Universal
Banking – Introduction, Advantages and Disadvantages
As Narrow Banking refers to restricted and
limited banking activity Universal Banking refers to broad based and
comprehensive banking activities. Under this type of banking, a bank will deal
with working capital requirements as well as term loans for developmental
activities. They will be dealing with individual customers as well as big
corporate customers. They will have expanded lines of business activity
combining the functions of traditional deposit taking, modern financial
services, selling long-term saving products, insurance cover, investment
banking, etc.
Advantages
of Universal Banking
a) Economies
of Scale: Universal banking results in greater economic efficiency in the form
of lower cost, higher output and better products. It enables the banks to
exploit economies of large scale and wider scope.
b) 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.
c) 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.
d) Easy
Marketing of Services: 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.
e) 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.
Disadvantages
of Universal Banking
a) 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.
b) Non-performing
Assets problem: One of the most serious problems faced by universal banking is
Non-performing Assets.
c) 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.
d) 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.
e) 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.