8/13/2019 Banking on Universality

http://slidepdf.com/reader/full/banking-on-universality 1/3

Banking on UniversalityAuthor(s): Joydeep SenSource: Economic and Political Weekly, Vol. 37, No. 48 (Nov. 30 - Dec. 6, 2002), pp. 4770-4771Published by: Economic and Political Weekly

Stable URL: http://www.jstor.org/stable/4412891 .

Accessed: 14/12/2013 06:34

Your use of the JSTOR archive indicates your acceptance of the Terms & Conditions of Use, available at .http://www.jstor.org/page/info/about/policies/terms.jsp

 .JSTOR is a not-for-profit service that helps scholars, researchers, and students discover, use, and build upon a wide range of 

content in a trusted digital archive. We use information technology and tools to increase productivity and facilitate new forms

of scholarship. For more information about JSTOR, please contact support@jstor.org.

 .

 Economic and Political Weekly is collaborating with JSTOR to digitize, preserve and extend access to

 Economic and Political Weekly.

http://www.jstor.org

8/13/2019 Banking on Universality

http://slidepdf.com/reader/full/banking-on-universality 2/3

CPDThaddealt hissensitivematter n alittle moredetail.

The principalrecommendationswith

regard o corporate axes are simplifiedand lower taxrates,abolitionof most ofthe ncentives ndaligningbookdeprecia-tion with tax depreciation.What has in-vited corporatewrath are the last two

suggestions.In

myview, industrymust

seriously xamine heimpactof abolitionof incentives,manyof whicharefor 'non

recurring' xpenditure, eriouslyin thecontextof reductionn tax rates.As re-

gardsdepreciation, ithnewrequirementsof computing ookprofitsafterallowingdeferred ax liability,the impactof this

suggestionwill be margina'.

IV

Concluding Observations

CPDTmakesa strongandcogentcase

forautonomy f taxadministration,rans-formingt into a taxpayer ervicedepart-mentandabolitionof fiscal incentives. tis arguednthisarticle hatgovernment'srecordwithregard o genuineautonomyof even commercial nd industrial ublicsectorenterprisess dismal.Oneis boundto have seriousdoubtsaboutgovernmentgranting utonomyo CBDT.Even f oneleaves this aspectaside,for the orderoftransformationequired,empiricalevi-dence uggestshat t s notpossiblewithout

strongfactors- positive motivationor

regulatoryrother xternal ressures. ortransformationo succeed t shouldmakebusinesssense. CPDTbeyondmakingavirtuous asefor 'goodconduct'doesnot

provideransformationynamicsitherorindividualsor for CBDT to become aservice activity. As regards ncentives,CPDT houldhaveappreciatedowdeeprooted heseare. It has harped oo muchon the distortion ffect andadministrativehassles.Post-reformmacroeconomicn-

vironment,n itself, is a strongcase forabolitionof incentives.Benefitof incen-tives is too

small,particularlyor house-

holds thatsave a highproportionf their

income,to influence he level of saving.Besides,unlike n the pre-reform eriod,consumptions an mportantrowth river.Itmightbe advisable oreconsiderncen-tivesfor nfrastructurendhousing,npartbecausegovernmentsn the foreseeable

futuremaynotbeabletocreatepolicyenviron-ment that makes nfrastructureconomi-

cally viable and reducecost of housing.AlthoughCPDT has, perhapswith a

view topressurise overnment,xpressed

its concern that the efficacy of its recom-

mendations is likely to be vitiated if indi-

vidualcomponentsareselectively acceptedor rejected; success of tax reform efforts

depend on their implementation in an

integrated manner ,it will have to offer,

maybe behind the scenes, some optionswith analysis of pluses andminuses so that

government can take a more balanced

decision. Oneof the most important hings

missing from thereport s anydiscussion of

the government's credibility with regardto consistency of tax policy. Unless there

are some mechanisms installed to ensure

that governments do not tinker with tax

structure, ependingupon theexigencies of

revenue.Whateverdecisiongovernmenttakes hopefully t will be takenbearingin mindmanyof thepointsmadebyCPDT- itcannot hange tin ashort ime.CPDT

expectsmuchstrongercommitment nd

couragerom heIndian overnmentshandemonstratedy them n the recentpast.Probability f a highratioof recommen-dations rashedmauled)othoseacceptedis real.Till then he fieldis openfor com-mentators aving asyaccessto the mediato show how ill-educatedheexpertgrouphas been. One hopesthatbeforegovern-ment takesa finaldecisionsome seriousminded commentators will criticallyexamine he relevant ssues. B3

anking o niversality

If universalbanking s to work,we should have guidelinesthat areclear andmanageable;and once theguidelinesare inplace, thereshould not be any concessionson a piecemeal basis.

