1) ExplainUBandevolutionofUB

AnsUniversalBanking
Introduction
InthelightofglobalexperienceofdiversificationtakenbytheBankingsectoraswellasthe
emergenceoftheUniversalBankingconcept,anattempthasbeenmadethroughthereviewof
literaturetotracetheextentofdiversificationmadebybanksintheIndianBankinghorizonand
theireventualtransitiontoUniversalBankingframework,

opportunitiesandchallengesbeforedomesticbanks,therisksconfrontedincourseofthis
transitionandtheregulatoryandsupervisoryissuesthatarelikelytoariseintheIndiancontext
onresortingtoUniversalBankingframework.Ananalysisofhistoryisrequiredsothatbanks
canmovetowardsuniversalbanking,onlyafterfullyappreciatingwhatliesinstoreforthem.
UniversalBankcanbedefinedasafinancialsupermarketofferingmultifariousproductsunder
oneroof.However,asmentionedintheDiscussionPaperbyReserveBankofIndia,theterm
UniversalbankingingeneralreferstothecombinationofcommercialbankingandInvestment
bankingi.e.,issuingunderwriting,investingandtradinginsecurities.Inabroadsense,theterm
Universalbankingreferstothosebanksthatofferawidevarietyoffinancialservicesespecially
insurance(Reddy,2000).

EvolutionOfUniversalBanking

TheIndianBankingsystemgainedmuchstrengthandcohesionafterthefirstroundof
nationalisationofbanksin1969.Nationalisationimprovedtheenvironmentinrespectof
formulationandimplementationofthemonetaryandbankingpolicies(Dhar,2004).Post
nationalisationperiodwitnessedrapidbranchexpansion,increaseincreditfacilitiestothe
prioritysectors,andincreaseinthevolumeofdepositmobilisationandintroductionofvarious
schemeslikeLeadBankScheme,IntegratedRuralDevelopmentProgrammeetc.
Early1980s,Indiawitnessedexplosivegrowthoffinancialmarkets.Accordingto
Rajadhyaksha(2004),thesedevelopmentsintheIndianFinancialsectorallowedCompanies
andsometimesevencustomerstobypassbanksandgetmoneydirectlyfromthosewhosaveit
aprocesscalleddisintermediation.Thisforcedbankstoenternewbusinessinordertohang
ontotheirpreciouscustomers.Moreover,productboundarieshaveblurredwhichwasalso
anotherstrikingreasonforbankstoenterintonewareastomeetcustomerneeds.Andabove
all,newnetworktechnologyallowedbankstoexploiteconomiesofscaleandofferwiderrange
offinancialproducts.Alltheseenabledbankstoofferavarietyofinnovativeservicesin
anticipationofmaterialsgains,followingacostbenefitanalysis(Ho,2006).Infact,thefocusof
bankswhileofferingdiversifiedservices

isoncustomersdemandandsatisfyingtheirneedsinabestpossiblewayandalsoonreducing
transactioncostsandtoyieldhigherprofits.Moreover,ascustomersdemandedforvariety,
convenience,andnewservices,bankstoowantedtoprovideproductsthatcouldmeettheir

precise,individualneeds.Significantly,themarketshiftedfrombeing
sellercentrictobuyercentricandcustomerswerefloodedwithoffersofavarietyof
tailormadeproductslikeinsurance,mutualfund,stocktrading,housingfinanceetc.under
oneroofalongwiththeirtraditionalproducts(Darshan,2006).Thus,diversificationofbanking
activitiesofCommercialbankseventuallyledtotheemergenceofUniversalBanksintheIndian
FinancialSystem.
Rao(2004)notedthatderegulationandglobalisationofthefinancialmarketinIndiasinceearly
1990s,markedbyinterestratecompetition,relaxationofexchangecontrolanddevelopmentof
I.T.largelyfacilitatedinternationalpoolingoffinancialresourcesacrosstheworldmarkets.
Amidstallthesedevelopments,banksstartedplacingmoreemphasisonnewsourcesof
noninterestincomes.
Kannan(2002)mentionsthatthefirstimpulsesofamorediversifiedfinancial
intermediationwaswitnessedinthelate1980sandearly1990s,whenbankswereallowedto
undertakeleasing,investmentbanking,mutualfunds,factoring,hirepurchaseactivitiesthrough
separatesubsidiaries.Bythemid1990s,allrestrictionsonprojectfinancewereremovedand
bankswereallowedtoundertakeseveralactivitiesinhouse.Accordingtotheauthor,reformsin
theInsurancesectorinthelate1990sandopeningupofthisfieldtoprivateandforeignplayers,
alsoresultedinpermittingbankstoundertakesaleofinsuranceproducts.Allthesehave
resultedingradualmetamorphosisofIndiancommercialbanksintoUniversalbanks,offeringa
varietyoffinancialservices.
AnothersignificantfactpointedoutbyKarunagaran(2005)isthatinIndia,thoughthereisno
legislativedistinctionbetweenCommercialbankingandInvestmentbankingoranyexplicit
legislativerestrictionforthebankstooperateininvestmentbankingactivities,thebankshave
traditionallybeenmaintainingthearm'slengthdistancefrominvestmentbanking.However,
withthefinancialsectorreformsbeginningin1990s,banksweregivenabundantfreedomtogo
muchbeyondtheirtraditionalconservativecommercialbankingandthesefacilitatedbanksin
providingahostoffinancialproductstomeetcustomerneeds.Butthemoretangible
momentumfortheemergenceofUniversalbankingconceptinIndiaseemstohavesetinonly
afterthesecondNarasimhamCommitteeReport(1998)recommendingDevelopmentFinancial
Institutions,overaperiodoftimetoconvertthemselvesintobanks(implicitlyUniversal
banks)andthatthereshouldeventuallybeonly

