Universal Banking : Meaning / Introduction Advantages and Disadvantages

Meaning

Universal banking is a system in which banks provide a wide variety of comprehensive financial services, including those tailored to retail, commercial, and investment services. Universal banking is common in some European countries, including Switzerland.

Under this type of banking a bank will deal with working capital requirement as well as term loans for development activities.They will be dealing with individual customer as well as big corporate customers.They will have expanded lines of business activities combining the functions of traditional deposit taking,modern financial services ,selling long -term saving products, insurance cover , investment banking etc.

Advantages of Universal Banking

• Economics of scale : Universal banking result in greater economics efficiency in the form of low cost,higher output and better products. In India , RBI is in favour of universal banking because it result in economics of scale.
• Profitable Diversions: The banks can utilize its existing skill in single type of financial services in offering other kinds by diversifying the activities. Therefore, it involves lower cost in performing all types of financial functions by one unit instead of other institution.
• Resources Utilization: A bank possesses all types of information about the existing customers which can be utilized to perform other financial activities with the same customer.
• Easy Marketing : A bank with established brand name can easily use its existing branches and staff to sell the other financial products like insurance policies, mutual fund plans without spending much effort on marketing.
• One-stop Shopping: One-stop shopping is beneficial for the bank and its customers as it saves lot of transaction costs by increasing the speed of economic activities.
• Under one roof:Universal banking offers all financial products and services under one roof. It save transaction cost and time.It also increase the speed of work.Hence it is beneficial to bank as well as customer.
• Investors trust: Universal banks hold equity shares of many companies .These companies can easily get investors from public to invest in their business . This is due to other investor have full confidence and faith in the universal banks.

Disadvantages of Universal Banking

• No Expertise in Long Term Lending: These are different types of long term loans like project finance and infrastructure finance, having long gestation projects can not properly handle by the single bank.
• Non-Performing Assets problem: One of the most serious problems faced by universal banking is Non-performing Assets.
• Risk of Failure: The larger the banks, the greater the effects of their failure on the system. The failure of a larger institution could have serious for the entire banking system. If one universal bank were to collapse, it could lead to a systemic financial crisis.
• Concentration of Monopoly Power in the Hands of Few Banker: Universal banking sometimes creates monopoly power in the hands of few large bankers. Such a monopoly power in the hands of a few big bankers is a source of danger to the community whose goal is a socialistic pattern of society.
• Bureaucratic and Inflexible: Universal banks tend to be bureaucratic and inflexible. They tend to work primarily with large established customers and ignore or discourage smaller and newly established businesses.
• Different Rules and regulations: In offers all financial product and services under one roof.However ,all these products and services have to follow different rules and regulation of RBI, SEBI, IRDA. This create many problems because same bank has to follow different rules and regulation for different products.
• Conflict of interest : Combining commercial and investment banking can result in conflict of interest .some banks may give more importance to one types of banking and less importance to another one.

Thanks for taking out your time to read this blog.I hope you all must have gained some knowledge .

Thanks again.