A PROJECT REPORT ON

Impact of Universal Banking on the operation of banks

Under the Guidance of

Dr. M.K. RastogiSubmitted By

Gulzar Ahmad

(MBA IV Semester)

(Roll no. 0805470028)

Submitted for the permission of Pursuing Research Project Report [MBA-043]

DEPARTMENT OF MANAGEMENT

SESSION 2009-10

Babu Banarasi Das

National Institute Of Technology & Management

Lucknow (U.P.)

DECLARATION

I undersigned Gulzar Ahmad student of MBA 4th semester declare that I have done the project on Impact of universal banking on . has been personally done by me under the guidance of Dr. M.K. Rastogi (B.B.D.N.I.T.M) Lucknow in partial fulfillment of MBA Program- during academic year-2008-10. All the data represented in this project is true & correct to the best of my knowledge & belief.

I further declare that this project work is based on my original work and no part of this project has been published or submitted to anybody.

[Gulzar ahmad]

AcknowledgementTo acknowledge all the persons who had helped for the fulfillment of the project is not possible for any researcher but in spite of all that it becomes the foremost responsibility of the researcher and also the part of research ethics to acknowledge those who had played a great role for the completion of the project.

So in the same sequence at very first, I would like to acknowledge my parents because of whom I got the existence in the world for the inception and the conception of this project. Later on I would like to confer the flower of acknowledgement to Dr.M.K. Rastogi and other faculty members who taught me that how to do project through appropriate tools and techniques. Rest all those people who helped me are not only matter of acknowledgment but also authorized for sharing my success.

Preface

Decision making is a fundamental part of the research process. Decisions regarding that what you want to do, how you want to do, what tools and techniques must be used for the successful completion of the project. In fact it is the researchers efficiency as a decision maker that makes project fruitful for those who concern to the area of study.

Basically when we are playing with computer in every part of life, I used it in my project not for the ease of my but for the ease of result explanation to those who will read this project. The project presents the role of financial system in life of persons.

I had toiled to achieve the goals desired. Being a neophyte in this highly competitive world of business, I had come across several difficulties to make the objectives a reality. I am presenting this hand carved efforts in black and white. If anywhere something is found not in tandem to the theme then you are welcome with your valuable suggestions.

Executive Summary

Banking Industry which is basically my concern industry around which my project has to be revolved is really a very complex industry. In the financial system, the players can be broadly classified into the following groups: public sector banks, private sector banks, foreign banks, co-operative banks, all- India financial institutions and non-banks.

The term 'Universal Banking' in general refers to the combination of commercial banking and investment banking. The concept of universal banking is spreading fast among various types of banks.

The topic of this project is Impact of Universal Banking on the Operation of Banks Because of the following reasons, I prefer this project work -Banking is an essential industry. It is where we often wind up when we are seeking a problem in financial crisis and money related query. Banking is one of the most regulated businesses in the world.

Findings from the study show that the admission of foreign investors in Indian banking sector, the competition and the service value also started to increase The idea of 'one stop shopping' saves a lot of transaction costs and increases the speed of economic activities. It is beneficial for the bank as well as customers the most serious problem of DFIs have had to encounter is bad loans or Non Performing Assets (NPA). For the DFIs and Universal Banking or installation of cutting-edge-technology in operations are unlikely to improve the situation concerning NPAs

India's financial system is currently undergoing a period of revolutionary changes so

much so that, in the very initial phase of the next millennium, its face may be totally

unrecognizable.TABLE OF CONTENTSa) DECLARATION

ib) ACKNOWLEDGEMENT

iic) PREFACE

iiid) Executive Summary

iv

1. Introduction

12. Universal Banking

423. Research Methodology

794. Problems and Limitations of the Research

865. Major findings

886. Suggestions and Recommendations

907. Conclusion

928. Bibliography

93

The banking scenario in India has been changing at fast pace from being just the borrowers and lenders traditionally, the focus has shifted to more differentiated and customized product/service provider from regulation to liberalization in the year 1991, from planned economy to market.

The Indian banking has come a long way from being a sleepy business institution to a highly proactive and dynamic entity. This transformation has been largely brought about by the large dose of liberalization and economic reforms that allowed banks to explore new business opportunities rather than generating revenues from conventional streams (i.e. borrowing and lending).The stalwarts of India's financial community nodded their heads sagaciously when Prime Minister Manmohan Singh said in a speech: "If there is one aspect in which we can confidentially assert that India is ahead of China, it is in the robustness and soundness of our banking system." Indian banks have been rated higher than Chinese banks by international rating agency Standard & Poor's. The competition heated up with the entry of private and foreign banks deregulation and globalization resulted in increased competition that refined the traditional way of doing business. They have realized the importance of a customer centric approach, brand building and IT enabled solutions. In the fierce battle for market share and mind share, the most potent weapon is a strong, well recognized and trusted brand name. Brands attract and convince people that they will get what is promised. Banking today has transformed into a technology intensive and customer friendly model with a focus on convenience. The companies have redoubled their efforts to woo the customers and establish themselves firmly in the market. It is no longer an option for a company to provide good customer service, it is expected.

Reforms are continuing as part of the overall structural reforms aimed at improving the productivity and efficiency of the economy. The sector is set to witness the emergence of financial supermarkets in the form of universal banks providing a suite of services from retail to corporate banking and industrial lending to investment banking. The financial services market has become a battle ground with the marketers with the latest and the most sophisticated weapons.

Currently overall, banking in India is considered as fairly mature in terms of supply, product range and reach-even though reach in rural India still remains a challenge for the private sector and foreign banks. Even in terms of quality of assets and capital adequacy, Indian banks are considered to have clean, strong and transparent balance sheets-as compared to other banks in comparable economies in its region. The Indian banking industry is currently in a transition phase. On the one hand, the public sector banks, which are the mainstay of the Indian banking system, are in the process of consolidating their position by capitalizing on the strength of their huge networks and customer bases. On the other, the private sector banks are venturing into a whole new game of mergers and acquisitions to expand their bases. The use of technology has placed Indian banks at par with their global peers. It has also changed the way banking is done in India. Anywhere banking and Anytime banking have become a reality. The financial sector now operates in a more competitive environment than before and intermediates relatively large volume of international financial flows. The introduction of Basel II norms from 2009 and the fair level playing field that will be available to foreign banks from 2010 will further enhance the solidarity of the Indian banking sector and open new avenues.

The entry of banks into the realm of financial services was followed very soon after the introduction of liberalization in the economy. Since the early 1990s structural changes of profound magnitude have been witnessed in global banking systems. Large scale mergers, amalgamations and acquisitions between the banks and financial institutions resulted in the growth in size and competitive strengths of the merged entities. Thus, emerged new financial conglomerates that could maximize economies of scale and scope by building the production of financial services organization called Universal Banking HISTORY OF BANKING IN INDIA

Without a sound and effective banking system in India it cannot have a healthy economy. The banking system of India should not only be hassle free but it should be able to meet new challenges posed by the technology and any other external and internal factors. For the past three decades India's banking system has several outstanding achievements to its credit. The most striking is its extensive reach. It is no longer confined to only metropolitans or cosmopolitans in India. In fact, Indian banking system has reached even to the remote corners of the country. This is one of the main reasons of India's growth process. The government's regular policy for Indian bank since 1969 has paid rich dividends with the nationalization of 14 major private banks of India.Not long ago, an account holder had to wait for hours at the bank counters for

getting a draft or for withdrawing his own money. Today, he has a choice. Gone are days when the most efficient bank transferred money from one branch to other in two days. Now it is simple as instant messaging or dial a pizza. Money has become the order of the day. The first bank in India, though conservative, was established in 1786. From 1786 till today, the journey of Indian Banking System can be segregated into three distinct phases.

