RBI states: “The emerging scenario in the Indian banking system points to the likelihood of the provision of multifarious financial services under one roof. This will present opportunities to banks to explore territories in the field of credit/debit cards, mortgage financing, infrastructure lending, asset securitisation, leasing and factoring. At the same time it will throw challenges in the form of increased competition and place strain on the profit margins of banks”
The evolving scenario in the Indian banking system points to the emergence of universal banking. The traditional working capital financing is no longer the banks major lending area while FIs are no longer dominant in term lending. The motive of universal banking is to fulfill all the financial needs of the customer under one roof. The leaders in the financial sector will be aiming to become a one-stop financial shop.
In recent times, ICICI group has expressed their aim to function on the concept of the Universal Bank and was willing to go for a reverse merger of ICICI ltd. with ICICI Bank. But due to some regulatory constraints, the matter seems to have been delayed. Sooner or later, the group would be working towards its aim. Even some of the other groups in the financial sector like HDFC, IDBI have started functioning on the same concept.
An Overview of Universal Banking
Universal Banking includes not only services related to savings and loans but also investments. However in practice the term ‘universal banks’ refers to those banks that offer a wide range of financial services, beyond commercial banking and investment banking, insurance etc. Universal banking is a combination of commercial banking, investment banking and various other activities including insurance. If specialised banking is the one end universal banking is the other. This is most common in European countries.
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. The spread of universal banking ideas will bring to the fore issues such as mergers, capital adequacy and risk management of banks. Universal banks may be comparatively better placed to overcome such problems of asset-liability mismatches (for banks). However, larger the banks the greater the effects of their failure on the system. Also there is the fear that such institutions, by virtue of their sheer size, would gain monopoly power in the market, which can have significant undesirable consequences for economic efficiency. Also combining commercial and investment banking can give rise to conflict of interests.
Universal Banking In India
The issue of universal banking resurfaced in Year 2000, when ICICI gave a presentation to RBI to discuss the time frame and possible options for transforming itself into an universal bank. Reserve Bank of India also spelt out to Parliamentary Standing Committee on Finance, its proposed policy for universal banking, including a case-by-case approach towards allowing domestic financial institutions to become universal banks.
Now RBI has asked FIs, which are interested to convert itself into a universal bank, to submit their plans for transition to a universal bank for consideration and further discussions. FIs need to formulate a road map for the transition path and strategy for smooth conversion into an universal bank over a specified time frame. The plan should specifically provide for full compliance with prudential norms as applicable to banks over the proposed period.
The Narsimham Committee II suggested that DFIs should convert ultimately into either commercial banks or non-bank finance companies. The Khan Working Group held the view that DFIs should be allowed to become banks at the earliest. The RBI released a ‘Discussion Paper’ (DP) in January 1999 for wider public debate. The feedback indicated that while the universal banking is desirable from the point of view of efficiency of resource use, there is need for caution in moving towards such a system. Major areas requiring attention are the status of financial sector reforms, the state of preparedness of the concerned institutions, the evolution of the regulatory regime and above all a viable transition path for institutions which are desirous of moving in the direction of universal banking.
Case Study: ICICI gearing to become a universal bank
ICICI envisages a timeframe of 12 to 18 months in converting itself into a Universal Bank. ICICI has received favourable response from Indian investors and FIIs on its move to merge with ICICI Bank and become a universal bank. ICICI was the first one to propagate universal banking as an ideal concept for the DFIs to support industries with low cost funds.
In August, ICICI executive director Kalpana Morparia said that ICICI has to obtain a separate banking licence from RBI for becoming a universal bank. It can avoid the stamp duty burden by first converting ICICI into bank, instead of going for a direct merger of ICICI into ICICI Bank.
“We have created fire walls and functioning as separate legal entities only for complying with statutory obligations,” she noted. There is clear demarcation in the operation of ICICI and the bank. The bank takes care of liabilities of less than one year by offering short-term loans to corporates and personal loans. Medium to long-term products like home loans, auto loans are handled by the parent; absolute coordination between them while marketing the products exist.
Crisil has reaffirmed its triple A rating for ICICI and FIIs also expects its profit margins to improve after the merger due to the access to low cost deposits & the scope to increase income from fee-based activities.
She said ICICI has started increasing its international presence and associating closely with NRI community in various countries. ICICI InfoTech is based in US & has an office in Singapore. ICICI Securities has been registered as a broking firm in the US.
ICICI Bank is leveraging on strong network of 400 branches and extension counters & 600 ATMs for offering products to NRIs; NRIs can transfer their money to 200 locations in India by internet. The payment will be made within 72 hours. It also offers loan products for helping their relatives in India. Besides, the Visa card helps them to withdraw cash through the ATM network.
Morparia said NPA of banks in India are < 10 per cent of GDP when compared to emerging economies like China, Korea & Thailand. It should not be compared with developed countries like Europe and US. ICICI’s gross NPA comes to Rs 6,000 crore. Asked about a approach to resolve the problem, she said if the units are viable, it supported financial restructuring, mergers. If these options aren’t possible and the units are not viable, it will go in for one time settlement.
“Because of law, once the units are referred to BIFR, the lenders were unable to enforce securities,” she pointed out.