twoformsofintermediationBankingcompaniesandNonBankingFinancialCompanies.
Moreover,thiswasfollowedbyaWorkingGroupchairedbyS.H.KhanonHarmonisingthe
RolesandOperationsofDevelopmentFinancialInstitutionsandBanks(1998),whichmadeit
moreexplicitbyrecommendingforaprogressivemovementtowardsUniversalbankingforthe
DFIs.Significantly,bythattimeCommercialbankswerealreadypermittedtoenterdiversified
areasoffinancialbusinesses.
Theotherdrivingforcebehindbanksoptingfordiversificationisthedevelopmentinthefieldof
InformationTechnology.Infact,ithasbeenITthathasenabledbankstoofferavarietyof
servicesunderoneroofandthattooincosteffectiveandspeedymanner.Manyregard
computerisationinthebankingindustryasakeyingredientofthefinancialsectorreform

processanditaimstoimprovecustomerservice,housekeeping,decisionmakingand
productivityandprofitability(Suneja,1994).TheRBI,inviewoftheneedofI.Tinbanking,had
formedtwohighlevelcommitteesonein1983underDr.CRangarajanandanotherinthe
year1988.Moreover,theenactmentofInformationTechnologyAct2000bytheGovernment
hadfacilitatedtheuseofITintheBankingsector.TheI.TActasprovidedbySection93inthe
FourthSchedulemakesamendmenttotheReserveBankofIndiaAct,
1934andanewclausepertainingtobuildingabasiclegalframeworkforecommercehasbeen
incorporatedinSection58insubsection(2),afterclause(p).Infact,I.Thaspavedthewayto
speeduptheprocessofbankingoperationsandreducethedrudgeryandthetimetakenin
normalbankingoperations(Vittal,2001).TheintroductionofI.Tinbankingactivitieshas
facilitatedbanksindiversifyingtheirbusinessactivitiesandinturnmadethetransitionpath
easierforcommercialbanksinthedirectionofUniversalbanking.
Moreover,competitioninliberalisedmarketsrequiresflexibilityandreliableinformationandthe
FinancialSystembeinginformationintensive,needsawelldesignedManagementInformation
System(MIS)toserveasatoolfornotonlyriskmanagementbutforeffectiveoperational
management(Murty,2001).Infact,foreffectivebusinessdecisions,banksneedtocarryout
predictiveanalysiswithwhatifsimulations.Withderegulation,manyofthebarriersto
globalisationhavevanishedandthebankingoperationsarenomorerestrictedtodomestic
marketbuthavebecomemoreglobalandcarriedout24hours7daysaweek(Ramaswamy,
2005).Withlargefunctionalandgeographicalspreadofbanks,therehasbeenasharpgrowth
inthenumberofaccountsintheareasofoperationofbanks(Talwar,2000).Thus,increased
customerbase,complexproductsandroundtheclockservicestothecustomersnecessitate
theneedofmoderntechnologyinthebankingsector.

Inshort,itcanbesaidthatdiversificationinthebankingsectorhasbeenpossibledueto
financialsectorreformsinitiatedbytheGovernmentandInformationTechnologyrevolutionthat
sweptthecountryinearly1980s.However,intrueterms,diversificationintheBankingsector
andtheacceptanceofUniversalBankingconcept,asdifferentfromnarrowbanking,actually
cametotheforefrontintheIndiancontextwiththesecondNarasimhamCommittee(1998)and
latertheKhanCommittee(1998)reports.
Significantly,therecommendationsofNarasimhamCommitteeandKhanCommitteefor
consolidationofbankingthroughmergersandamalgamationshavebroughtaboutachangein
thefunctioningofcommercialbanksandgraduallytheyaremarchingtowardsUniversalbanking
framework(Bhaskar,2005).

2)Writeaboutneeds,meritsanddemeritsorbenefitsandlimitationsofUniversalBanking
Ansanswerofneedsinslidesharoffline

3)Writeanoteonfeebasedandfundbasedservices
AnsA.Asset/FundBasedServices
1.Equipmentleasing/Leasefinancing:Aleaseisanagreementunderwhichafirmacquiresa