JOYDEEP SEN

he concept of universal banking, in

the Indian context, has somehow

come torepresent he reversemergerof a financial institution with its banking

progeny.Theburning ssue about universal

banking had been about how the institu-

tion would go about garnering Rs 18,000crore to meet statutoryobligations and the

degree of concessions they would be able

to obtain from RBI about the magnitudeof CRR, SLR and priority sector lending.In the context of universal banking, let us

spare some time for the real issues.

A universal bank provides the entire

spectrum of financial products/services,be it accepting deposits, offering short-

term andlong-term loans to industry, per-sonalloans, insurance, nvestmentbanking,etc. The practice of universal banking is

quiteold and the

global experiencehas

been mixed. In the US, after the bankingcrisis of the 1930s,theybanned itby passingthe Glass-Steagal Act of 1933. This pro-hibited commercial banks from activities

like investment banking, insurance, etc,and from taking equity positions in bor-

rowing entities. The idea was to mitigate

risky behaviourby restrictingcommercial

banksto their traditionalactivity of accept-

ing depositsand ending.Inrecent decades,a combinationof macroeconomic distress,internationalcompetitive pressureand the

creative nventionof new financial nter-mediaries has helped the US financial

systemovercome heregulatorymandateof financial ragmentation.n the 1990s,the US has beenslowly movingtowardsuniversalbankingby rollingback someof the earlier restrictions.The conceptof universalbankinghas workedin the

European context. In countries likeGermany, witzerland, rance, taly,etc,commercial ankshavebeenselling nsur-anceproducts,whichis variouslyknownas Bancassurance r Allfinanz.

The real issue is whetherwe needuni-versalbanks nIndiaandhowtheconceptis different rom he traditionalonceptofwhatmaybecalled narrow anking'non-universalbanking).Anyway, t is alreadybeing practisedhere; many traditional'narrow' anksareofferingahostof otherservices ikemutualunds, onsumeroans,

housing inance,merchant

anking,nsur-

ance,etc,eitherbythemselvesorthroughsubsidiariesrjointventures.Oneobvious

advantages that he scenarioof financialserviceprovidersecomesessfragmented,which seasier orregulatorsokeep rackof. This argumentmay be juxtaposedagainstthe fact that more than 37,000NBFCsapplied o RBI for registrationfew years back, in the clean-up drive

following heCRBscam.Thereweremanymorewhodidnotevenapply.Thequestionis, did we ever need so manyNBFCs?If

4770 Economicand PoliticalWeekly November30, 2002

This content downloaded from 146.110.156.8 on Sat, 14 Dec 2013 06:34:07 AMAll use subject to JSTOR Terms and Conditions

8/13/2019 Banking on Universality

http://slidepdf.com/reader/full/banking-on-universality 3/3

the traditional anks,with their reach nthe interiorsand ruralareas,had been

offeringall servicesincludingconsumer

loans, omany mall-timeperators ouldnothavemushroomed ndthingswouldhave been easierfor the regulators.

Bydiversifyingtsportfolio f services,a bank anuse itsexistingexpertisenone

typeof financial ervice n providinghe

other ypes.A bankpossesses nformationon the risk characteristics f its clients,which t can use topursueotheractivitieswith he ameclients. bank asanexistingnetworkof branches,which can act as

shopsforsellingproductsike insurance.Thiswayabigbank anreach heremotestclient withouthaving o take recourse oan agent.When an entityis offeringallservicesunder ne umbrella t saves timeand ransactionost for the consumer. orthe universal bank,' t leads to betterutilisation f capitalas it does not have

to havecapitalas pertherequirementsfthe various ntitiesbutone unifiedcapitalbase would cater to all the services ren-dered.In other words, the incremental

capital-outputatioICOR)wouldmprove.There reother dvantagesikeeconomiesof scale,buteconomiesof scale are notas much of an advantage n financialservices as in manufacturing.

However, othingomeswithouttscostordisadvantages.heremaybe loss of the

advantagesfspecialisation.ize and calearebeneficial nly fthey ead o increased

efficiency,or lower customer cquisitioncosts.But hisdoesnotalwayshappen, ndwe haveseenmany xamples f large ize

actuallybeingan impedimento innova-tionand lexibility.fabank ngagesn too

manyactivities,tmay osesightof itscore

responsibilitynd ncrease heriskprofileby ndulgingnuntested ctivities.RBIhasstated hat he movementowardsuniver-sal bankingshould foster stabilityand

efficiencyof thefinancial ystem,butbyitself t cannotprovide viableorsustain-able solution o theoperational roblemsof individualnstitutions

risingrom ow

capitalisation, igh level of NPAs, largeasset-liabilitymismatches,iquidity,etc.

Theideal situationwould havebeen tocleanup hebalanceheetsofFIs,andonlythereaftergo for mergerswith, or thetakeoverof, a largebank.Had thatbeen

done,universalbankingwould not havebeenjusta cover forFIs tryingto brushall theirproblemsunder he carpet.Uni-versalbankingwillcome inhandy or theFIs to coveruptheir oanand nvestmentlosses andignorethe realproblems hat

have landed hem n thepresent inancialmess. The bottomline s, in the Indian

context,howshouldwe go aboutachiev-

inguniversalbanking byexpandinghe

portfolioof banksor by convertingDFIsintobanks? nadeveloping conomy hereisalways heneed or ong-termnfrastruc-

ture/project apitalandspecialised nsti-tutionscatering o such needs.