They are as mentioned below:1)Pre-Nationalization Era.

2) Nationalization Stage.

3)Post Liberalization Era.

1) Pre-Nationalization Era:In India the business of banking and credit was practices even in very early times. The remittance of money through Hundies, an indigenous credit instrument, was very popular. The hundies were issued by bankers known as Shroffs, Sahukars, Shahus or Mahajans in different parts of the country.During the early part of the 19th Century, ht volume of foreign trade was relatively small. Later on as the trade expanded, the need for banks of the European type was felt and the government of the East India Company took interest in having its own bank. The government of Bengal took the initiative and the first presidency bank, the Bank of Calcutta (Bank of Bengal) was established in 180. In 1840, the Bank of Bombay and IN 1843, the Bank of Madras was also set up.These three banks also known as Presidency Bank. The Presidency Banks had their branches in important trading centers but mostly lacked in uniformity in their operational policies. In 1899, the Government proposed to amalgamate these three banks in to one so that it could also function as a Central Bank, but the Presidency Banks did not favor the idea. However, the conditions obtaining during world war period (1914-1918) emphasized the need for a unified banking institution, as a result of which the Imperial Bank was set up in1921. The Imperial Bank of India acted like a Central bank and as a banker for other banks.

In 1950, the Indian Banking system comprised of the RBI, the Imperial Bank of India, Cooperative banks, Exchange banks and Indian Joint Stock banks.

2) Nationalization Stages:The main objective of establishing SBI by nationalizing the Imperial Bank of India was to extend banking facilities on a large scale more particularly in the rural and semi-urban areas and to diverse other public purposes.1. State Bank of Hyderabad

1st October 1959

3. State Bank of Jaipur

1st January 1960

5. State Bank of Patiala

1st April 1960

7. State Bank of Indore

1st January 1968

With effect from 1st January 1963, the State Bank of Bikaner and State Bank of Jaipur with head office located at Jaipur. Thus, seven subsidiary banks State Bank of India formed the SBI Group.

On 19th July 1969, then the Prime Minister, Mrs. Indira Gandhi announced the nationalization of 14 major scheduled Commercial Banks each having deposits worth Rs. 50 crore and above. This was a turning point in the history of commercial banking in India.

In 1969, the Lead Bank Scheme was introduced to extend banking facilities to every corner of the country. Later in 1975, Regional Rural Banks were set up to supplement the activities of the commercial banks and to especially meet the credit needs of the weaker sections of the rural society.

The first year after nationalization witnessed the total growth in the agricultural loans and the loans made to SSI by 87% and 48% respectively. The overall growth in the deposits and the advances indicates the improvement that has taken place in the banking habits of the people in the rural and semi-urban areas where the branch network has spread. Such credit expansion enabled the banks to achieve the goals of nationalization, it was however, achieved at the coast of profitability of the banks.

Consequences of Nationalization:

The quality of credit assets fell because of liberal credit extension policy.

Political interference has been as additional malady.

Poor appraisal involved during the loan meals conducted for credit disbursals.

The credit facilities extended to the priority sector at concessional rates.

The high level of low yielding SLR investments adversely affected the profitability of the banks.

The rapid branch expansion has been the squeeze on profitability of banks emanating primarily due to the increase in the fixed costs.

There was downward trend in the quality of services and efficiency of the banks.3) Post-Liberalization Era---Thrust on Quality and Profitability:

The need for restructuring the banking industry was felt greater with the initiation of the real sector reform process in 1992. the reforms have enhanced the opportunities and challenges for the real sector making them operate in a borderless global market place. However, to harness the benefits of globalization, there should be an efficient financial sector to support the structural reforms taking place in the real economy. Hence, along with the reforms of the real sector, the banking sector reformation was also addressed.

In this context, the recommendations made by a high level committee on financial sector, chaired by M. Narasimham, laid the foundation for the banking sector reforms. These reforms tried to enhance the viability and efficiency of the banking sector. The Narasimham Committee suggested that there should be functional autonomy, flexibility in operations, dilution of banking strangulations, reduction in reserve requirements and adequate financial infrastructure in terms of supervision, audit and technology. The committee further advocated introduction of prudential forms, transparency in operations and improvement in productivity, only aimed at liberalizing the regulatory framework, but also to keep them in time with international standards. The emphasis shifted to efficient and prudential banking linked to better customer care and customer services.BANKING STRUCTURE IN INDIA:In todays dynamic world banks are inevitable for the development of a country. Banks play a pivotal role in enhancing each and every sector. They have helped bring a draw of development on the worlds horizon and developing country like India is no exception.Banks fulfills the role of a financial intermediary. This means that it acts as a vehicle for moving finance from those who have surplus money to (however temporarily) those who have deficit. In everyday branch terms the banks channel funds from depositors whose accounts are in credit to borrowers who are in debit.Without the intermediary of the banks both their depositors and their borrowers would have to contact each other directly. This can and does happen of course. This is what has lead to the very foundation of financial institution like banks.Before few decades there existed some influential people who used to land money. But a substantially high rate of interest was charged which made borrowing of money out of the reach of the majority of the people so there arose a need for a financial intermediate.The Bank have developed their roles to such an extent that a direct contact between the depositors and borrowers in now known as disintermediation.Banking industry has always revolved around the traditional function of taking deposits, money transfer and making advances. Those three are closely related to each other, the objective being to lend money, which is the profitable activity of the three. Taking deposits generates funds for lending and money transfer services are necessary for the attention of deposits. The Bank have introduced progressively more sophisticated versions of these services and have diversified introduction in numerable areas of activity not directly relating to this traditional trinityINDIAN BANKING SYSTEM

1) The RBI: The RBI is the supreme monetary and banking authority in the country and has the responsibility to control the banking system in the country. It keeps the reserves of all scheduled banks and hence is known as the Reserve Bank.

State Bank of India and its Associates (8)

Regional Rural Banks Sponsored by Public Sector Banks (196) Old Generation Private Banks (22) Banks in India (40) State Co-operative Banks

Primary Agricultural Credit Societies

State Land Development Banks

Industrial Finance Co-operation of India (IFCI)

Industrial Investment Bank of India (IIBI)

National Bank for Agriculture and Rural Development (NABARD)

Role of Banks:

The activities of commercial banking have growth in multi-directional ways as well as multi-dimensional manner. Banks have been playing a catalytic role in area development, backward area development, extended assistance to rural development all along helping agriculture, industry, international trade in a significant manner. In a way, commercial banks have emerged as key financial agencies for rapid economic development.

Mobilization of resources forms an integral part of the development process in India. In this process of mobilization, banks are at a great advantage, chiefly because of their network of branches in the country. And banks have to place considerable reliance on the mobilization of deposits from the public to finance development programmes. Further, deposit mobalization by banks in India acquired greater significance in their new role in economic development.

release of advance money, supply of raw materials for processing, full payment of bills on the assurance of the performance etc. Commercial banks issue such guarantees also.The Role of Reserve Bank of India (RBI) Bankers Bank:

The Reserve Bank of India (RBI) is the central bank of India, and was established on April 1, 1935 in accordance with the provisions of the Reserve Bank of India Act, 1934. Since its inception, it has been headquartered in Mumbai. Though originally privately owned, RBI has been fully owned by the Government of India since nationalization in 1949.