righttomakeuseofacapitalassetlikemachineryetc.onpaymentofanagreedfeecalled
lease
rentals.Theperson(orthecompany)whichacquirestherightisknownaslessee.Hedoesnot
get
theownershipoftheasset.Heacquiresonlytherighttousetheasset.Theperson(orthe
company)whogivestherightisknownaslessor.
2.Hirepurchaseandconsumercredit:Hirepurchaseisanalternativetoleasing.Hire
purchaseisatransactionwheregoodsarepurchasedandsoldontheconditionthatpaymentis
madeininstalments.Thebuyergetsonlypossessionofgoods.Hedoesnotgetownership.He
getsownershiponlyafterthepaymentofthelastinstalment.Ifthebuyerfailstopayany
instalment,thesellercanrepossessthegoods.Eachinstalmentincludesinterestalso.
3.Billdiscounting:Discountingofbillisanattractivefundbasedfinancialserviceprovidedby
thefinancecompanies.Inthecaseoftimebill(payableafteraspecifiedperiod),theholder
need
notwaittillmaturityorduedate.Ifheisinneedofmoney,hecandiscountthebillwithhis
banker.Afterdeductingacertainamount(discount),thebankercreditsthenetamountinthe
customersaccount.Thus,thebankpurchasesthebillandcreditsthecustomersaccountwith
the
amountofthebilllessdiscount.Ontheduedate,thedraweemakespaymenttothebanker.If
he
failstomakepayment,thebankerwillrecovertheamountfromthecustomerwhohas
discounted
thebill.Inshort,discountingofbillmeansgivingloansonthebasisofthesecurityofabillof
exchange.
4.Venturecapital:Venturecapitalsimplyreferstocapitalwhichisavailableforfinancingthe
newbusinessventures.Itinvolveslendingfinancetothegrowingcompanies.Itisthe
investment
inahighlyriskyprojectwiththeobjectiveofearningahighrateofreturn.Inshort,venture
capital
meanslongtermriskcapitalintheformofequityfinance.
5.Housingfinance:Housingfinancesimplyreferstoprovidingfinanceforhousebuilding.It
emergedasafundbasedfinancialserviceinIndiawiththeestablishmentofNationalHousing
Bank
(NHB)bytheRBIin1988.Itisanapexhousingfinanceinstitutioninthecountry.Tillnow,a
numberofspecialisedfinancialinstitutions/companieshaveenteredinthefieldofhousing
finance.
SomeoftheinstitutionsareHDFC,LICHousingFinance,CitiHome,IndBankHousingetc

6.Insuranceservices:Insuranceisacontractbetweentwoparties.Onepartyistheinsuredand
theotherpartyistheinsurer.Insuredisthepersonwhoselifeorpropertyisinsuredwiththe
insurer.Thatis,thepersonwhoseriskisinsurediscalledinsured.Insureristheinsurance
company
towhomriskistransferredbytheinsured.Thatis,thepersonwhoinsurestheriskofinsuredis

calledinsurer.Thusinsuranceisacontractbetweeninsurerandinsured.Itisacontractin
whichthe
insurancecompanyundertakestoindemnifytheinsuredonthehappeningofcertaineventfora
paymentofconsideration.Itisacontractbetweentheinsurerandinsuredunderwhichthe
insurer
undertakestocompensatetheinsuredforthelossarisingfromtheriskinsuredagainst.
AccordingtoMcgill,Insuranceisaprocessinwhichuncertaintiesaremadecertain.Inthe
wordsofJonMegi,Insuranceisaplanwhereinpersonscollectivelysharethelossesofrisks.
Thus,insuranceisadevicebywhichalosslikelytobecausedbyuncertaineventisspread
overalargenumberofpersonswhoareexposedtoitandwhovoluntarilyjointhemselves
against
suchanevent.Thedocumentwhichcontainsallthetermsandconditionsofinsurance(i.e.the
writtencontract)iscalledtheinsurancepolicy.Theamountforwhichtheinsurancepolicyis
takeniscalledsumassured.Theconsiderationinreturnforwhichtheinsureragreestomake
good
thelossisknownasinsurancepremium.Thispremiumistobepaidregularlybytheinsured.It
maybepaidmonthly,quarterly,halfyearlyoryearly.
7.Factoring:Factoringisanarrangementunderwhichthefactorpurchasestheaccount
receivables(arisingoutofcreditsaleofgoods/services)andmakesimmediatecashpaymentto
the
supplierorcreditor.Thus,itisanarrangementinwhichtheaccountreceivablesofafirm(client)
arepurchasedbyafinancialinstitutionorbanker.Thus,thefactorprovidesfinancetotheclient
(supplier)inrespectofaccountreceivables.Thefactorundertakestheresponsibilityof
collecting
theaccountreceivables.Thefinancialinstitution(factor)undertakestherisk.Forthistypeof
serviceaswellasfortheinterest,thefactorchargesafeefortheinterveningperiod.Thisfeeor
chargeiscalledfactorage.
8.Forfaiting:Forfaitingisaformoffinancingofreceivablesrelatingtointernationaltrade.Itis
anonrecoursepurchasebyabankeroranyotherfinancialinstitutionofreceivablesarising
from
exportofgoodsandservices.Theexportersurrendershisrighttotheforfaitertoreceivefuture
paymentfromthebuyertowhomgoodshavebeensupplied.Forfaitingisatechniquethathelps
theexportersellshisgoodsoncreditandyetreceivesthecashwellbeforetheduedate.In
short,
forfaitingisatechniquebywhichaforfaitor(financingagency)discountsanexportbillandpay
readycashtotheexporter.Theexporterneednotbotheraboutcollectionofexportbill.Hecan
justconcentrateonexporttrade.
9.Mutualfund:Mutualfundsarefinancialintermediarieswhichmobilisesavingsfromthe
peopleandinvesttheminamixofcorporateandgovernmentsecurities.Themutualfund
operators
activelymanagethisportfolioofsecuritiesandearnincomethroughdividend,interestand
capital
gains.Theincomesareeventuallypassedontomutualfundshareholders.


