years
ago, investment banks like JP Morgan, Morgan Stanley, Lehman
Brothers and Merrill Lynch were the leaders in managing G-3
currency bond deals. But times have changed. Today, universal
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banks like Citigroup, Deutsche Bank and Barclays Capital, are

dominating the markets. By gobbling up smaller banks, these
banks have transformed themselves into universal banks in Asia.
This has resulted in higher capital costs for companies in Asia.
1. Relationship Business
Banking has always been a relationship business. Universal

banking, focuses on fostering better relationships with customers,
which is used a retention tool. Universal banks can also give
advantage of lower fees to a customer who gets all his banking
needs from the same bank, be it purchase of foreign exchange,
managing pension funds or underwriting bonds etc. By acting as
lender and underwriter, universal banks are in a better position to
understand how a secondary stock offering or an acquisition will
affect critical ratios and covenants in loan agreements. And, since
banks conduct due diligence before making a loan, they can jump
in quickly if a corporation wants to have a last-minute junk-bond
offering.
In Asia, bankers do have relationship lending but their

approach is based on loan tying. If the bank loses money on its
loans, it recoups its capital from other business driven out of the
lending process. In contrast, the universals decide, after carefully
considering the returns on capital. As long as the required return
from the relationship transaction is in line with their projections,
universals go in for loan tying. As opposed to this, investment
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banks consider returns purely on cost basis. They are more

interested in synchronizing the costs of a particular department
with the fees charged in the deal. So, while universal banks have
the leverage to subsidise their fees with relationship loans
investment banks stand deprived.
2. Universals' practice in Asia
Universals constantly look to lower their fees to grab a deal.

They create special purpose entities, which allow them to write off
risky assets. These special purpose entities help universals create
capital against them. The proceeds from these kinds of activities
enable them to charge lesser interest for extended loans.
Universals like HSBC and Standard Chartered have dominated
the corporate market for over three years. The capital markets
have put the emphasis back on lending. Asia's loan volumes have
surpassed volumes of equity and equity-linked issuance in 2002,
and corporate loan volume is much higher than corporate bond
issuance. This has helped universal banks make their presence in
the market.
Citigroup, HSBC, Standard Chartered, ING, Bank of

America and ABN AMRO make wide use of special purpose
entities for the simple reason that these entities will help them
exploit a regulatory loophole in their funding. These entities allow
banks to transfer loans from the balance sheet into a vehicle that
transforms them into capital-generating assets. Since the special
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purpose entities remain in the bank’s possession, they offset loan

costs at below-market rates. This strengthens the banking
relationship and also the risk tied to the underlying asset
disappears.
This is how universal banks operate. Universals offload assets

such as bonds, receivables and asset-backed securities into a
special purpose entity. Then they issue short-term commercial
paper against these assets at very cheap rates. The rate can be in
the range 7 to 10 basis points below London Inter-Bank Offer
Rate.
For instance, Korea Development Bank (KDB) had sought a

one-year USD 400 million loan in 2002. Several banks like ABN
AMRO, Barclays Capital, Deutsche Bank and Bank of Tokyo and
Mitsubishi offered KDB a mouth-watering lending rate of 10 basis
points over London Inter-Bank Offer Rate (LIBOR). It was a cheap
loan for one-year maturity by any standard, the average being 30
basis points over LIBOR for a one-year maturity. Two months after
the deal, three loan arrangers of KDB were involved in a bond
issue. Following this, KDB
Closed a USD 300 million bond and a USD 450 million bond
issues. Barclays Capital acted as a book-runner for both these
issues, and ABN AMRO and Deutsche co-managed the deals.
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Structured finance bankers, be it universal banking

institutions or investment banking houses, agree that special
purpose entities, as a tool of relationship, bolsters business.
Universals, thereby, grasp the business by offering competitive
fees and cheap loans, which investment banks fail to do. As long
as loan tying lowers the company’s cost of capital, the corporate
are comfortable with this concept.
3. Future of universal banks in Asia
Universal institutions such as HSBC, Citigroup, Standard