DFIs in India

Talking fDFIs, et usgoback ohistoryfor a while. In 1953, RBIset up a com-mitteeunderA D Shroff o examinehowincreasedinance ouldbemadeavailableto theprivateector.Among he mportantcontributionsf theShroffCommitteewasthe recommendationo set upspecialisedfinancial nstitutionsorrouting unds totheprivateector.Theyrecommendedne

state-sponsorednstitution,nitially alled

the IndustrialDevelopmentCorporation,whichwasa divisionof RBIand henwenton to become heIndustrial evelopmentBankof Indiaand one private ector n-stitution alled heIndustrial evelopmentandFinanceCorporation, hich went ontobecome heIndustrial redit nd nvest-mentCorporation f India.The present

day developments aveto be seen in the

perspectiveof the objectivesfor whichtheseweresetup whether heconversionto universalbank, n spiteof all the ad-

vantages,wouldhelp nrouting dditional

funds or industrial ctivity. na scenariowhereDFIs are convertedntobanks, hesourceof fundswouldnot be as longtermasprojectoans,hence herewouldalwaysbe a tendencyof usingshort-termundsfor funding ong-termoans.This would

go on fine as long as interestratesareconstantor movingdownward;marginswould shrinkwhenshort-termatesstart

movingupwards.Anyway, herewouldbea perpetual sset-liabilitymismatch.

A glanceat section4-A of CompaniesAct tells us of the various inancial nsti-

tutions; t is a fact thatthey

came intoexistence because of the need for

specialisednstitutions, g, SIDBIcater-

ing to small industries r NABARD ca-

tering oagriculture/ruralreas.Changingthe form of a specialisedinstitution s

justified nlywhenthasoutlived tsutility.Therearecases,e g, ShippingCreditandInvestmentCorporationf India SCICI)

being mergedwithICICI, ndustrialRe-construction ankof India IRBI),whichused to cater to sick industries,beingchanged o IndustrialnvestmentBankof

India IIBI) ocater ogreenfieldprojects.However, hese areexceptions. ndia tillneeds nfrastructure/projectinance; f alltheinstitutionsikeICICI, DBIandIFCIare onvertedntouniversal ank'sorsomeobviousadvantages,we will be left withIDFConly.As in allsectors, here s needfor competitionn this sector as well.

Whicheverway we go about it, the

authorities houldcodifywhatcomprisesuniversalbanking,whatadvantagesuchanentity hould njoyvis-a-vis raditional

banks,whatwouldbe its responsibilityothe economyand the regulatory equire-ments ikeCRR,SLRandpriority ector

lending,rather handecidingpiecemealabout the concessionsto one institution.There houldbeseparateodesofconductfora traditionalank onvertingtself ntoa universal ankanda DFIconvertingntoa universalbank.Whena DFI becomesauniversal ank,t becomesadifferenttory

altogether; t gets access to short-termunsecuredmoneypayable ndemand.Oncethecode is in place,otherparticipantsfthe financial ystemcandecide forthem-selves whether ojump ntothefray.One

bigregulatory roblemn Indiasmultipli-cityofauthorities; BIwoulddecideabout

bankingactivities,SEBI wouldregulatemerchantbanking,IRDA would controlinsurance ctivitiesandso on. A uniformcode wouldclearsomeof the confusions

emanatingrommulti-agency ontrol.Therehavebeencertaindevelopments

in theregulatory tmosphere. ankshavebeen permitted o diversifyinto invest-ments and long-term inancingand theDFIs to lend forworking apital, tc. Butthemajor mpedimento complyingwithRBIstipulationss thatDFIsaresupposedto complywith the samerequirementssbanks.The guidelinewas thatany DFI,which wishes to do so, would have the

option to transform tself into a bank,

provided he prudential ormsas appli-cable o banks re ullysatisfied.Tobypasstheregulatoryequirements,heICICI ookthe 'reverse oute'

by mergingtself with

its bankingprogenyratherhenprepareblueprint f converting tself into a uni-versalbank.Reductions n CRRrequire-mentsand inking he nterest ateonCRR

deposits o thebankratewouldhelp,butit still leaves out a lot to be managed ocomeupto the evelof regulatory equire-ments.Hence,if universalbankings towork n India,we shouldhaveguidelinesthataremanageable,ndonce suchguide-lines are n place,there houldnot beanyconcessionson a piecemealbasis.F33

EconomicandPoliticalWeekly November30, 2002 4771

This content downloaded from 146.110.156.8 on Sat, 14 Dec 2013 06:34:07 AMAll use subject to JSTOR Terms and Conditions