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smu mba solved assignment Q Discuss the concept of Universal banking.

RBI had set up a committee on harmonization of relationship between DFIs and banks, popularly known as ‘Khan Committee’ headed by then chairman of IDBI. However, RBI has its own views on the recommendations of the committee which suggested DFIs may be converted into banks. The following recommendations were however implemented:

·         DFIs should be allowed to convert themselves into banks by giving them banking licences.
·         Merger of DFIs and DFIs/banks should be allowed.
·         IDBI’s shareholding in SFCs should be transferred to SIDBI.
·         SIDBI should be delinked from IDBI and ownership should be transferred to RBI/Govt.

The objective of universal banking is to help bring harmony in the role of FIs/ banks, offer world class financial services to the clients by using information technology and cross selling, reduce per customer cost and increase per customer revenue, take benefit of economies of scale and compete with international banks by expanding business beyond the boundaries of the countries.

As per RBI guidelines of April 2001, FIs have an option to transform into a bank provided they ensure compliance with the following:
·         Reserve requirements (CRR/SLR) – compliance with cash reserve ratio and statutory liquidity ratio requirements would be mandatory for an FI after its conversion into a universal bank.
·         Permissible activities – Any activity of an FI currently undertaken but not permissible for a Bank under Sec 6 (1) of the Banking Regulation Act 1949, may have to be stopped or divested after its conversion into a universal bank.
·         Composition of Board – Composition of Board of Directors to ensure compliance with the provisions in the Banking Regulation Act 1949, which requires at least 51% of the total number of directors to have special knowledge and experience.


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