NonFundBased/FeeBasedFinancialServices
1.Merchantbanking:Merchantbankingisbasicallyaservicebanking,concernedwith
providingnonfundbasedservicesofarrangingfundsratherthanprovidingthem.Themerchant
bankermerelyactsasanintermediary.Itsmainjobistotransfercapitalfromthosewhoownit
to
thosewhoneedit.Today,merchantbankeractsasaninstitutionwhichunderstandsthe
requirementsofthepromotersontheonehandandfinancialinstitutions,banks,stockexchange
and
moneymarketsontheother.SEBI(MerchantBankers)Rule,1992hasdefinedamerchant
banker
as,anypersonwhoisengagedinthebusinessofissuemanagementeitherbymaking
arrangementsregardingselling,buyingorsubscribingtosecuritiesoractingasmanager,
consultant,advisor,orrenderingcorporateadvisoryservicesinrelationtosuchissue
management.
2.Creditrating:Creditratingmeansgivinganexpertopinionbyaratingagencyontherelative
willingnessandabilityoftheissuerofadebtinstrumenttomeetthefinancialobligationsintime
andinfull.Itmeasurestherelativeriskofanissuersabilityandwillingnesstorepayboth
interest
andprincipalovertheperiodoftheratedinstrument.Itisajudgementaboutafirmsfinancial
and
businessprospects.Inshort,creditratingmeansassessingthecreditworthinessofacompany
byan
independentorganisation.
3.Stockbroking:Nowstockbrokinghasemergedasaprofessionaladvisoryservice.Stock
brokerisamemberofarecognizedstockexchange.Hebuys,sells,ordealsin
shares/securities.It
iscompulsoryforeachstockbrokertogethimself/herselfregisteredwithSEBIinordertoactas
a
broker.Asamemberofastockexchange,hewillhavetoabidebyitsrules,regulationsandby
laws.
4.Custodialservices:Insimplewords,theservicesprovidedbyacustodianareknownas
custodialservices(custodianservices).Custodianisaninstitutionorapersonwhoishanded
over
securitiesbythesecurityownersforsafecustody.Custodianisacaretakerofapublicproperty
or
securities.Custodiansareintermediariesbetweencompaniesandclients(i.e.securityholders)
and
institutions(financialinstitutionsandmutualfunds).Thereisanarrangementandagreement
betweencustodianandrealownersofsecuritiesorpropertiestoactascustodiansofthosewho
handoverit.Thedutyofacustodianistokeepthesecuritiesordocumentsundersafecustody.
The
workofcustodianisveryriskyandcostlyinnature.Forrenderingtheseservices,hegetsa

remunerationcalledcustodialcharges.
Thuscustodialserviceistheserviceofkeepingthesecuritiessafeforandonbehalfof
somebody
elseforaremunerationcalledcustodialcharges.
5.Loansyndication:Loansyndicationisanarrangementwhereagroupofbanksparticipateto
providefundsforasingleloan.Inaloansyndication,agroupofbankscomprising10to30
banks
participatetoprovidefundswhereinoneofthebanksistheleadmanager.Thisleadbankis
decidedbythecorporateenterprises,dependingonconfidenceintheleadmanager.
Asinglebankcannotgiveahugeloan.Henceanumberofbanksjointogetherandforma
syndicate.Thisisknownasloansyndication.Thus,loansyndicationisverysimilarto
consortium
financing.
6.Securitisation(ofdebt):Loansgiventocustomersareassetsforthebank.Theyarecalled
loanassets.Unlikeinvestmentassets,loanassetsarenottradableandtransferable.Thusloan
assets
arenotliquid.Theproblemishowtomaketheloanofabankliquid.Thisproblemcanbesolved
bytransformingtheloansintomarketablesecurities.Nowloansbecomeliquid.Theygetthe
characteristicofmarketability.Thisisdonethroughtheprocessofsecuritization.Securitisation
is
afinancialinnovation.Itisconversionofexistingorfuturecashflowsintomarketablesecurities
thatcanbesoldtoinvestors.Itistheprocessbywhichfinancialassetssuchasloan
receivables,
creditcardbalances,hirepurchasedebtors,leasereceivables,tradedebtorsetc.are
transformedinto
securities.Thus,anyassetwithpredictablecashflowscanbesecuritised.
Securitisationisdefinedasaprocessoftransformationofilliquidassetintosecuritywhich
maybetradedlaterintheopeningmarket.Inshort,securitizationisthetransformationof
illiquid,
nonmarketableassetsintosecuritieswhichareliquidandmarketableassets.Itisaprocessof
transformationofassetsofalendinginstitutionintonegotiableinstruments.
Securitisationisdifferentfromfactoring.Factoringinvolvestransferofdebtswithout
transformingdebtsintomarketablesecurities.Butsecuritisationalwaysinvolvestransformation
of
illiquidassetsintoliquidassetsthatcanbesoldtoinvestors.