Main Objective:

Monetary Authority

Formulates, implements and monitors the monetary policy.

Objective: maintaining price stability and ensuring adequate flow of credit to productive sectors.

Regulator and supervisor of the financial system

Prescribes broad parameters of banking operations within which the countrys banking and financial system functions.

Objective: maintain public confidence in the system, protect depositors interest and provide cost-effective banking services to the public. The Banking Ombudsman Scheme has been formulated by the Reserve Bank of India (RBI) for effective redressal of complaints by bank customers

Manager of Exchange Control

Manages the Foreign Exchange Management Act, 1999.

Objective: to facilitate external trade and payment and promote orderly development and maintenance of foreign exchange market in India.

Issuer of currency

Issues and exchanges or destroys currency and coins not fit for circulation.

Objective: to give the public adequate quantity of supplies of currency notes and coins and in good quality.

Developmental role

Performs a wide range of promotional functions to support national objectives.Related Functions

Banker to the Government: performs merchant banking function for the central and the state governments; also acts as their banker.

Banker to banks: maintains banking accounts of all scheduled banks.

Owner and operator of the depository (SGL) and exchange (NDS) for government bonds.

There is now an international consensus about the need to focus the tasks of a central bank upon central banking. RBI is far out of touch with such a principle, owing to the sprawling mandate described above.

In addition to its traditional central functions, the Reserve bank has certain non-monetary functions of the nature of supervision of banks and promotion of sound banking in India. The Reserve Bank Act, 1934, and the Banking Regulation Act, 1949 have given the RBI wide powers of supervision and control over commercial and cooperative banks, relating to licensing and establishments, branch expansion, liquidity of their assets, management and methods of working, amalgamation, reconstruction and liquidation. The RBI is authorized to carry out periodical inspections of the banks and to call for returns and necessary information from them. The nationalization of 14 major Indian scheduled banks in July 1969 has imposed new responsibilities on the RBI for directing the growth of banking and credit policies towards more rapid development of the economy and realization of certain desired social objectives. The supervisory functions of the RBI have helped a great deal in improving the standard of banking in India to develop on sound lines and to improve the methods of their operation.

With economic growth assuming a new urgency since Independence, the range of the Reserve Banks functions have steadily widened. The Bank now performs a variety of developmental and promotional functions, which, at one time, were regarded as outside the normal scope of central banking. The Reserve Bank was asked to promote banking habit, extend banking facilities to rural and semi-urban areas, and establish and promote new specialized financing agencies. Accordingly, the Reserve bank has helped in the setting up of the IFCI and the SFC: it set up the Deposit Insurance Corporation of India in 1963 and the Industrial Reconstruction Corporation of India in 1972. These institutions were set up directly or indirectly by the Reserve Bank to promote saving habit and to mobilize savings, and to provide industrial finance as well as agricultural finance. As far back as 1935, the RBI set up the Agricultural Credit Department to provide agricultural credit. But only since 1951 the Banks role in this field has become extremely important. The Bank has developed the co-operative credit movement to encourage saving, to eliminate money-lenders from the villages and to route its short term credit to agriculture. The RBI has set up the Agricultural Refinance and Development Corporation to provide long-term finance to farmers.The Co-operative bank has a history of almost 100 years. The Co-operative banks are an important constituent of the Indian Financial System, judging by the role assigned to them, the expectations they are supposed to fulfill, their number, and the number of offices they operate. The co-operative movement originated in the West, but the importance that such banks have assumed in India is rarely paralleled anywhere else in the world. Their role in rural financing continues to be important even today, and their business in the urban areas also has increased phenomenally in recent years mainly due to the sharp increase in the number of co-operative banks.

According to NAFCUB the total deposits & lendings of Co-operative Banks is much more than Old Private Sector Banks & also the New Private Sector Banks. This exponential growth of Co-operative Banks is attributed mainly to their much better local reach, personal interaction with customers, their ability to catch the nerve of the local clientele. Though registered under the Co-operative Societies Act of the Respective States (where formed originally) the banking related activities of the co-operative banks are also regulated by the Reserve Bank of India. They are governed by the Banking Regulations Act 1949 and Banking Laws (Co-operative Societies) Act, 1965.

(a) Short term lending oriented co-operative Banks within this category there are three sub categories of banks viz state co-operative banks, District co-operative banks and Primary Agricultural co-operative societies.

Features of Cooperative BanksThe UCBs can provide advances against shares and debentures also. Co-operative bank do banking business mainly in the agriculture and rural sector. However, UCBs, SCBs, and CCBs operate in semi urban, urban, and metropolitan areas also.

Co-operative Banks belong to the money market as well as to the capital market. Primary agricultural credit societies provide short term and medium term loans. Land Development Banks (LDBs) provide long-term loans. SCBs and CCBs also provide both short term and term loans. Co-operative banks are financial intermediaries only partially. The sources of their funds (resources) are (a) central and state government, (b) the Reserve Bank of India and NABARD, (c) other co-operative institutions, (d) ownership funds and, (e) deposits or debenture issues. It is interesting to note that intra-sectoral flows of funds are much greater in co-operative banking than in commercial banking. Inter-bank deposits, borrowings, and credit from a significant part of assets and liabilities of co-operative banks. This means that intra-sectoral competition is absent and intra-sectoral integration is high for co-operative bank.

Co-operative Banks are subject to CRR and liquidity requirements as other scheduled and non-scheduled banks are. However, their requirements are less than commercial banks. Since 1966 the lending and deposit rate of commercial banks have been directly regulated by the Reserve Bank of India. Although the Reserve Bank of India had power to regulate the rate co-operative bank but this have been exercised only after 1979 in respect of non-agricultural advances they were free to charge any rates at their discretion. Although the main aim of the co-operative bank is to provide cheaper credit to their members and not to maximize profits, they may access the money market to improve their income so as to remain viable.Private Sector Banks

There has been a paradigm shift in mindsets both at the Government level in the banking industry over the years since Nationalization of Banks in 1969, particularly during the last decade (1990-2000). Having achieved the objectives of Nationalization, the most important issue before the industry at present is survival and growth in the environment generated by the economic liberalization greater competition with a view to achieving higher productivity and efficiency in January 1993 for the entry of Private Sector banks based on the Nationalization Committee report of 1991, which envisaged a larger role for Private Sector Banks.

Role of Banks:

The activities of commercial banking have growth in multi-directional ways as well as multi-dimensional manner. Banks have been playing a catalytic role in area development, backward area development, extended assistance to rural development all along helping agriculture, industry, international trade in a significant manner. In a way, commercial banks have emerged as key financial agencies for rapid economic development by pooling the savings together, banks can make available funds to specialized institutions which finance different sectors of the economy, needing capital for various purposes, risks and durations. By contributing to government securities, bonds and debentures of term-lending institutions in the fields of agriculture, industries and now housing, banks are also providing these institutions with an access to the common pool of savings mobilized by them, to that extent relieving them of the responsibility of directly approaching the saver. This intermediation role of banks is particularly important in the early stages of economic development and financial specification. A country like India, with different regions at different stages of development, presents an interesting spectrum of the evolving role of banks, in the matter of inter-mediation and beyond.

