Banking that includes investment services in addition to services related to savings and loans are known as Universal Banking. A system of banking is where banks are allowed to provide a variety of services to their customers.
In universal banking, banks are not limited to just loans, checking and savings accounts, and other similar activities, but are allowed to offer investment services as well.
Universal banking is a multi-purpose and multi-functional financial supermarket (a company offering a wide range of financial services, like, stock, insurance, and real estate, brokerage) providing both banking and financial services through a single window.
Concept of Universal Banking
In a nutshell, universal banking is a superstore for financial products under one roof.
The corporate can get loans and avid of other handy services, apart from depositing and borrowing. It includes not only services related to savings and loans but also investments.
However, in practice, the term universal banking refers to those banks that offer a wide range of financial services, beyond the commercial banking functions like mutual funds, merchant banking, factoring, credit cards, retail loans, housing finance, auto loans, investment banking, insurance, etc.
Advantages of Universal Banking
Following are the advantages of universal banking:
1. Economies of Scale
The main advantage of universal banking is that it results in greater economic efficiency in the form of lower cost, higher output, and better products.
Many committees and reports by Reserve Bank Of Nation are in favor so universal banking as it enables banks to exploit economies of scale and scope.
2. Profitable Diversions
By diversifying the activities, the bank can use its existing expertise in one type of financial service in providing other types.
So, it entails less cost in performing all the functions by one entity instead of separate bodies.
3. Resources Utilization
A bank possesses information on the risk characteristics of the clients, which can be used to pursue other activities with the same clients.
A data collection about the market trends, risk, and returns associated with a portfolio of mutual funds, diversifiable and non-diversifiable risk analysis, etc. are useful for other clients and information seekers.
Automatically, a bank will get the benefits of being involved in the research.
4. Easy Marketing on the Foundation of a Brand Name
A bank’s existing branches can act as shops of selling financing products like insurance, mutual funds without spending much effort on marketing as the branch will act here as a company or source.
In this way, a bank can reach the client even in the remotest area without having to take resources to an agent.
5. One-Stop Shopping
The idea of one-stop shopping saves a lot of transaction costs and increase the speed of economic activities.
It is beneficial for the bak as well as its customers.
6. Investor-Friendly Activities
Another manifestation of universal banking is bank holding stakes in a form: a bank’s equity holding in a borrower firm acts as a signal for other investors onto the health of the firm since the lending bank is in a better position to monitor the firm’s activities.
Disadvantages of Universal Banking
Following are the disadvantages of universal banking:
1. Grey Area of Universal Bank
The path of universal baking for DFI 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.
2. No Expertise in Long Term Lending
In the case of traditional project finance, an area where DFIs treat carefully, becoming a bank may not make a big difference to a DFI.
Project finance and infrastructure finance are generally long gestation projects and would require DFIs to borrow long term loans.
Therefore, the transformation into a bank ma is not of great assistance in lending long term loans.
3. NPA Problems Remained Intact
The most serious problems that the DFI’s have had to encounter are bad loans or non-performing assets (NPA’s).
For the DFIs and universal baking or installation of cutting edge technology in operations are unlikely to improve the situation concerning NPA’s.
In universal baing, large banks operate an extensive network of branches, provide many different services, hold several claims on firms (including equity and debt) and participate directly in the corporate governance of firms that rely on the banks for funding or as insurance underwriters.
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