Chartered, ABN AMRO, BNP and Barclays are increasingly
dominating loan markets. The specialized investment banks don't
have access to a commercial bank's varied deposits to lend from.
These banks tend concentrate at their returns on equity. However,
investment banks like UBS, which have massive balance sheets,
have become very selective about their lending in Asia. Even
universal banks like Deutsche Bank are scaling down due to
pressure in its home.
Universal banks tend to bond their relationship lending with

successful companies. The investment banks are under increasing
pressure to lend money the way the universals do. A three-year
collapse of equity markets of Asia is making its impact on
corporate capital structures. The regulatory considerations also
affect the functioning of the business.
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UNIVERSAL BANKING: AN OVERVIEW
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, insurance etc. Universal banking is a combination of
commercial banking, investment banking and various other
activities including insurance. If specialized banking is the other.
This is most co in European countries.
Scenario in India has also changed after the Narasimham

Committee(1998) and the Khan Committee (1998) reports
recommended consolidation of the banking industry through
mergers, and integration of financial activities. Today, the shining
example is ICICI Bank, second largest bank (in India) in terms of
the size of assets, which has consolidated all the services after the
merger of ICICI Ltd with ICICI Bank. There are rumors of merger of
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IDBI with IDBI Bank. With the launch of retail banking, Kotak
Mahindra has also embarked on the path of Universal banking.
COMMENTS/VIEWS OF EXPERTS
GEORGE BENSTON-THE PROFESSOR OF FINANCE

AND ECONOMICS IS A VISITING FACULTY AT UNIVERSITY
OF LONDON HAS EXAMINED CERTAIN FUNDAMENTAL
ISSUES IN DETAIL IN HIS STUDIES, WHICH ARE STATED
BELOW: -
 Universal bank raises the risk of financial instability

Universal Banks tend to grow so large that failure of one can
cause economic distress and that narrow, specialized banks may
be better. However, the lessons from savings and loans societies
scandal do not support this. In fact, neither theory nor experience
seems to validate the assumption that limitations on banking – like
the separation of commercial and investment banking – either
- 85 -
were or more likely to be effective in reducing risk-taking.

Incidentally, most of the activities in which universal banks deal are
no more risky than the ordinary commercial bank activities. A study
of the combined effect of commercial and investment banking on
risk reveals that while the returns would be considerably higher,
the risks would only be strictly higher. The residual risks regarding
a depository institution should be addressed by high capital
adequacy, replacing the economic capital before it falls below zero
etc., (as against book capital)
 Universal Banks deploy capital as efficiently as the stock

market
While there is some merit in this, the evidence in support is
quite weak. It has been observed that the Universal banks have
certain advantages in restructuring firms. The transaction costs of
takeovers and mergers are high in stock market system and night
well is lower with a universal bank.
 Universal Banks Create Unhealthy A Concentrate Of Power

In fact, we have seen in many countries, such a risk prevails in
specialized institutions, particularly when they are government
sponsored. Indeed, public choice theory suggests that UB serve
diverse interest, they find it difficult to combine as a political
- 86 -
coalition-even this is difficult when the number of members in

coalition is large.
 Universal Banks tends reduce consumer choice

The German experience does not appear to support this.
Further, it is open for a consumer to approach different universal
banks for different services although there are examples of “tie-ins”
and “shut-outs”. But then, there will be other universal banks would
be competing and therefore, they may not go for “tie-ins”. Besides,
there would be regulatory controls also. The only exception is the
situation in which bank tie-in-sales extend its monopoly power to
an artificially tied product by forcing away independent suppliers
out of the business and keeping those and other potentials
suppliers away from entering the market.
- 87 -
VIEWS BY Mr.B.SAMAL, CHAIRMAN AND MANAGING

DIRECTOR, ALLAHABAD BANK OVER UNIVERSAL BANKING
 Views on universal banking and current Position of

Allahabad Bank
Universal banks may be considered as one-stop financial
supermarket offering a broad range of services. In a narrow sense,
universal banking denotes combination of banking and
insurance/investment activities. The second Narasimhan
Committee noted the global trends in banking industry towards
consolidation and convergence leading to dismantling of
boundaries among suppliers of various financial products. The
same trend is visible in India too, as banks are already providing a
range of financial services either in-house or through subsidiaries.
Picking a cue from the Narasimhan Committee, the Khan Working
Group also recommended a progressive move towards universal
banking and development of enabling regulatory framework
For that purpose. It is contended that universal banking will
result in greater economic efficiency in the form of lower cost,
higher output and better products. The sector participants would
be free to choose the size and product-mix of their operations in
such a way that would optimize use of resources. Therefore, there
appears to be a general agreement about inevitability of
emergence of universal
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banking in India, although differences remain on the pace,

