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Concept of Universal Banking

Universal Banking refers to broad based and comprehensive banking activities. It is defined as a system of banking where banks undertake a blanket of financial services like investment banking, commercial banking, development banking, insurance and other financial services including functions of merchant banking, mutual funds, factoring, housing finance, insurance etc.

In other words , it is a type of financial service that combines the aspects of investment, retail, and wholesale banking and is usually undertaken by large banks who can manage the cost of such widespread operations .

FUNCTIONS OF UNIVERSAL BANKING

The two main functions performed by universal banking are as follows :-

COMMERCIAL BANKING :- Universal banks offer regular services like a savings account, current account, and credit for meeting the basic requirements of normal customers.

INVESTMENT BANKING :- the Universal banks perform investment banking functions such as asset management, Mergers & Acquisitions, raising capital, securities trading, and securities underwriting etc.

ADVANTAGES OF UNIVERSAL BANKING

  • 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.
  • Optimum utilization of resources Universal banks make sure that there is the optimal utilization of all the resources. These banks evaluate the customers’ ability to take risks and accordingly use their resources.

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  • Profitable Diversification Universal banks diversify their activities. So, they can use the same financial experts to provide different financial services. This helps them to save their costs as well as day to day expenses. 
  • All services under one roof – Universal banking offers all money merchandise and services below one roof. It is useful to the bank as well as the client as it helps in saving a lot of dealing price and time  and also increases the speed of labour.

DISADVANTAGES OF UNIVERSAL BANKING

  • Ignores small & new businesses :- Universal banks may tend to work primarily with large established customers and ignore or discourage smaller and newly established businesses.
  • Monopoly power :- Universal banks are very large. So, they can easily get monopoly power in the market. This will have many harmful effects on the other banks and the public and also hamper the economic development of the country. 
  • Lack of expertise in long term lending :There are different types of long term loans like project finance and infrastructure finance, having long gestation projects which cannot be properly held by a single bank.

Thus, in simple words Universal banking is a type of financial service that combines the aspects of investment, retail, and wholesale banking under one roof. These entities focus on leveraging their large branch network and offer wide range of services under single brand name.


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