Commercial banks provide short-term and medium-term financial assistance. The short-term credit facilities are granted for working capital requirements. The medium-term loans are for the acquisition of land, construction of factory premises and purchase of machinery and equipment. These loans are generally granted for periods ranging from five to seven years. They also establish letters of credit on behalf of their clients favouring suppliers of raw materials/machinery (both Indian and foreign) which extend the bankers assurance for payment and thus help their delivery. Certain transaction, particularly those in contracts of sale of Government Departments, may require guarantees being issued in lieu of security earnest money deposits for release of advance money, supply of raw materials for processing, full payment of bills on the assurance of the performance etc. Commercial banks issue such guarantees also.

Current scenario.In March 2006, the Reserve Bank of India allowed Warburg Pincus to increase its stake in Kotak Mahindra Bank (a private sector bank) to 10%. This is the first time an investor has been allowed to hold more than 5% in a private sector bank since the RBI announced norms in 2005 that any stake exceeding 5% in the private sector banks would need to be vetted by them. Currently, India has 88 scheduled commercial banks (SCBs) - 28 public sector banks (that is with the Government of India holding a stake), 29 private banks (these do not have government stake; they may be publicly listed and traded on stock exchanges) and 31 foreign banks.

PRODUCTS AND SERVICES OFFERED BY UNIVERSAL BANKSThe different products in an universal bank can be broadly classified into:

Trade Finance.

Retail Banking and Trade finance operations are conducted at the branch level while the wholesale banking operations, which cover treasury operations, are at the hand office or a designated branch.

Deposits

Negotiating for Loans and advances

Book-Keeping (maintaining all accounting records)

Trade Finance:

Drawing, accepting, discounting, buying, selling, collecting of bills of exchange, promissory notes, drafts, bill of lading and other securities Buying and selling of bullion. Foreign exchange

Purchasing and selling of bonds and securities on behalf of constituents.

Apart from the above-mentioned functions of the bank, the bank provides a whole lot of other services like investment counseling for individuals, short-term funds management and portfolio management for individuals and companies. It undertakes the inward and outward remittances with reference to foreign exchange and collection of varied types for the Government.

Some of common available banking products which arein universal banks are explained below:

These bills are assembled in the bank and the amount is paid to the bank by the card holder totally or by installments. The bank charges the customer a small amount for these services. The card holder need not have to carry money/cash with him when he travels or goes for purchasing.

2) Debit Cards: Debit Card is a prepaid or pay now card with some storedvalue. Debit Cards quickly debit or subtract money from ones savings account,or if one were taking out cash.

Debit Card holder need not carry a bulky checkbook or large sums of cash when he/she goes at for shopping. This is a fast and easy way of payment one can get debit card facility as debit cards use ones own money at the time of sale, so they are often easier than credit cards to obtain.

3) Automatic Teller Machine:The introduction of ATMs has given the customers the facility of round the clock banking. The ATMs are used by banks for making the customers dealing easier. ATM card is a device that allows customer who has an ATM card to perform routine banking transaction at any time without interacting with human teller. It provides exchange services. This service helps the customer to withdraw money even when the banks ate closed. This can be done by inserting the card in the ATM and entering the Personal Identification Number and secret Password.

To transfer money to and from accounts.

To order cash.

Advantages of ATMs:

ATMs provide 24 hrs., 7 days and 365 days a year service. Privacy in transaction The transaction is completely secure you need to key in Personal Identification Number (Unique number for every customer) Alternative to extend banking hours. Alternative to new branches and to reduce operating expenses. Increased market penetration.The ATM services provided first by the foreign banks like Citibank, Grind lays bank and now by many private and public sector banks in India like ICICI Bank, HDFC Bank, SBI, UTI Bank etc. The ICICI has launched ATM Services to its customers in all the Metropolitan Cities in India. By the end of 1990 Indian Private Banks and public sector banks have come up with their own ATM Network in the form of SWADHAN. Over the past year up to 44 banks in Mumbai, Vashi and Thane, have became a part of SWADHAN a system of shared payments networks, introduced by the Indian Bank The customer accesses the merchant server and the merchant server presents its goods to the customer.

The merchant validates the e-cheque with its bank for payment authorisation.

The merchants bank forwards the e-cheque to the clearing house for cashing.

The merchants bank updates the merchants account.

The e-chequing is a great boon to big corporate as well as small retailers. Most major banks accept e-cheques. Thus this system offers secure means of collecting payments, transferring value and managing cash flows.

The other important type of facility in the EFT system is automated clearing houses. These are the computer centers that handle the bills meant for deposits and the bills meant for payment. In big companies pay is not disbursed by issued cheques or issuing cash. The payment office directs the computer to credit an employees account with the persons pay.

To get a particular work done through the bank, the users may leave his instructions in the form of message with bank.

Information on the current interest rates.

Request for a DD or pay order.

And other similar services.According to this system, customer can access account details on mobile using the Short Messaging System (SMS) technology6 where select data is pushed to the mobile device. The wireless application protocol (WAP) technology, which will allow user to surf the net on their mobiles to access anything and everything. This is a very flexible way of transacting banking business.

8) Internet Banking: Internet banking involves use of internet for delivery of banking products and services. With internet banking is now no longer confirmed to the branches where one has to approach the branch in person, to withdraw cash or deposits a cheque or request a statement of accounts. In internet banking, any inquiry or transaction is processed online without any reference to the branch (anywhere banking) at any time.

Benefits of Internet Banking:

Increase convenience for customers, since they can conduct many banking transaction 24 hours a day. Improve customer access. Easy online application for all accounts, including personal loans and mortgagesElectronic Cash: Companies are developing electronic replicas of all existing payment system: cash, cheque, credit cards and coins.

Direct Deposits: Earnings (or Government payments) automatically deposited into bank accounts, saving time, effort and money.

Point of Sale transactions: Acceptance of ATM/Cheque at retail stores and restaurants for payment of goods and services. This system has made functioning of the stock Market very smooth and efficient.

9) Demat: Demat is short for de-materialisation of shares. In short, Demat is a process where at the customers request the physical stock is converted into electronic entries in the depository system.

How to Operate DEMAT ACCOUNT?

1) If the investor wants to sell his shares, he has to place an order with his broker and give a Delivery Instruction to his DP (Depository Participant). The DP will debit hi s account with the number of shares sold by him.

3) Payment for the electronic shares bought or sold is to be made in the same way as in the case of physical securities. SOME COMMENTS BY EXPERTS

According to ICICI CEO Mr. K V Kamath

He is seriously exploring merger options with the aim of becoming a Universal Banking

group. And he already has two mergers - with the Shipping Credit & Investment

Corporation of India (SCICI) in early 1997 and ITC Classic in December 1997. Both the

mergers have enabled ICICI to become bigger and better. It is proposed that the merger

between IDBI and ICICI will definitely result in a mega-institution since the combined

entity will become the second largest Indian Company in terms of income.

RBI is willing to consider the transformation of DFIs into banks only 5 -year hence.

RBI's argument is that a 'transitional path' is needed to enable DFIs become either -full

fledged NBFCs or banks. But the pretext of 'transitional phase' may be just a trick to

delay decision-making. The discussion paper on harmonizing the role and operations of

banks and DFIs discusses that there is a special role for DFIs till such time as the long term debt market gains depth and liquidity. Therefore, one should forget about Universal

Banking since it will take a long time for long-term debt market to fully develop in India.

The biggest stumbling block to developing such a market is RBI's own s loth in

revamping its Public Debt Offices (PDO's) .