4)explaincommercialbankinganddevelopmentbankingindetailanddistinguishbetweenthe
two?
AnsThereareseveraldifferentiatingfactorsbetweenadevelopmentbankandacommercial
bank.Someextremeobservationsbelowaremadeinordertoemphasizetraditional
differencesbetweenthetwoinordertoemphasizethepoint.Actualpractice,ofcourse,
differsfromcommercialbanktocommercialbankandfromdevelopmentbankto
developmentbank.Asthecountryscapitalmarketsdevelop,thereshallbeless

differencebetweenthesespecializedinstitutionsandthesimilaritiesshallbecomemore
apparent.Withthisasapremise,thetraditionaldifferencesbetweendevelopmentand
commercialbanksareinthefollowingareas:
a)ImpetusfortheCreationoftheInstitution:Adevelopmentbankiscreatedasan
instrumentofeconomicdevelopmentwhileacommercialbankiscreatedby
businessopportunities.
b)PostureRelativetoBusinessOpportunities:Adevelopmentbankissupposedto
beproactiveasitshouldtakeanactiveroletopromoteprojectsandtodevelop
institutions(entrepreneurs).Theprojectschosenarethosethatareconsistentwith
theeconomicdevelopmentpriorities.Acommercialbankisknowntobereactive
tobusinessopportunities.Itrequiresbankabilityonlyaftertheentrepreneurs
decisionhasbeenmadeitwaitsfortheideatoculminateintoafunding
requirement.
c)TypesofProjectsSupported:Foradevelopmentbank,thereisanexpliciteffortto
supporteconomicdevelopmentprojects.Thefollowingdesiredimpactprojects
formthebasisforscanningforopportunities:importsubstitution(atcompetitive
prices)exportsincreasedlocaldemandregionaldevelopment(forexample,
tourism)andincreasedindustrialefficiencythroughbettertechnology.Foracommercialbank,
theabovementionedgoalsarenotthestartingpointforthe
identificationofprojects.Rather,theywouldmostlikelybesidebenefits.A
commercialbankhaslittleconcernfortheseobjectives,exceptfortheviabilityof
thebanktransaction.Inshort,adevelopmentbanksactivitiesareprojectbased
whilethatofthecommercialbankaretransactionbased.
d)SearchProcessforProjectsFinanced:Adevelopmentbankgoesintoaplanning
cycle,identifyingwhicharethelikelyareastogointo.Forexample,ifit
determinesthatexportsisanareatobepromoted,thenitconductsamarketing
studyandseeksentrepreneurstoimplementrelatedprojects.Forthecommercial
bank,thesearchprocessisdifferent.Itasks,Areyouanexporter?,thenlooksat
thatentrepreneurscashbalancetodetermineifthereisamarketingopportunity
forthetransaction.
e)ProjectPromotionActivities:Adevelopmentbankofferscounselingand
advisoryservicesforenterprisedevelopmentandpromotionaspartofits
developmentlendingprocess.Acommercialbankofferslegalandbusiness
advice,appraisalservicesandcreditinvestigation,usuallyforafee.Itundertakes
verylittleprojectpromotionandinstitutionaldevelopment.Itsemphasisison
clientdevelopmentandmarketing.
f)StrategicGoals:Adevelopmentbankhasamoredifficultstrategicobjective
becauseitisinvolvedwiththeconcernsofthecountry,specificallyeconomic
development.Asidefromthis,afterprovidingfinancing,itisalsoconcernedwith
developingtheenterprise.Developingthemexplicitlywouldmeanadditional
coststothebank.Enterprisedevelopmentdramaticallylimitsthenumberof
accountsthatadevelopmentcanhandlebecausethisistimeconsuming.A
commercialbanksmainconcernistogenerateprofits.Otherbenefitsareonly

incidental.Withacommercialbankscostconsciousness,economicdevelopment
wouldbeitslastpriority.
g)CriteriaforFinancing:Adevelopmentbankassumesprojectrisksanddoesnot
insistontoomuchcollateral.Itwillprovidefinancingaslongastheothercriteria
aremet.Acommercialbankpayslessattentiontotheprojectinrelationtothe
collateralrequirements.However,themoreprogressivebanksarelendingagainst
projectcashflowandwithoutcollateral.
h)AssessmentoftheLoanProposal:Adevelopmentbankemploysprojectappraisal
asameanstodeterminetheviabilityoftheprojectsubmittedforfinancing.
Projectappraisallooksatthetechnical,financial,marketing,management,
environmentalandeconomicaspectsoftheproject.Loanrepaymentisbasedon
thecashflowtobegeneratedbytheproject.Acommercialbankusesriskasset
managementastooltoassesstheborrower.Itlooksatthesocalled5Csof
credit,i.e.,character,capacity,capital,collateralandcondition.Itbasesloan
repaymentonthecapacityoftheborrowertopay(evenfromothersources)than
fromtheprojectitself.Thus,itcanbesaidthatdevelopmentbankfinancingis
projectfocusedwhilethatofacommercialbankisborroweroriented.
i)TermofLoansExtended:Adevelopmentbankprovidesmainlytermloans
(maturityofmorethanoneyear).Ontheotherhand,acommercialbankprovides
mainlyshorttermloans(lessthanoneyearmaturity).
j)SourcesofLoanFunds:Adevelopmentbankisdependentonconcessionary,
longtermfunds,e.g.pensionfunds,fundsfrommultilateralfinancialinstitutions
liketheWorldBank,AsianDevelopmentBank,etc.Ithastraditionallylimited
accesstodomesticorcommercialfunds.Acommercialbankhasastrongdeposit
baseanditscorporateborrowersarealsodepositors.Theycanmatchits
commercialborrowingagainstitsownshorttermloans.
k)LendingPoliciesforCyclicalIndustries:Adevelopmentbanksupportsitsclients
inspiteofshorttermcycleswhileacommercialbankdoesnotlikecyclical
industries.
l)ResourceMobilization:Adevelopmentbankundertakesprojectpromotionwork
tomatchconcessionarylongtermfinancingwhileacommercialbankmobilizes
depositfundsfromsmalldepositorswhicharelentouttolargecompanies.
m)ClientRelationship:Adevelopmentbankrelatesmoretoclientsasborrowers.
Thereislessdaytodaybusinessrelationship.Tradetransactionsofacommercial
bankallowforfrequentmonitoringandcloseclientrelationship.
n)ScopeofInstitutionalMandate:Adevelopmentbankisessentiallyaspecialized
institution.Ithaslimitedbranchingandrangeofproducts.Thecommercialbank
hasageneralizedcharter.Itcanofferawiderangeofproducts(especiallyinthe
caseofuniversalbanks)andcanopenmorebranches.

