Disadvantage of Universal Bank

Disadvantages: •Conflicts of interests between bank and investor: For banks savings deposits are a financing possibility at a favorable rate of interest; private investors, however, would usually prefer investments in securities to realize higher interest earnings. •Risk of concentration processes; but in spite of a decreasing number of banks, especially of private banks, neither a suppression strategy of big universal banks against smaller competitors nor a cartelization is to constate in the banking sector.

•Potentials of influence: In particular big banks – as a result of their broad offer of financial products – are to be expected to have special influence possibilities on other economic subjects. But, whether this influence is brought to bear depends especially on the intensity of competition among the universal banks. DISADVANTAGES IN UNIVERSAL BANKING :- 1. To meet with the increasing demands of customers.

The establishment of new private sector banks and foreign banks have rapidly changed the competitive landscape in the Indian consumer banking industry and placed greater demands on banks to gear themselves up to meet the increasing needs of customers. For the dissatisfied current day bank customers, it is not only relevant to offer a wide menu of services but also provide these in an increasingly efficient manner in terms of cost, time and convenience. E. g. : Today there is a lot of burden on staff members, they are given no or less number of bank holidays, the time limit is 8-8. 2. Merger with DFI {Biggest Challenge}.

Development Financial Institutions (DFIs) opting for conversion into Universal Banks by merger/reverse merger routes may also face certain difficult situations on account of Asset Liability Mismatches, burden of mounting NPAs and differences in regulatory prescriptions applicable to FIs and banks such as CRR and SLR requirements and priority sector lending. The asset profile of DFIs in India is predominately of long-term nature, which also includes a very high level of non-performing assets. E. g. : NPAs of ICICI and IDBI were transferred to ICICI Bank and IDBI Bank respectively after their merger.

3. Statutory Liquid Ratio {SLR} and Cash Reserve Ratio {CRR} requirements of DFI. In case DFIs are converted into banks they would also be subject to the reserve requirement like banks. CRR and SLR burden that wasn’t there for DFI will be applied after its merger with any bank. This would mean that all liabilities issued by the DFIs in the past would also be subject to reserve requirements and since the assets structure of DFIs are largely of long term nature it would be very difficult for them to maintain the required level of SLR/CRR.

4. High cost of funds for DFI. Cost of deposits is high as the only source of funds is Fixed Deposits having higher Rate Of Interest. Costs of funds for Fixed Deposit are higher than CASA {Current account Savings account}. CASA has low cost, as the Rate Of Interest is low. Further, the cost at which DFIs have been raising resources in the past has generally remained high as compared to banks and maintenance of CRR/SLR of such liabilities, which may earn lower returns, would adversely affect the profitability of Universal Banks.

Compliance of priority sector lending norms, which earn lower returns, may also create difficult situations for such bank. Risk Management is one of the major challenges, where in the financial activity carries with it various risks, which would need to be identified, measured, monitored and controlled by Universal Banks. The nature of risks and mitigating techniques for different financial product/services will be different and therefore, Universal Banks will be required to develop comprehensive system of each product/service and each kind of risk. 5. Improving risk management systems.

With the increasing degree of deregulation and exposure of banks to various types of risks, efficient risk management systems have become essential. For enhancing the risk management system in banks, Reserve Bank has issued guidelines on asset liability management and risk management systems in banks in 1999 and Guidelines Notes on Credit Risk Management and Market Risk Management in October 2002 and the Guidance Note on Operational risk management in 2005. E. g. : Today most banks have stopped personal loans because there is no guarantee, no loans are granted for travel and tourism, i. e. holiday loans too are stopped.

1. Supervisory and regulatory infrastructure Another aspect is related to building up of supervisory infrastructure. The regulatory framework would need to be strengthened so as to cover all aspects of Universal Banking either under control of one regulator or a co-coordinating mechanism would have to be developed among different regulators like the Reserve Bank of India, SEBI, Insurance Regulatory, Authority etc. The regulators will have to frame sound mechanism to protect the interest of all concerned including the customer, the Universal Banking Institution and the financial system of the country.

1. Supervisory of financial conglomerates In view of increased focus on empowering supervisors to undertake consolidated supervision of bank groups and since the Core Principle for Banking Supervisory issued by the BASEL committee on Banking Supervision have underscored consolidated supervision as an independent principle, the Reserve Bank of India had introduced, as an initial step, consolidated accounting and other quantitative methods to facilitate consolidated supervision.

The components of consolidated supervision include, consolidated financial statements intended for public disclosure, consolidated prudential reports intended or supervisory assessment of risk and application of certain prudential regulations on group basis. In due course, consolidated supervision as introduced above would evolve to cover. 1.

Technology improvement and compensation and incentive systems for employees It is likely that Universal Banks of roughly the same size and providing roughly the same range of services may have very different cost levels per unit of output on account of efficiency differences in the use of labour and capital, effectiveness in the sourcing and application of available technology, and perhaps effectiveness in the acquisition of productive inputs, organization designs, compensation and incentive system-and just plain better management.

1. Conflict of interest between commercial and investment banking Larger the banks, the greater will be the effects of the failure on the system. Also there is the fear that such institutions, by virtue of their sheer size would gain monopoly power in the market, which can have undesirable consequences for economic efficiency. Further combining commercial and investment banking can give rise to conflict of interest. 10. Sharpening skills.

The far-reaching changes in the banking and financial sector entail a fundamental shift in the set of skills required in banking. To meet increased competition and manage risk, the demand for specialized banking functions, using IT, as a competitive tool has to go up. Special skills in retail banking, treasury, risk management, foreign exchange, development banking, etc, will need to be carefully nurtured and built. Thus, the twin pillars of the banking sector i. e. human resource and IT will have to be strengthened.

Thus the need of the day is a combination of improved technology and quality human resources. 11. Competition Monopolistic competition among universal banks will decrease their profit margin. 12. Government interferences Interferences by government in public sector banks through RBI are hampering progress of universal banks. 13. Present economic recession Recession is affecting universal banks in a big way as their investment in infrastructure as well as the establishment expenses is much higher as compared to public sector banks.