The Reserve Bank has proposed that banks be given the power to sell the security in case assets become non-performing. Currently, banks have to go through a long drawn legal process before it can sell a security and recover the money from the defaulting borrower.

However, in the developed international markets like the US for instance, the bank can

foreclose the loan without any resort to the legal process.

The need for such system gains ground in India as banks and financial institutions are

unable to recover funds even though they have adequate asset cover. By the time a

decision comes through the value of the asset has depreciated and not much cash is

recovered. However, for banks and financial institutions to foreclose without resorting to

the courts or the debt recovery tribunal, an enabling legislation will have to be passed.

Regarding the realisability of the security, the rating agencies Moody's and Standard and Poor feel that since the security is not realizable, financial intermediaries should make an enhanced provision for NPAs.

It is also sometimes debated that non-performing assets were due to the fact that policies had changed. In this regard, the financial intermediaries opined that time should be given before an asset is classified as NPAs. The steel industry is a case in point. It has been suggested that in case a loan is rescheduled, it must be shown separately, in order to give transparency to the banking system.

At present, there is no formal forum for interaction between DFIs and banks despite the

emerging overlap in their functional areas. Narasimham committee recommended

merging strong banks together, rather than strong with weak, and Khan suggests merger between banks and DFIs. Bu t neither committee provided any details or tackles reducing labour or closing inefficient branches.

According to Mr. A D Navaneethan, MD & CEO, Karur Vysya Bank (KVB)

It is a historical fact that monolithic organizations, like a super-bank, cannot care for the

customers. The banking system in India has over 67000 branches today, and it is

questioned whether the development financial institutions will set up a similar network.

However, there should be a level playing field between different players in the financial

market. Further, all banks must be allowed to grow such that instead of a geographical

based tiered system, it should be more on functional lines.

According to Mr. S V Venkataramanan, Former Governor of RBI

In the long run, DFIs have to become what is recognized in the west as wholesale banks.To assist that, they should be NBFCs would be wrong. There is also need to ensure access for DFIs to more resources in the national and international capital markets.

Indeed, there should be a degree of statutory pre-emption to enable DFIs to access

resources at lower rate of interest, at least to meet the needs of infrastructural finance.

The issue of Universal Banking-as exists in Germany, is increasingly becoming a global

trend. But at the same time, "Big may not always be beautiful". Further, an allencompassing supervisory should not be created.

There is continuing need for maintaining separate supervisory organizations for different

functions like IRA, SEBI, etc. REI's discussion paper on harmonizing the role and

operations of banks and DFIs should not remain only on paper but should promote a

genuine exchange of views.

According to Mr. C M Vasudev, Special Secretary (Banking)

It is not prudent for banks and development financial institutions to keep all their eggs in

one basket- either short term or long term. Ideally, there must be a mix of long and short term liabilities and assets. In such a case, while banks will have an opportunity to

increase their profitability, they will have to deal with greater risks. The challenge for

banks are to deal with new types of risks-market risk, credits risk, etc. Therefore, there is a need to adopt a risk-mitigation mechanism.

In the Indian context, universal banks would mean harmonizing the roles of development financial institutions and banks-which means harmonizing long-term and short-term debt.

In the global context, however, it means a combination of commercial banks and

investment banks, which essentially means bringing together debt and equity type of

financing.

According to Mr. G P Gupta, Chairman IDBI

Former State Bank of India chairman M S Verma has suggested a merger of the largest

bank, viz. State Bank of India (SBI) and the largest financial institution of India, viz.,

Industrial Development Bank of India (IDBI) thereby making the India's biggest

universal bank. But the more politically connected bankers are of the view that the

finance ministry is not in favor of such a deal for the simple reason that it will create an

institution "which will be too big". The numbers are simply enormous. SBI has over

8,900 branches and an asset base of Rs. 179,673 crores. By merely adding up the two

balance sheets, the resulting entity will have an asset base of over Rs. 250,000 crores.

However, with a higher equity base, the proposed merged entity will have to return

higher net profits if only to maintain its return on capital.

Further, if the purpose of the merger is to build a more responsive and market sawy

entity, then product distribution channels have to be strengthened and revamped. In the

specific issue of a hypothetical SBI-IDBI merger, the merged entity could have the

benefit in the sense that the liability profile would span the entire horizon (short-to-long

term), and so would its lending profile.

Additionally, the merged entity would not have to spend any more resources to reequipping

itself in learning new skills since SBI has skills in assessing short-term,

working capital requirements of a company. Whereas IDBI has skills in project appraisal.

The mega entity could also have the advantage of spreading its lending across various

time baskets and industry groups, which will reduce stress in the system.

But there are flip sides of this issue also. There may be brand confusion, i.e., whether the merged entity would be just SBI or IDBI or SBI-IDBI. The new brand may not be as

effective as the old brands. Second, both entities are in customer businesses. A merger,

without a clear idea of objectives, could lead to customer disorientation and significant

loss of business.

Further, all the staff cuts in mega-bank mergers in the recent past are proof that they are cutting costs not by rationalizing products but by cutting staff strength. Further, Mr. G P Gupta, Chairman - IDBI says, If some of the DFIs go for the conversion into commercial banks or setting up banking subsidiaries, it is simply to take advantage of deposit resources, which are available mainly to commercial banks and to a very limited extent to the DFIs.

According to Mr. T T Ram Mohan, Faculty of IIM AhmadabadNarasimham (II) committee had suggested that weak banks should be recapitalized and

then merged with strong banks. But after the experience PNB & SBI have had with

mergers foisted on them by REI, the banking system has developed a strong fear of the

prospect.

In any case, banks can acquire both term funds and expertise by simply merging with the DFIs. Such mergers make sense from the standpoint of the DFIs too because it's hard to see how they can ever compete with the banks' network of branches by building from scratch. Both Narasimham (II) and KWG had viewed mergers of DFIs with banks

Favorably.One of the best things to have happened to commercial banks post liberalization is the cleaning up of their balance sheets through re-capitalization. The DFIs were not subject to such a clean up and as a result, their NPAs have mounted. There are few takers in the market today for the NPAs figures being put out by some of the DFIs. The problem is so big that mergers with banks are infeasible without re-capitalization of DFIs by the government on a scale that is hard to contemplate in the present fiscal situation.

According to Mr. V H Ramakrishna, General Manager - Bank of India

Since it will not be possible for DFIs to establish branch networks in the immediate

future, they should be allowed to open accounts for clients in existing branches and

gradually expand. This will enable first charge on the cash flow of the account holders.

Further, DFIs should be subject to reserve requirements on an incremental basis.

Internationally, development banks are allowed to open operating accounts of customers and issue letters of credit.

The debate on establishing an appropriate regulating body essentially revolves around the choice between a multiple body and a single body. The single body option enjoys greater preference. Under a multiple system, the operations of a universal bank would be subject to the regimen of REI, the SEBI, the Insurance Regulatory Authority of India, and the comptroller and auditor-general, causing substantial duplication. Evidently, it would be essential to separate the regulatory and central bank functions of REI. Further, it would require all existing regulators to be represented in a super-regulator.

According to Mr. P V Narasimham, Chairman & Managing Director IFCI

Within 3 to 4 years, IFCI proposes to convert itself into a bank to access low-cost

deposits. It will become a wholesale bank catering to industry and will offer all products

so as to have a better asset-liability match. It will rely more on the current account

balances of companies. They have to keep a cash float. That will be IFCI's source of

cheap funds. IFCI proposes to have branches only in major centers. IFCI will access trade finance, go into factoring and even cash management for companies. IFCI will transform into a new type of entity and not remain only in the development finance mode. The Reserve Bank has permitted us to achieve this in 5 years.

