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) 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.