modalities and sequences of the events. Allahabad Bank has
spotted the opportunity in the insurance sector, as India has a very
high potential for growth in insurance because of low level of
penetration. We have already tied up with ICICI-Prudential
Insurance Company for marketing their product
Conclusion
As a student of BMS I had a great opportunity to do a

project of “Universal Banking” which was indeed a wonderful
experience and has enhanced my knowledge in banking
sector.
This study on Universal Banking is important not only to an

organization, shareholders, banking sector but also to an
Indian economy as a whole. Due to globalization and
liberalization our economy is opening its door for reforms.
The onset of universal banking will undoubtedly accelerate
the pace of structural change within the Indian banking
system. The financial institutions as a segment will
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essentially convert into banks. This can potentially impose a

better corporate control structure on the firms, they can be
sources of long-term finance, and they can contribute to real
sector restructuring. Universal Banking is totally a new
concept in Indian Banking system and ICICI Bank is the first
financial Institution to go ahead with this concept.
Thus Universal banking, in fact, provides for a cafeteria

approach or, if one were to vary the metaphor, it would take
on the role of a one-stop financial supermarket.
Bibliography
 BOOKS
Harmonizing the Role and operations of development
Financial Institutions and banks-a discussion paper of
R.B.I., Mumbai.
“Universal Banking”- International comparisons
& Theoretical perspectives” by Jordi Canals.
 MAGAZINES
Annual Report of ICICI bank
Indian Institute Journal
 SITES
www.rbi.org.in
www.icicibank.com
- 90 -
www.banknetindia.com
www.barclays.com
www.indiainfoline.com
www.galintranet.godrej.com
www.indiatimes.com
www.icfaipress.org
www.financialexpress.com
www.kannan.com
www.allahabadbank.com
www.economiotimes.com
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- 92 -

UNIVERSAL Banking Visit Us at Management - Umakant.info

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A project on “Universal Banking”

The latest mantra is Universal Banking, which is combination of

Universal banking is the solution to FIs problems.

Financial Institutions & Insurance Companies are now merging ahead

INTRODUCTION TO UNIVERSAL BANKING

Since the early 1990s, structural and functional changes of

HISTORY OF UNIVERSAL BANKING IN INDIA

Historically, India followed a very compartmentalized financial

DEFINITION AND CONCEPTS

The term ‘universal bank’ has different meanings, but usually it

In certain countries these type of universal banking are successfully

Broad Outline of Universal banking

Banking Guarantee Insurance other

All functions are under one roof

Banking and Guarantee related securities

“Others” Insurance Guarantee

Associate Associate Associate

Banking Other Financial Insurance

Associated Associated Associated

Banking Guarantee Related Insurance

Associated Associated Associated

Basically it is a holding company and three subsidiary

Therefore banking can also work together with investment

PRACTICE OF UNIVERSAL BANKING IN SELECTED COUNTRIES

1)The traditional home of universal banking is central and northern

2)While countries like Germany and Switzerland never imposed any

commercial banking and investment banking and made it almost

3)The competition in the banking industry has intensified following

4)The restrictions on banks engaged in securities business have been

5)Universal banking usually takes one of three forms, i.e., in-house,

Statement 1: Universal Banking Practices in Select Countries

Type of Features Countries Position in India

I. Narrow Combination of In India, presently

b) Through Brazil, Canada, deposit of the

d) Not permitted In U.S., banks are which have

instance, IDBI and

Unit Trust of India,

@ Except for limitation on shareholding in certain listed companies and

Statement 1: Universal Banking Practices in Select

Type of Features Countries Position in India

II. Broad Combination of

a) In-house Hongkong**, Presently

d) Not permitted Chile, Japan,

** Subject to limits based on the capital of the bank.

ADVANTAGES AND LIMITATIONS OF UNIVERSAL BANKING

 Greater economic efficiency

 Easy handling of business cycles

Due to various shifts in business cycles, the demand for

broader set of financial products than what a specialized bank provides,

 Failure Risk System

 Risk of increase in Monopoly power

 Bureaucratic and inflexible

UNIVERSAL BANKING IN INDIA

In India Development financial institutions (DFIs) and

about greater clarity in the respective roles of banks and financial

KHAN COMMITTEE ON UNIVERSAL BANKING & FIs

The khan committee on harmonizing the role and operations of

 Give banking license to DFIs

 About Universal Banking