Universal Banking coupled with SWOTThe solution of Universal Banking was having many factors to deal with which further categorized under Strengths, Weaknesses, Opportunities and ThreatsStrengths: 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. Various Reserve Banks Committees and reports in favor of Universal Banking, is that it enables banks to exploit economies of scale and scope. It means a bank can reduce average costs and thereby improve spreads if it expands its scale of operations and diversifying activities. Profitable DiversionsBy 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 it can use to pursue other activities with the same client. A data collection about the market trends, risk and returns associated with portfolios of Mutual Funds, diversifiable and non diversifiable risk analysis, etc are useful for other clients and information seekers. Automatically, a bank will get the benefit of being involved in Research.

Easy marketing on the foundation a of Brand name

A bank has an existing network of branches, which can act as shops for selling products like Insurance, Mutual Fund without much efforts on marketing, as the branch will act here as a parent company or source. In this way a bank can reach the remotest client without having to take recourse ton an agent.

One stop shopping

The idea of 'one stop shopping' saves a lot of transaction costs and increases the speed of economic activities. It is beneficial for the bank as well as customers.

Investor friendly activities

Another manifestation of Universal Banking is bank holding stakes in a firm. A bank's equity holding in a borrower firm, acts as a signal for other investors on to the health of the firm, since the lending bank is in a better position to monitor the firm's activities.

Weaknesses:

Grey area of Universal Bank

The path of Universal Banking for DFIs is strewn with obstacles. The biggest one is overcoming the differences in regulatory requirements for a bank and DFI. Unlike banks, DFIs are not required to keep a portion of their deposits as cash reserves.

No expertise in long term lending

In the case of traditional project finance an area where DFIs tread carefully, becoming a bank may not make a big difference. Project finance and Infrastructure Finance are generally long gestation projects and would require DFIs to borrow long term. Therefore, the transformation into a bank may not be of great assistance in lending long-term.

NPA problem remained intact

The most serious problem of DFIs have had to encounter is bad loans or Non Performing Assets (NPA). For the DFIs and Universal Banking or installation of cutting-edge-technology in operations are unlikely to improve the situation concerning NPAs.

Most of the NPAs came out of loans to commodity sectors, such as steel, chemicals, textiles, etc. the improper use of DFI funds by project promoters, a sharp change in operating environment and poor appraisals by DFIs combined to destroy the viability of some projects. So, instead of improving the situation Universal Banking may worsen the situation, due to the expansion in activities banks will fail to make thorough study of the actual need of the party concerned, the prospect of the business, in which it is engaged, its track record, the quality of the management, etc.

ICICI suffered the least in this section, but the IDBI has got worst hit of NPAs, considering the negative developments at Dabhol Power Company (DPC)

Threats:

Big Empires

Universal Banking is an outcome of the mergers and acquisitions in the banking sector. The Finance Ministry is also empathetic towards it. But there will be big empires which may put the economy in a problem. Universal Banks will be the largest banks, by their asset base, income level and profitability there is a danger of 'Price Distortion'. It might take place by manipulating interests of the bank for the self interest motive instead of social interest. There is a threat to the overall quality of the products of the bank, because of the possibility of turning all the strengths of the Universal Banking into weaknesses. (e.g. - the strength of economies of scale may turn into the degradation of qualities of bank products, due to over expansion.

If the banks are not prudent enough, deposit rates could shoot up and thus affect profits. To increase profits quickly banks may go in for riskier business, which could lead to a full in asset quality. Disintermediation and securitization could further affect the business of banks.

Opportunities:

To increase efficiency and productivity

Liberalization offers opportunities to banks. Now, the focus will be on profits rather than on the size of balance sheet. Fee based incomes will be more attractive than mobilizing deposits, which lead to lower cost funds. To face the increased competition, banks will need to improve their efficiency and productivity, which will lead to new products and better services.

To get more exposure in the global market

In terms of total asset base and net worth the Indian banks have a very long road to travel when compared to top 10 banks in the world. (SBI is the only Indian bank to appear in the top 100 banks list of 'Fortune 500' based on sales, profits, assets and market value. It also ranks II in the list of Forbes 2000 among all Indian companies) as the asset base sans capital of most of the top 10 banks in the world are much more than the asset base and capital of the entire Indian banking sector. In order to enter at least the top 100 segment in the world, the Indian banks need to acquire a lot of mass in their volume of operations.

Pure routine banking operations alone cannot take the Indian banks into the league of the Top 100 banks in the world. Here is the real need of universal banking, as the wide range of financial services in addition to the Commercial banking functions like Mutual Funds, Merchant banking, Factoring, Insurance, credit cards, retail, personal loans, etc. will help in enhancing overall profitability.

To eradicate the 'Financial Apartheid'

A recent study on the informal sector conducted by Scientific Research Association for Economics (SRA), a Chennai based association, has found out that, 'Though having a large number of branch network in rural areas and urban areas, the lowest strata of the society is still out of the purview of banking services. Because the small businesses in the city, 34% of that goes to money lenders for funds. Another 6.5% goes to pawn brokers, etc.

The respondents were businesses engaged in activities such as fruits and vegetables vendors, laundry services, provision stores, petty shops and tea stalls. 97% of them do not depend the banking system for funds. Not because they do not want credit from banking sources, but because banks do not want to lend these entrepreneurs. It is a situation of Financial Apartheid in the informal sector. It means with the help of retail and personal banking services Universal Banking can reach this stratum easily.

IMPACT OF UNIVERSAL BANKING

Since the early 1990s, banking systems worldwide have been going through a

rapid transformation. Mergers, amalgamations and acquisitions have been undertaken on a large scale in order to gain size and to focus more sharply on competitive strengths. This consolidation has produced financial conglomerates that are expected to maximize economies of scale and scope by bundling the production of financial services. The general trend has been towards downstream universal banking where banks have undertaken traditionally non-banking activities such as investment banking, insurance, mortgage financing, securitization, and particularly, insurance. Upstream linkages, where non-banks undertake banking business, are also on the increase. The global experience can be segregated into broadly three models. There is the Swedish or Hong Kong type model in which the banking corporate engages in in-house activities associated with banking. In Germany and the UK, certain types of activities are required to be carried out by separate subsidiaries. In the US type model, there is a holding company structure and separately capitalized subsidiaries.In India, the first impulses for a more diversified financial intermediation were

witnessed in the 1980s and 1990s when banks were allowed to undertake leasing,

investment banking, mutual funds, factoring, hire-purchase activities through separate

subsidiaries. By the mid-1990s, all restrictions on project financing were removed and

banks were allowed to undertake several activities in-house. In the recent period, the

focus is on Development Financial Institutions (DFIs), which have been allowed to set up banking subsidiaries and to enter the insurance business along with banks. DFIs were also allowed to undertake working capital financing and to raise short-term funds within limits. It was the Narasimham Committee II Report (1998) which suggested that the DFIs should convert themselves into banks or non-bank financial companies, and this conversion was endorsed by the Khan Working Group (1998). The Reserve Banks

Discussion Paper (1999) and the feedback thereon indicated the desirability of universal

banking from the point of view of efficiency of resource use, but it also emphasized the

need to take into account factors such as the status of reforms, the state of preparedness of the institutions, and a viable transition path while moving in the desired direction. Accordingly, the mid-term review of monetary and credit policy, October 1999

and the annual policy statements of April 2000 and April 2001 enunciated the broad

approach to universal banking and the Reserve Banks circular of April 2001 set out the

operational and regulatory aspects of conversion of DFIs into universal banks. The need

to proceed with planning and foresight is necessary for several reasons. The move

towards universal banking would not provide a panacea for the endemic weaknesses of a DFI or its liquidity and solvency problems and/or operational difficulties arising from

undercapitalization, non-performing assets, and asset liability mismatches, etc. The

overriding consideration should be the objectives and strategic interests of the financial

institution concerned in the context of meeting the varied needs of customers, subject to

normal prudential norms applicable to banks. From the point of view of the regulatory

framework, the movement towards universal banking should entrench stability of the

financial system, preserve the safety of public deposits, improve efficiency in financial

intermediation, ensure healthy competition, and impart transparent and equitable

regulation.Lets discuss the impact of universal banking on the performance of State bank of India.