5)explainbrieflysourcesandusesoffundsofcommercialbanksandsourcesandallocationof
fundsfordevelopmentbanks
Ans


6)writeanoteon
i)Khanworkinggroup:
CHAT
ARCHIVES

Khangrouphintsatbank,FImergers

SendthisstorytoafriendTheworkinggroupheadedbyIndustrialDevelopmentBankofIndia
chairmanSHKhantodaysubmitteditssummaryrecommendationstoReserveBankofIndia
GovernorDrBimalJalan,recommendingthepossibilityofgainfulmergersbetweenbanksand
betweenbanksandfinancialinstitutionsunderaspecificregulatoryframeworkandariskbased
supervisoryframework.

Theworkinggroupalsomadeseveralrecommendationsforimprovingtheorganisational
efficiencyandriskmanagementstrategiesbringinginformationtechnologytointernational
standardsanddevelopmentofhumanresources.

Withregardtothereorganisationofstatelevelinstitutions(SLI),thegroupsuggested
consolidationandprofessionalisingofSLI,allowingthemtogrowstrongerandbringingthem
underthesupervisoryambitoftheRBI.

Thegroup,setupbytheRBIinDecember1997toreviewtheroleandstructureofthe
developingfinancialinstitutionsandcommercialbanksintheemergingenvironment,
recommendedseveralinterimmeasurestowardsachievingcoordinationandharmonisationof
thelendingpoliciesofbanksandfinancialinstitutionsbeforetheymovetowardsuniversal
banking.

Ithassuggestedsettingupofastanding(coordination)committeewithbanks,financial
institutions,andRBIasmemberstoachievethecoordination.

Onstructuralchanges,theworkinggrouprecommendedaprogressivemovetowardsuniversal
bankingandthedevelopmentofanenablingregulatoryframeworkforthepurpose.Inparticular,
itemphasisedthatafullbankinglicencebeeventuallygrantedtodevelopmentfinancial
institutions.Intheinterimperiod,developmentFIsmaybepermittedtohaveabanking
subsidiarywith100percentholdingwhilethedevelopmentFIsthemselvesmaycontinueto
playtheirexistingrole.

Whilesize,expertiseandreacharecrucialtosustainedviabilityandfuturesurvivalinthe
financialsector,thegroupreportsaidthatthegainfulmergersshouldbepossiblenotonly
betweenbanks,butalsobetweenbanksanddevelopmentFIs,andnotonlybetweenstrongand
weakthoughviableentities,butevenbetweentwoormorestrongbanksanddevelopmentFIs.
However,suchrestructuringandmergersshouldbebroughtaboutinamarketorientedfashion

andshouldbeledbyviabilityandprofitabilityconsiderationsalone.

IfthedevelopmentFIsarerequiredtoassumeanydevelopmentalobligations,thegroup
suggestedthattheRBIandthegovernmentshouldprovideanappropriateleveloffinancial
supporttoenablethemtofulfiltheseobligations.

Afunctionspecificregulatoryframeworkmustbedevelopedwhichaimsattargetsactivitiesand
institutionneutralwithregardtotheregulatorytreatmentofidenticalservicesrenderedbyany
participantinthefinancialsystem.Thisconceptofneutralityshouldbeapplicabletobothforeign
andlocalentities.

Inviewoftheincreasingoverlapinfunctionsbeingperformedbyvariousparticipantsinthe
financialsystem,theKhangroupfeltthatameasureofcoordinationamongregulatorswas
desirable.Itsuggestedforsettingupasuperregulatortosuperviseandcoordinatetheactivities
ofthesemultipleregulatorstoensureuniformityinregulatorytreatment.

Thegroup'sviewisthatatafundamentallevel,legalreformiscalledfor,incasesof
enforcementofcontractualobligationsanddissolutionofcompanies.Inparticular,aspeedy
implementationoflegalreformsinthedebtrecoveryareaofbanksandfinancialinstitutions
shouldbegiventoppriority.Itrecommendedathoroughrevampofthe1993actonrecoveryof
debtsfrombanksanddevelopmentFIsonthesuggestedlineinthisregard.

