Meaning Advantages Disadvantages
Universal bank is a combination of Commercial banking, Investment banking, Development banking, Insurance and many other financial activities. It is a place where all financial loans are available under one roofing. Universal banking is performed by large banks. These banks give a complete lot of finance to many companies. So, they take part in the Corporate Governance (management) of these companies. These banks have a big network of branches all over the country and all over the world. They provide many different financial services with their clients. India, two reviews in 1998 talked about the idea of universal banking. These are, the Narasimham Committee Report and the S.H.
Khan Committee Report. Both these reports advised to combine (gather) the bank industry through mergers and integration of financial activities. That is, they advised a combination of all bank and financial activities. That’s a Common was suggested by them banking. In 2000, ICICI asked permission from RBI to become a universal bank. RBI wants some big domestic financial institutions to become universal banks. Investors’ Trust: Universal banks hold stakes (equity shares) of several companies.
These companies can easily get other traders to purchase their business. This is because other traders have full beliefs and confidence in the Common banks. They know that the Universal banks will closely watch all the actions of the companies in which they hold a stake. Economics of Scale: Universal bank results in economic efficiency. That’s, it leads to lower costs, higher output and better products. In India, RBI is in favor of universal banking since it leads to economies of scale.
Resource Utilization : Universal banking institutions use their client’s resources as per the client’s ability to have a risk. If your client has a high risk taking capacity then the universal bank or investment company will advise him to make dangerous investments rather than safe investments. Similarly, clients with a low risk taking capacity are advised to make safe investments.
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- ÷ Initial Capital Investment
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Today, universal banking institutions make investments their client’s money in various types of Mutual money and also directly into the share market. They also do equity research. So, they can also manage their client’s portfolios (different investments) profitably. Profitable Diversification: Universal banking institutions diversify their activities. So, they can use the same financial experts to provide different financial services.
This will save cost for the universal bank. Even the day-to-day expenses will be kept because all financial services are given under one roof, i.e. in the same office. Easy Marketing: The general banks can easily market (sell) all their financial loans and services through their many branches. They can ask their existing clients to buy their other products and services.
This requires less marketing attempts because of their well-established brand name. One-stop Shopping: Universal banking offers all financial products under one roofing. One-stop shopping saves a lot of time and transaction costs. It also increases the speed or flow of work. So, one-stop shopping gives advantages to both banks and their clients. Different Rules and Regulations: Universal banking offers all financial products and services under one roofing.
However, each one of these services and products have to follow different regulations. This creates many problems. For e.g. Mutual Funds, Insurance, MORTGAGE LOANS, etc. have to check out different pieces of rules and guidelines, but they are provided by the same bank or investment company. Effect of failing on Banking System: Universal banking is done by large banking institutions. If these huge banking institutions fail, then it has an extremely big and bad effect on the banking system and the confidence of the public.
For e.g. Recently, Lehman Brothers a very large universal bank or investment company failed. It got very bad effects in America, Europe, and even in India. Monopoly: Universal banks are very large. So, they can get monopoly power in the market easily. This will have many harmful effects on the other banks and the public.