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Universal Banking – A perspective
Sonit Singh
Universal Banking
Universal Banking refers to financial intermediaries offering a
wide range of banking and financial services under a single roof.
It is a combination of commercial banking, investment banking,
insurance and various other activities. Here, entities leverage on
large branch network and offer wide range of services under the
same roof - i.e., a one- stop super market for both wholesale and
retail services.
Universal Banking- International perspective
Europe - unlike US, Universal banking is a common phenomenon
in Europe. The term Universal Banking could mean slightly
different things in different countries. For example, it takes one
of three forms: (a) in-house (departmental) as in Germany, (b)
through separate subsidiaries as in U.K. or (c) through holding
companies as in U.S.A.
Incidentally the term ‘Universal Banking Services’ also
denotes another meaning in U.K., which would means providing
banking services to all the public. In May 2001, the U.K.
Government announced provision of Universal Banking services with
all the main banks in the U.K. The scheme will give millions of
people (currently without any banking facilities) access to one of
the bank’s basic bank accounts or to a new post office- based card
account
US - Post depression The Glass-Steagall Act (GS Act)
passed in 1933 in USA created a wall between commercial
banking and investment banking. The underlying reason,
which resulted in promulgation of the Act, was the thinking that
the risky business of investing in stocks is definitely not the
area meant for banks that should rather stick to conservative
commercial lending.
In 1999 Gramm - Leach- Bliley Act (GLBA, 1999) was passed.
GLBA repealed the restrictions on banks affiliating with
securities firms & banks in US can now declare themselves as
‘financial holding companies’ and engage in a broader spectrum of
activities including operation in insurance and securities market.
Requirements:
Some of the important stipulations / norms required to be complied
with by FIs after conversion into Universal Bank are listed below.
(List is not exhaustive)
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Mandatory compliance with the CRR
and SLR requirements as applicable to commercial banks.
-
Stoppage of activities, which are
currently undertaken by FIs but not permissible for a bank under
Sec.6 (1) of the Banking Regulation Act, 1949.
-
Disposal of non-banking assets such as
immovable property within the maximum period of 7 years from the
date of acquisition in terms of Sec.9 of the Banking Regulation
Act.
-
Composition of the Board to be in
conformity with the provisions of Sec.10 (A) of the Banking
Regulation Act which requires at least 51% of the total number of
directors to have special knowledge and experience.
-
Prohibition on floating charge of
assets: i.e., floating charge if any, created by a FI, over its
assets, would require, after its conversion into Universal Bank,
ratification by RBI under Sec.14 (A) of Banking Regulation Act,
since 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.
-
Delinking of existing subsidiaries, if
any, of the FI engaged in any activity not permitted under Sec
6 (1) of Banking Regulation Act.
-
Divesting of holding by the FI in
other companies, in excess of the limits prescribed under
Sec.19 (2) of the Banking Regulation Act.
-
FI converting into a Universal Bank
would require separate banking license from RBI under Sec.22
of the Banking Regulation Act.
-
The new Universal Bank would attract
the full rigor of the Exchange control regulations as applicable
to banks at present.
-
Compliance with priority sector
lending norms, prudential norms etc as applicable to banks.
Khan Committee’s Recommendations
India – Blurring of lines:
The Khan panel on harmonizing the role and operations of
development financial institutions (DFIs) and banks has set the
agenda for Universal Banking. The working group headed by
IDBI chairman SH Khan, which submitted a summary of
recommendations to RBI governor Bimal Jalan made a strong pitch
for "eventually" giving full banking licenses to the development
financial institutions (DFIs) and called for mergers between
strong banks and institutions.
The Khan panel suggested the establishment of a super regulator to
supervise and coordinate the activities of the multiple regulators
in the financial system.
The panel called for a revamp of the 1993 Act on recovery of
debts, legal reforms, a reduction in the cash reserve ratio (CRR)
to international levels and the abolition of statutory liquidity
ratio (SLR) and the statutory minimum of advances to certain
sectors. It has called for modifications in the definition of
priority sector by excluding all infrastructure loans from the net
bank credit for the priority sector. It has suggested the creation
of an alternative mechanism to finance the priority sector.
Till the time the DFIs are given full banking licenses, they
should be permitted to have wholly-owned banking subsidiaries, it
said. A universal bank can be a single company, a holding company
with wholly owned subsidiaries, a group of entities with
cross-holdings or even a flagship company which may or may not
have independent shareholders. The panel has argued that the
regulator should not impose the appropriate corporate structure.
Calling for an enabling regulatory framework to ensure the
transition towards universal banking, the panel said a
function-specific and institution-neutral regulatory framework
must be developed. "This concept of neutrality should be
applicable to both foreign and local entities," it said.
On the existing supervisory role of the RBI, the panel said the
supervisory authority should focus on off-site supervision based
on periodic reporting by banks and DFIs and on-site supervision
should be undertaken only in exceptional cases.