State bank of India transform it into an universal bank in 2004.Following are the some performance indicator of State bank of India

Capital adequacy ratio- it provide cushioning effect to the bank. It improve the risk taking ability of the bank. Following graph shows the capital adequacy ratio of the 5 financial years of the State bank of India GRAPH-1Interpretation Capital adequacy ratio of the Sate bank of India is increased by 14.37 percent in FY 2008-09(14.24) as compared to FY 2004-05(12.45)

Business per employee- it shows the average amount of business which is done by employee of State bank of india GRAPH-2

Interpretation The of business per employee is increased by 23 percent in 2005-06, 19 percent in 2006-07, 27.73 percent in 2007-08, 22 percent in 2008-09. If compare the 2008-09 to 2004-05 then it is increased by 128.73 percent inFY 2008-09 as compared to FY 2004-05

Profit per employee- the followingbgraph represent the amount of profit on each employee.

GRAPH-3

InterpretationProfit per employee is increased by 4.46 percent in 2005-06, 9.25 percent in 2006-07, 57.32 percent in 2007-08, 27.16 percent in 2008-09. If compare the 2008-09 to 2004-05 then it is increased by 128.32 percent in FY 2008-09 as compared to FY 2004-05

Return on Assets Return on assets shows the ratio of the return on assets.GRAPH-4

Interpretation ROA is decreased by 10.10 percent in 2005-06, decreased by 5.61 percent in 2006-07, but in 2007-08 it us increased by 20.23 percent it is also increased by 2.97 percent in 2008-09. If compare the 2008-09 to 2004-05 then it is increased by 5.05 percent in FY 2008-09 as compared to FY 2004-05

Net NPA ratio- it shows the percentage of NPA to assets

GRAPH-5

NET NPA ratio is decreased by 29.05 percent in 2005-06, decreased by 17.02 percent in 2006-07, but in 2007-08 it is increased by 14.10 percent it is decreased by 1.12 percent in 2008-09. If compare the 2008-09 to 2004-05 then it is decreased by 33.58 percent in FY 2008-09 as compared to FY 2004-05

ADVANTAGES OF UNIVERSAL BANKING

Economies of scale from lower operational costs, i.e., larger scale can avoid the wasteful duplication of marketing, research and development and information gathering efforts.

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

Flexibility in adapting to the fast changing environment.

Better and innovative products.

Reduction of risk by diversification.

Access to international financial markets.

Higher output due to specialization.

1.1.2 LIMITATIONS OF UNIVERSAL BANKING

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.

Universal bankers may be tempted to take excessive risks. In such cases, the government would be forced to step in to save the bank.

Vulnerable to high risks due to investment banking activities coupled with focus on commercial banking activities.

By virtue of their sheer size, universal banks may gain monopoly power in the market, which can have significant undesirable consequences for economic efficiency.

Universal banks may 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.

Combining commercial and investment banking gives rise to conflict of interests, as universal banks may not objectively advise their clients on optimal means of financing or they may have an interest in securities because of underwriting activities.

There may be conflict between the investment banker's promotional role and the commercial banker's obligation to provide disinterested advice .

Banks may deploy their own assets in securities with consequent risk to commercial and savings deposits.

Unsound loans may be made in order to shore up the price of securities or the financial position of companies in which a bank had invested its own assets.

A commercial bank's financial interest in the ownership, price, or distribution of securities inevitably may tempt bank officials to press their banking customers into investing in securities which the bank itself was under pressure to sell because of its own pecuniary stake in the transaction.AREA OF RESEARCHThe banking industry in India has undergone a sea of change ever since the economic form process was initiated. There is no doubt that the banking industry continues to play a cardinal role in spread heading the economic activity of the country. From an industry almost monopolized by the nationalized bank till the 90's it has now emerged as a conglomerate of nationalized, private and foreign banks setting new trends in the way banking is carried out. Banking Industry which is basically my concern industry around which my project has to be revolved is really a very complex industry. And to work for this was really a complex and hectic task. The area of this research is finance.SCOPE OF RESEARCH

The findings of this study is helpful for banks in understanding of impact of universal banking and taking decision regarding the universal banking

RESEARCH OBJECTIVE

Find out the steps undertaken by banks for adopting universal banking.

To come out with valuable suggestions for improvement

RESEARCH METHODOLOGY

Research design:

Exploratory research

Methods of data collection:

The most desirable approach with regards to the selection of the research methodology depends on the nature of the particular problem, time and resources available along with the desired level of accuracy. As for as method of data collection is considered secondary data sources have been used SECONDRY DATA:

Secondary data is collected from websites , magazines, journals and news paperINTRODUCTION TO RESEARCH WORK

This report is an attempt to study the Impact of universal banking on the operations of banks. Ever since the financial sector reforms were introduced in early 90s the banking sector saw the emergence of new generation private sector banks. These banks gained at most popularity as they have technology edge and better business models when compared to public sector banks and the most important thing is they are able to attract more volumes simply because they meet their customers requirements under one roof. If the newer players can do that then why cant the bigger players like the Financial Institutions (FIs) try their hands on it? Here comes the concept of universal banking, its emergence, merits and related issues.Business boom in universal banks, and entities like SBI, ICICI, HDFC and

Kotak Mahindra have all become one-stop departmental stores for

Mutual funds, loans, insurance and much else (see chart).

The spinoffs

For savvy institutions, the appeal of becoming a universal bank is now

Irresistible. Institutions like ICICI, SBI and HDFC have realised that it

helps to spread risks among different segments. They are also waking up

to the sheer potential for growth: life insurance premium to GDP in India

is estimated at less than 2%; retail loans are less than 3% of GDP; and

more than 70% of mutual fund collections are only from the major

metros. Besides, with more and more middle class customers wanting to spread

their wealth across banking products, equity, mutual funds, pension

products and insurance leading banks see sense in becoming one-stop

shopsso they can capture the consumer completely.

