UNDERSTANDING UNIVERSAL BANKING
Universal Banking is a multi-purpose and multi-functional financial supermarket (a company offering a wide range of financial services e.g. stock, insurance and real-estate brokerage) providing both banking and financial services through a single window.
Definition of Universal Banking: As per the World Bank, "In Universal Banking, large banks operate extensive network of branches, provide many different services, hold several claims on firms(including equity and debt) and participate directly in the Corporate Governance of firms that rely on the banks for funding or as insurance underwriters".
In a nutshell, a Universal Banking is a superstore for ...view middle of the document...
Thus, emerged new financial conglomerates that could maximize economies of scale and scope by building the production of financial services organization called Universal Banking.
By the mid-1990s, all the restrictions on project financing were removed and banks were allowed to undertake several in-house activities. Reforms in the insurance sector in the late 1990s, and opening up of this field to private and foreign players also resulted in permitting banks to undertake the sale of insurance products.
The phenomenon of Universal Banking as a distinct concept, as different from Narrow Banking came to the forefront in the Indian context with the Narsimham Committee (1998) and later the Khan Committee (1998) reports recommending consolidation of the banking industry through mergers and integration of financial activities.
UNIVERSAL BANKING – PROS AND CONS
Universal banking is a combination of commercial banking, investment banking and various other activities, including insurance. It seeks to provide the entire gamut of financial products under one roof and reflects the global convergence between commercial banks, investment banking and insurance companies. The convergence is an attempt by banks to fulfill the lifelong needs of the customer by following the cradle-to-grave concept. Commercial banks have a long-term relationship with their customers when compared to other financial intermediaries.
Universal banking has its own merits and demerits. The main advantage is that it results in economy efficiency, lower cost and higher output. But there is a fear that because of their sheer size they might gain a monopoly, which is undesirable for the economy. Also there can be conflict of interest because of the combination of all types of financial activities. The solution of Universal Banking was having many factors to deal with, which can be further analyzed by the pros and cons.
Advantages of Universal Banking
• Economies of Scale. The main advantage of Universal Banking is that it results in greater economic efficiency in the form of lower cost, higher output and better products. Many Committees and reports by Reserve Bank of India are in favour of Universal banking as it enables banks to explit economies of scale and scope.
• Profitable Diversions. By diversifying the activities, the bank can use its existing expertise in one type of financial service in providing other types. So, it entails less cost in performing all the functions by one entity instead of separate bodies.
• Resource Utilization. A bank possesses the information on the risk characteristics of the clients, which can be used to pursue other activities with the same clients. A data collection about the market trends, risk and returns associated with portfolios of Mutual Funds, diversifiable and non diversifiable risk analysis, etc, is useful for other clients and information seekers. Automatically, a bank will get the benefit of being involved in the researching.