Recommending the development of a risk-based supervisory
framework, in tune with international practice, the panel said
banks and institutions should be supervised on a consolidated
basis. On the existing reserve ratio requirements, the panel said
the application of CRR should be confined to cash and cash-like
instruments and it should be brought down progressively. It is
also in favor of phasing out of SLR.
Admitting that there is a considerable amount of overlap between
the business of banks and institutions, the panel recommended the
setting up of a standing committee to harmonize the roles. To
start with, the group wants the RBI to waive all restrictions on
institutions' resource mobilization as they run counter to the
spirit of financial sector liberalization. Its other interim
recommendations in this regard are:
The recommendations of the Khan working group echo the
Narasimham Committee report's observation that the financial
structure is evolving towards a continuum of institutions rather
than discrete specialization. Universal banking is the model
espoused by both the committees. Given this objective, the problem
then becomes one of providing a level playing field between the
various players in the financial sector. The Khan committee has
tried to do this in various ways. One of the most interesting ones
is the suggestion to explore ways of merging banks and financial
institutions, which could be one solution to the problem of
weak banks.
For Whom ???
At present, the DFIs and the banks operate in different segments
of the financial market. The DFIs finance long-term investment
requirements, and the banks the short-term investment and
production requirements. Both the banks and the DFIs would be
looking to inter-mediate in a big way at the other end of the
market where they are less dominant now. Some of them also may
diversify into insurance and other related areas.
The cost of funds differentiates the DFIs from the banks.
There are three key problems facing the Institutions - huge NPA’s,
maturity mismatch and high cost of borrowing. The idea of
Universal Banking stems from solving the last. Conversion into
a bank would give an Institution access to low cost bank deposits.
However it will not help in fixing the maturity mismatch, as the
Institution will only be replacing its medium term funding with
short term deposit funding, while the asset tenure would continue
to remain long term. Infact it would only add to the burden of the
Banking sector by worsening the quality of the asset portfolio and
increasing the risk profile of the merging banks. On one hand the
entry norms for Banks insist on solvency as a prerequisite, while
on the other hand, close to insolvent institutions are being
allowed to convert themselves into banks in the name of Universal
Banking
Its Impact
• The customers stand to gain the most as it gets all the services
under a single roof saving transaction costs.
• The bank can leverage the branch network to cross sell different
product thus saving transaction costs.
• Advantage of Economies of scale and scope.
Flips
It will lead to maturity mismatch, as the Institution will only be
replacing its medium term funding with short term deposit funding,
while the asset tenure would continue to remain long term. Infact
it would only add to the burden of the Banking sector by worsening
the quality of the asset portfolio and increasing the risk profile
of the merging banks. On one hand the entry norms for Banks insist
on solvency as a prerequisite, while on the other hand, close to
insolvent institutions are being allowed to convert themselves
into banks in the name of Universal Banking.
It would help the banks to come out of huge NPAs. Writing off the
debts as was done by Citi Group can only solve this.
The merger of ICICI Bank with its parent organization i.e.
ICICI leading to the existence of the first Universal Bank is a
testimony to the importance.
The global scenario also seems to be changing as the there is drop
in trading volumes and increased competition leading to fall in
commissions. Also the fall in IPO and M&A activities have hit the
Investment Banks worldwide has lead to a movement towards
emergence of Universal Banks like Citi, JP Morgan.
The success of Citi group with Salomon Smith Barney has proved
that this model can work. Hence it can be said that the financial
sector, is likely to see rationalization and consolidates across
product lines and geographies.
If we see this in the Indian context, any move towards the
Universal Banking must be on the profitability motive and not to
bail out weak banks and DFIs.
As this debate continues, we need to debate further keeping
in mind:
While clear separation between investment banking and commercial
banking is statutorily mandated in advanced economies such as the
US (at least till very recently) and Japan, why are we compelled
to harmonize?
When specialized financial institutions exist with state support
in developed countries, why do we want to erase their identity in
India?
If the DFIs in their present form go out of existence, how will
long-term resources be mobilized?
What is the place for refinance facilities in the emerging future
for banks ill-equipped to mobilise long-term resources to meet
their term-lending commitments, especially considering the new
asset-liability management norms?
Can banks develop project-lending skills while carrying on
service-intensive retail banking?
Can the DFIs develop banking skills within a short period of five
years, that too in a crowded competitive market?
Have the industrial and agricultural sectors come of age, and do
they have the maturity to deal with a commercial financial system?
Are satisfactory regulatory and supervisory mechanisms in place to
oversee the complex financial supermarkets that would emerge?
Is harmonizing an objective in itself, or does it serve any
objective of establishing a national financial structure capable
of meeting appropriately differing financial requirements of
different sectors?
What would be the shape of the rural financial sector, and what
would be the involvement of `universal banks' in it?
Are there still priority sector and social obligations of banks in
the harmonization and universalisation of banking process?
Sonit Singh
sonit_in@yahoo.com
Symbiosis Institute of International Business, Pune
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