Onchangesinsupervisorypractices,thereportsaid,thesupervisoryauthorityshouldundertake
primarilyoffsitesupervisionbasedonperiodicreportingbythebanksanddevelopmentFIsas
thecasemaybe.Anotheressentialelementoftheimprovedsupervisoryframeworkshouldbe
theabilityofthesupervisorstosupervisethedevelopmentFIsandbanksonaconsolidated
basis.Itrecommendedsettingupofariskbasedsupervisoryframeworkalongthelinesofthe
reportofthetaskforceonconglomeratesupervision,publishedbytheinstituteofinternational
financeinFebruarylastyear.

Onstatutoryobligations,thegroupreportsaidthattheapplicationofcashreserveratioshould
beconfinedtocashlikeinstrumentsanditshouldbebroughtdownprogressivelywithina
timeboundframetointernationallevels.Thereisalsostrongcaseforphasingoutthestatutory
liquidityratioinlinewithinternationalpractice.

Ratherthanimposingthestatutoryobligationslikecreditreserveratioandstatutoryliquidity
rationormsontheentirebankingsystem,thegroup'sviewwasthattherewasaneedforan
alternatemechanismtobedevelopedforfinancingthesectorsthatsufferedfromapaucityof
funds.Suchamechanismwillaimtobalancetheneedforfundswiththeneedtobringbetter
suitedstructuresandspecialisedskillstobearindealingwiththesectors.Inthecontext,the
groupsaidthatitmightbepreferablenottoincludeinfrastructurelendinginthedefinitionofnet
bankcreditusedincomputingtheprioritysectorobligations.

Onstatelevelinstitutions,theKhangroupsaidthatstrongSLIsshouldbeencouragedtogo
publicbymakinginitialpublicoffersandbringdownthestategovernment'sholdingtobelow50
percent.TheseinstitutionsshouldbebroughtunderRBIsupervision.Thegroupsuggestedthat
creditreserveratioshouldnotbeapplicabletodevelopmentFIsunderthepresentstructure
wheretheyarenotpermittedtoaccesscashandcashlikeinstruments.

Thegroupsuggestedthatthebanksbepermittedtoexcludeinvestmentsinstatutoryliquidity
ratiosecuritiesissuedbyadevelopmentFIwhilecalculatingtheexposuretothatinstitution.In
linewithinterbankdeposits,auniformriskweightageof20percentmaybeassignedfor
investmentmadebycommercialbanksinbondsofrateddevelopmentFIs.

ThedevelopmentFIsshouldbegrantedfullauthoriseddealerslicence.Thegroupwasofthe
viewthatitwouldbeworthwhilegoingintothedetailsoftherequirementsanddrawingupa
perspectiveplanandblueprintforarobustautomationinthefinancialsector.

ii)narsimhancommittee:ThesalientfeaturesoftheNarasimhamCommitteeReportareas
follows:

1.AccordingtotheCommittee,thefinancialsystemhasacrucialroletoplayinmobilisationof
savingsandtheirproductiveusebyefficientallocation.Thus,thecommitteesapproachto
ensurefinancialsectorreformistoensurethatthefinancialserviceindustryoperatesonthe
basisofoperationalflexibilityandfunctionalautonomy,withaviewtoenhancingefficiency,
productivityandprofitability.Theintegrityandautonomyofoperationsofbanksand
DevelopmentFinancialInstitution(DFIs)havetobeensuredforthispurpose.

2.TheIndianbankingandfinancialsystemhasmadecommendableprogressinextendingits
geographicalcoverageandfunctionaldimension.In1969,bankdepositsamountedto13per
centofgrossdomesticproduct(GDP)andadvancesto10percent.By1991,theseratiohave
increasedto38percentand25percentrespectively.Theprioritysectorlendinghascrossed
thetargetof40percentofaggregatebankcredit.

3.Duringthedecadeofeighties,therehasbeenaconsiderablediversificationofthemoneyand
capitalmarketsinIndia.Newfinancialservicesandinstrumentshaveappearedonthescene.
TheDFIshavebeenlargelysuccessfulinmeetingtheirprimaryobjectiveofprovidingfundsfor
industrialinvestment.And,inrelationtothetotalinvestmentintheprivatecorporatesector
between1985and1990,thecontributionoftheIDBI,ICICIandIFCIthreeallIndiaterm
lendinginstitutionshasbeen20percent.

TheDFIshaveattemptedawiderangeofpromotionalactivitiesincludingamajorthrusttowards
entrepreneurshipdevelopmentprogramme,identifyingindustrialpromotionneedsofdeserving
segmentsoftheindustrialsectorandevolvingmeasuresfortheirgrowthandprovidingavenues
forcommercialisationorindigenousresources.

4.TheestablishmentoftheDiscountandFinanceHouseofIndia(DFHI),andtheSecuritiesand
ExchangeBoardofIndiahasitsimpactonthegrowthofmoneyandcapitalmarketsinIndia.
Specialisedsavingsandinvestmentinstitutionscatertotheneedsofagrowingfinancialsystem.
Theproliferationoffinancialinstitutionsandinstrumentsprovidesawiderchoiceforthefinancial
investmentstothesaversclass.

5.Majorissuesinthefinancialsectoraredeclineinproductivityandefficiencyanderosionof
profitabilityofthebankingsector.Directedinvestmentanddivertedcreditprogrammesare
mainlyresponsibleforsuchanoutcome.