In fact, changing consumer preferences has clearly been the biggest driver

of universal banking in India. A retail customer would have been quite

content with a bank deposit about 20 years ago. Today he spreads his

wealth around: equities, mutual funds, pension products and insurance,

for example. A bank either has to offer it all to him, or lose him.Today, many banks have begun to migrate to the universal Banking model, which has opened up new avenues of growth for them. Several banks are now foraying into areas such as credit cards, insurance, DEMAT services, mortgage financing, investment banking, securitization, mutual funds, insurance, etc. , thereby offering different services to their customers under one roof. This is also fueling the growth of these banks. As the competition increases, it will make consolidation in the sector inevitable. With the highly fragmented nature of the sector, it is not unlikely that many banks especially PSBs will find some of their branches unproductive and unsustainable. The greater cost competitiveness of private banks will also force PSBs with inefficient operations and high costs to either close those branches of merge with other banks to bring down the costs. Signs of consolidation have already begun to emerge. The high profile merger of Times Bank with HDFC Bank five years ago marked the arrival of Mergers and Acquisitions (M&A) in the banking sector in the country. A couple of recent mergers clearly send a signal that consolidation is inevitable. The merger between ICICI Bank and Bank of Madura, Nedungadi Banks merger with Punjab National Bank, and more recently, the merger of the beleaguered Global Trust Bank with the government-owned Oriental Bank of Commerce vindicate the argument. Industry experts opine that there may be many more mergers on the cards. The Union Finance Minister has also hinted that he is favourable to mergers between banks, especially government-owned ones. He was recently quoted saying, Consolidation alone will give banks the muscle, size and scale to act local and seek new markets, new classes of borrowers. This gives enough indication as to what lies in store for the banks, particularly the PSBs, as far as consolidation is concerned. Further as banks in India look forward to expanding their presence outside the country and have a global reach they will be competing with global behemoths like the Citigroup, HSBC Bank, etc. in terms of strong balance sheet, and economies of scale and size. To acquire these capabilities Indian banks will have to look beyond organic growth. State-owned banks like State Bank of India and Bank of Baroda, and private sector players like ICICI Bank have already made their intentions of going global clear. Development financial institutions (DFIs) can turn themselves into banks, but have to adhere to the statutory liquidity ratio and cash reserve requirements meant for banks. Even then, some groups like the HDFC (commercial banking and insurance joint venture with Standard Assurance), ICICI (commercial banking), SBI (investment banking) etc., have already started diversifying from their traditional activities through setting up subsidiaries and joint ventures. In a recent move, the Life Insurance Corporation increased its stakes in Corporation Bank and is planning to sell insurance to the customers of the Bank. Corporation Bank itself has been planning to set up an insurance subsidiary since a long time. Even a specialized DFI, like IIBI, is now talking of turning into a universal bank. From the above description impact of universal banking on the operation of banks are a follows.

Improved financial healthThe ongoing reforms process has seen several major positive changes for the Indian banking sector. Deregulation has enabled banks in India to improve their financial health in terms of capital adequacy, asset quality, profitability, and provisioning (read: Non Performing Assets). Many of the PSU Banks have shown improved Capital Adequacy Ratio (CAR) for the fiscal 2002-03 as against the previous fiscal. Further, the progress made on the NPA front too is encouraging, though it needs to be further improved. For instance, only eight PSBs have shown NPAs of more than 5% for the fiscal 2003, as compared to 15% in the previous fiscal. According to Standard & Poors, key structural reforms have improved the asset quality, profitability and capital adequacy ratio of banks, besides increasing transparency and efficiency in the system. This is an encouraging sign as the Indian banking industry has for long been suffering the chronic problem of NPAs. However, the Securitization Act that came into vogue two years ago is helping banks clean their balance sheets. However, as the banks have pointed out the Act suffers from certain loopholes and, therefore, needs fine-tuning.

Technology: E-banking and mobile-banking services construct customer confidence in the that will increase the business of banksRisk Management: With increasing pace of globalization and easy flow of money across the globe, banks in the country will be exposed to several new kinds of risk, prominently country risk, besides the traditions risks like credit risk, and operational risk. In this backdrop, banks will be required to strengthen their risk management and surveillance systems and improve their credit assessment and risk management skills.

International Best Practices: If the banks in the country have to compete with international banks, they will have to gear up to embrace international best practices and standards in terms of operating, reporting and disclosure norms.

Corporate Governance:With growing emphasis on the part of listed companies worldwide on creating shareholder wealth; domestic banks, which are seeing a dilution in government ownership, will come under intense pressure to be more transparent in their operations, and improve disclosure and reporting practices. Hence these banks will have to gear up to meet the stock market demands, and improve their corporate governance practices.

Increased integration with the global economy and the fast changing banking environment in the country along with the reform process will be an overwhelming challenge for the banking sector. Factors such as cost competitiveness, giving emphasis on acquiring and leveraging technology capabilities to deliver services, strong balance sheet, better risk management skills, and, perhaps a global presence will hold key to the success of banks in the future.

LIMITATIONS AND PROBLEMS

No company can rely on it finding through any bind og study because the customers and the future is uncertain. Therefore organization has to develop an eagles site grab each and every opportunity existing in the market

Time is a limiting factor in any research.

This research is based on secondary data This is not an exhaustive study some import conclusions might have escaped my observation

FINDINGS

By the admission of foreign investors in Indian banking sector, the competition and the service value also started to increase.

By offering a broader set of financial products than what a specialized bank provides, 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 By virtue of their sheer size, universal banks may gain monopoly power in the market, which can have significant undesirable consequences for economic efficiency.

The idea of 'one stop shopping' saves a lot of transaction costs and increases the speed of economic activities. It is beneficial for the bank as well as customers.

With the increasing degree of deregulation and exposure of banks to various types of risks, efficient risk management systems have become essential The most serious problem of DFIs have had to encounter is bad loans or Non Performing Assets (NPA). For the DFIs and Universal Banking or installation of cutting-edge-technology in operations are unlikely to improve the situation concerning NPAs.

SUGGESTIONS AND RECOMMENDATIONS

There is need to review and amended the provisions of RBI Act, Banking Regulation Act, State Bank of act etc so as to bring them on same line of current banking needs Government should consider raising the prescribed capital adequacy ratio to improve the inherent strength of banks and to improve their risk taking ability

weak public sector banks which have accumulated a high percentage of non-paying assets (NPA), and in some cases, as high as 20% of their total assets. They suggested the concept of narrow banking to rehabilitate such weak banks.

CONCLUSION

The banking scenario has changed drastically. The changes which have taken place in the last ten years are more than the changes took place in last fifty years because of the institutionalisation, liberalisation, globalisation and automation in the banking industry.

Universal banking is the fastest growing sector of the banking industry with the key success by attending directly the needs of the end customers is having glorious future in coming years.

universal banking sector as a whole is facing a lot of competition ever since financial sector reforms were started in the country. Walk-in business is a thing of past and banks are now on their toes to capture business. Banks therefore, are now competing for increasing their business.

There is a need for constant innovation in universal banking. This requires product development and differentiation, micro-planning, marketing, prudent pricing, customization, technological upgradation, home / electronic / mobile banking, effective risk management and asset liability management techniques.

However, the kind of technology used and the efficiency of operations would provide the much needed competitive edge for success in universal banking business. Furthermore, in all these customer interest is of chief importance. The banking sector in India is representing this and I do hope they would continue to succeed in this traded path.

Bibliography BOOKS

Research Methodology C.R. Kothari (New Age International Publishers, 2nd edition)

Shekhar K.C (2005), Banking Theory and Practice, Vikas Publishing HouseMagazines and journals Annual reports of State bank ok IndiaWEBSITES

www.banknetindia.com/banking/ubfeature.htm: Universal Banking: introduction, RBI rules and regulations, Universal Banking in India www.answers.com/topic/universal-banking: Universal Banking: definition www.investopedia.com/terms/u/universalbanking.asp Universal Banking: definition www.cato.org/pubs/journal/cj13n2/cj13n2-8.pdf Universal Banking: Future

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