Universal Banking - Meaning
Universal banking is a combination of Commercial banking, Investment banking, Development banking, Insurance in addition to many other fiscal activities. It is a house where all fiscal products are available nether 1 roof. So, a universal banking concern is a banking concern which offers commercial banking concern functions addition other functions such every bit Merchant Banking, Mutual Funds, Factoring, Credit cards, Housing Finance, Auto loans, Retail loans, Insurance, etc.
Narasimham Committee Report in addition to the S.H. Khan Committee Report. Both these reports advised to consolidate (bring together) the banking manufacture through mergers in addition to integration of fiscal activities. That is, they advised a combination of all banking in addition to fiscal activities. That is, they suggested a Universal banking.
In 2000, ICICI asked permission from RBI to larn a universal bank. RBI wants closed to large domestic fiscal institutions to larn universal banks.
Advantages of Universal Banking
The benefits or advantages of universal banking are:-
- Investors' Trust : Universal banks concur stakes (equity shares) of many companies. These companies tin laissez passer on the axe easily larn other investors to invest inwards their business. This is because other investors possess got sum confidence in addition to organized faith inwards the Universal banks. They know that the Universal banks volition closely sentinel all the activities of the companies inwards which they concur a stake.
- Economics of Scale : Universal banking results inwards economical efficiency. That is, it results inwards lower costs, higher output in addition to amend products in addition to services. In India, RBI is inwards favour of universal banking because it results inwards economies of scale.
- Resource Utilisation : Universal banks utilization their client's resources every bit per the client's mightiness to accept a risk. If the customer has a high adventure taking capacity in addition to thence the universal banking concern volition advise him to build risky investments in addition to non rubber investments. Similarly, clients amongst a depression adventure taking capacity are advised to build rubber investments. Today, universal banks invest their client's coin inwards dissimilar types of Mutual funds in addition to every bit good direct into the part market. They every bit good create equity research. So, they tin laissez passer on the axe every bit good create create their client's portfolios (different investments) profitably.
- Profitable Diversification : Universal banks diversify their activities. So, they tin laissez passer on the axe utilization the same fiscal experts to furnish dissimilar fiscal services. This saves terms for the universal bank. Even the day-to-day expenses volition hold upwardly saved because all fiscal services are provided nether 1 roof, i.e. inwards the same office.
- Easy Marketing : The universal banks tin laissez passer on the axe easily marketplace (sell) all their fiscal products in addition to services through their many branches. They tin laissez passer on the axe enquire their existing clients to purchase their other products in addition to services. This requires less marketing efforts because of their well-established build name. For e.g. ICICI may enquire their existing banking concern draw of piece of job concern human relationship holders inwards all their branches, to accept menage loans, insurance, to purchase their Mutual funds, etc. This is done really easily because they utilization 1 build refer (ICICI) for all their fiscal products in addition to services.
- One-stop Shopping : Universal banking offers all fiscal products in addition to services nether 1 roof. One-stop shopping saves a lot of fourth dimension in addition to transaction costs. It every bit good increases the speed or catamenia of work. So, one-stop shopping gives benefits to both banks in addition to their clients.
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Disadvantages of Universal Banking
The limitations or disadvantages of universal banking are:-
- Different Rules in addition to Regulations : Universal banking offers all fiscal products in addition to services nether 1 roof. However, all these products in addition to services possess got to follow dissimilar rules in addition to regulations. This creates many problems. For e.g. Mutual Funds, Insurance, Home Loans, etc. possess got to follow dissimilar sets of rules in addition to regulations, only they are provided past times the same bank.
- Effect of failure on Banking System : Universal banking is done past times really large banks. If these huge banks fail, in addition to thence it volition possess got a really large in addition to bad upshot on the banking organization in addition to the confidence of the public. For e.g. Recently, Lehman Brothers a really large universal banking concern failed. It had really bad effects inwards the USA, Europe in addition to fifty-fifty inwards India.
- Monopoly : Universal banks are really large. So, they tin laissez passer on the axe easily larn monopoly mightiness inwards the market. This volition possess got many harmful effects on the other banks in addition to the public. This is every bit good harmful to economical evolution of the country.
- Conflict of Interest : Combining commercial in addition to investment banking tin laissez passer on the axe termination inwards conflict of interest. That is, Commercial banking versus Investment banking. Some banks may laissez passer on to a greater extent than importance to 1 type of banking in addition to laissez passer on less importance to the other type of banking. However, this does non build commercial sense.