6.AhighlevelofStatutoryLiquidityRatio(SLR)hasbeenlimitingtheoperationalflexibilityand
potentialearningofthebanks.TheCommittee,thus,feelsthatfromitsexisting38.5percent
level(inNovember1991)itshouldbegraduallybroughtdownto25percentofnetdemandand
timeliabilitiesofthebonds.InApril1993,thegovernmenthasbroughtdowntheSLRto30per
centoftheincrementaldepositsafterMarch,1992.

7.Theexistingcashreserveratio(CRR)at15percentishighandshouldbereduced.Thisis
becausewhenthefiscaldeficitisbroughtdownbythegovernmenttheoccasionfortheuseof
CRRtocontrolthesecondaryexpansionofcredithasbeenless.Withthederegulationof
interestrates,theemphasisonCRRshouldbelessenedandscopeforusingopenmarket
operations(OMO)formonetarymanagementshouldbeenlarged.

8.Directedcreditprogrammeshavecausedsegmentationofcreditmarketsandoperational
inflexibilityforthebanks.Hence,thesystemofdirectedcreditprogrammesshouldbegradually
phasedoutandredistributiveobjectiveshouldbetterbeconfinedtothefiscalratherthan
monetarypolicy.Assuch,prioritysectorshouldberedefinedtoincludesmallandmarginal
farmers,thetinysectorofindustry,smallbusinessandtransportoperators,villageandcottage
industries,ruralartisans,andotherweakersections.Thetargetforprioritysectorlendingshould
befixedat10percentofaggregatebankcredit.

9.Theexistingstructureofadministeredinterestrateishighlycomplexandrigidthoughthereis
amovetowardsderegulationandliberalisationofthefinancialsystem.Thus,theRBIshould
aimatsimplifyingthestructureofinterestrates.TheRBIandnotthegovernmentshouldbethe
authoritytodeterminethelevelandstructureofinterestrates.

10.TheBankrateshouldbeusedasananchorratetosignalchangesinthedirectionandlevel
ofinterestrates.

11.Itshouldbeensuredthattherealratesofinterestremainpositive.

12.Thebanksandfinancialinstitutionsshouldachieveaminimum4percentadequacyratio.


13.Profitmakingbanksshouldapproachthecapitalmarketforenhancementoftheircapital.

14.Banksassetsshouldbeclassifiedinto:(i)standard,(ii)substandard,(iii)doubtfuland(iv)
lossassets.

15.Thebalancesheetsofbanksandfinancialinstitutionsshouldbemadetransparent.Full
disclosuresshowedbemadeinthebalancesheetsasrecommendedbytheInternational
AccountingStandardsCommittee.

16.Asuitablemechanismshouldbedevisedwithlegislativemeasuressodevisedforthequick
recoveriesofloansandenforcementofsecuritycharged.SpecialTribunalsshouldbecreated.
AnAssetsReconstructionFund(ARF)iscreatedwhichcouldtakeoverfromthebanksand
financialinstitutionsaportionofthebadanddoubtfuldebtsatadiscount.

17.Thestructureofthebankingsystembereshapedwhichconsists3or4largebanks.8to10
nationalbanks,localbanksandruralbanks.

18.Thegovernmentmustassurethattherewouldnofurthernationalisationofbanks.

19.Branchlicensingsystembeabolished.

20.JointventuresbetweenforeignbanksandIndianbanksbepermittedinareaslikemerchant
andinvestmentbanking,leasing,etc.

21.Thegovernmentshouldnotinterfereinthematterofinternalorganisationofthebanks.

22.Banksaretobecomputerised.

23.Individualbanksarepermittedtomaketheirownrecruitmentoftherequiredstaff.

24.TheIndianbankingsystem,atpresent,isover
regulatedandoveradministered.The
supervisionofthebanksshouldbebasedonprudentialnorms.Excessivecontrolsonthe
workingofthebanksberemoved.

25.Aregulatoryframeworkforthemerchantbanks,mutualfunds,leasingcompanies,venture
capitalandfactorcompanieshavetobedevelopedinprudentialnorms.

26.TheStockExchangeBoardofIndia(SEBI)shouldbemadeacontrollingbodyinthecapital
marketforitssmoothandorderlyworking.

27.ThedualityofcontroloverthebankingsystembetweentheRBIandtheBankingDivisionof
theMinistryofFinanceshouldend.TheReserveBankshouldbetheprimaryagencyforthe

regulationofthebankingsystem.

28.AquasiautonomousBankingSupervisoryBoardundertheaegisoftheRBIbesetupfor
thesupervisionofthebanks.

29.Itisessentialthatothergovernmentdepartmentsshouldnotdealdirectlywiththebanksand
financialinstitutionsbutdosoonlythroughtheMinistryofFinancewhichinturnwoulddoso
throughtheRBI.

30.Newlegislationtoprovidelegalframeworkformutualfundsandforconferringstatutory
powersofSEBIhastotheenacted.Besides,tocarryoutthesuggestedreforms,suitable
legislativemeasureshavetobeundertaken.Thelegalimplicationswithreferencetoeachofthe
recommendationshavetobecarefullyexaminedanddetailedlegislativestepshavetobe
identifiedbythegovernmentinconsultationwiththeLawMinistry.