Unit Banking – Introduction, Merits and Demerits
Unit Bank is a type of bank under which the
banking operations are carried by a single branch with a single office and they
limit their operations to a limited area. Normally, unit banks may not have any
branch or it may have one or two branches. This unit banking system has its
origin in United State of America (USA) and each unit bank has its own
shareholders and board of management.
According to Shapiro, Soloman and White,” An
independent unit bank is a corporation that operates one office and that is not
related to other banks through either ownership or control.”
Advantages of Unit Banking: Unit
banking system has the following advantages:
1. Easy Management: The
management and control of unit banks is much easier and effective due to the
small size and operations of the banks.
There are less chances of fraud and irregularities in the financial
management of the unit banks.
2. Localised Banking: Unit banking is localized banking. The
unit bank has the specialised knowledge of the local problems and serves the
requirements of the local people in a better manner than branch banking. Since
the bank officers of a unit bank are fully acquainted with the local needs,
they cannot neglect the requirements of local development.
3. Quick
Decision: A great advantage of unit banking is that there is no delay of
any kind in taking decisions on important problems concerning the unit bank.
4. No Monopolistic Tendencies: Unit banks
are generally of small size. Thus, there is no possibility of generating
monopolistic tendencies under unit banking system.
5. Promotes Regional Balance: Under
unit banking system, there is no transfer of resources from rural and backward
areas to the big industrial commercial centres. This tends to reduce regional
in balance.
6. Initiative in Banking Business: Unit
banks have full knowledge of and greater involvement in the local problems.
They are in a position to take initiative to tackle these problems through
financial help.
7.
Flexibility in operation: The unit banks are more flexible. The manager
of the unit bank can use his discretion and arrive at quick decision.
8. No Inefficient Branches: Under unit banking system, weak and
inefficient branches are automatically eliminated. No protection is provided to
such banks.
9. No diseconomies of Large Scale Operations: Unit
banking is free from the diseconomies and problems of large-scale operations
which are generally experienced by the branch banks.
Disadvantages of Unit Banking: The
following are the disadvantages of unit banking system:
1. Limited Scope: The scope of unit banking is limited.
They do not get the benefits of large scale operations.
2. No. Distribution of Risks: Under
unit banking, the bank operations are highly localised. Therefore, there is
little possibility of distribution and diversification of risks in various
areas and industries.
3. Inability to Face Crisis: Limited
resources of the unit banks also restrict their ability to face financial
crisis. These banks are not in a position to stand a sudden rush of
withdrawals.
4. Lack of Specialization: Unit banks, because of their small
size, are not able to introduce, and get advantages of, division of labor and
specialization. Such banks cannot afford to employ highly trained and
specialized staff.
5. Operates only in urban areas and big towns: Unit
banks, because of their limits resources, cannot afford to open uneconomic
banking business is smaller towns and rural area. As such, these areas remain
unbanked.
6. Costly Remittance of Funds: A unit
bank has no branches at other place. As a result, it has to depend upon the
correspondent banks for transfer of funds which is very expensive.
7. Difference in Interest Rates: Since
easy and cheap movement of does not exist under the unit banking system,
interest rates vary considerably at different places.
8. Local Pressures: Since unit banks are highly localised
in their business, local pressures and interferences generally disrupt their
normal functioning.
9. Undesirable Competition: Unit banks are independently run by
different managements. This results in undesirable competition among different
unit banks.
Branch Banking – Introduction, Advantages and
Disadvantages
Branch Bank is a type of banking system under
which the banking operations are carried with the help of branch network and
the branches are controlled by the Head Office of the bank through their zonal
or regional offices. Each branch of a bank will be managed by a responsible person
called branch manager who will be assisted by the officers, clerks and
sub-staff. In England and India, this type of branch banking system is in
practice. In India, State Bank of India (SBI) is the biggest public sector bank
with a very wide network of 16000 branches.
According to Gold field and chandler,” A
branch bank is a baking corporation that directly own two or more banking
agencies.”
Thus branch banking is a system in which a
bank renders its banking activities at two or more places. Head office has the
overall control over the working of various branches.
Advantages
of Branch Banking: Branch banking system has the following
advantages:
1. Economies of Large Scale operations: Branch
banking enjoys the advantages and economies of large scale operations. Under
branch banking system economies can maintained through large scale of
operations and wider geographical coverage increase public confidence in the
banking system.
2. Economy of Cash Reserves: Under
branch banking system a particular branch can operate without keeping large
amounts of reserves. In time of need, resources can be transferred from one
branch to another. It is not easy for a .unit bank to draw on another unit
bank.
3. Proper use of capital: There is a proper use of capital under
the branch banking system. Since the resources are transferred from one branch
to another. So the capital can be properly used by investing in the profitable
branches.
3. Economy of Costs: Branch banking has the advantage of
effecting remittances of funds from one place to another with greater ease and
at a lesser cost than unit banking, for inter-office indebtedness can be far
more easily adjusted.
4. Risks-spreading Economy: The spreading of risks geographically
is another major advantage of the branch banking system. In branch banking,
losses incurred one branch can be offset by profits earned by the profit making
branches which is not possible in case of unit banking.
5. Easy and cheaper transfer of funds: Since the
branches of bank under branch banking are spread all over the country, it is
easier and cheaper, for it to transfer funds from one place to another.
6. Greater Safety and Liquidity: Branch
banking also offers a wider scope for the selection of diverse securities and
varied investments, so that a higher degree of safety and liquidity can be
maintained.
7. Balanced economical growth: Under
branch banking, the banking facilities can be made available to all cities,
towns, and even backward areas in the country. Thus, branch banking is very
helpful in achieving a balanced growth of the country's economy.
8. Convenient for the Central Bank's Supervision: Under a
system of branch banking it is more convenient for the central bank or the
government to regulate and supervise the activities of banks, as control
becomes more effective and easier since only the head office is to be dealt
with for the purpose.
9. Provision for Training the Personnel: Finally,
branch banking provides the best training ground for personnel. A person may be
trained in a small branch Where the pressure of work is less and he may be
transferred later to an active branch.
Disadvantages or Demerits of Branch Banking: Branch
banking generally suffers from the following limitations:
1. Danger of Mismanagement: Under the branch banking system a
number of difficulties as regards management, supervision and control, a number
of branches undue expansions lead the danger of mismanagement.
2. Delays in Decision-making: The
system of branch banking also suffers from red tape and delay on account of the
inadequate authority of branch managers. Usually, application for big credits
has to be referred to the head office by the branch manager. This causes delay
and gives little initiative to branch managers.
3. Lack of Personal Contact: A large
bank tends to become more and more impersonal in its dealings. The general
managers have hardly any personal contact with the local people or the staff of
different branches.
4. High operating and maintenance expenses: Branch
banking is very expensive, because with the opening of too many branches,
establishment and maintenance charges of the branches are bound to be high and,
as a result, profits may shrink.
5. Concentration of Monopoly Power in the hands of few banker: Branch
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.
6. Lack of
initiative: Branch banking lacks initiative. No branch office can take
independent decisions and also branch manager has limited powers.
7.
Regional imbalances: Branch banking encourages regional
imbalances. The financial resources of economically backward areas tend to get
transferred to industrial and business centres. Due to which backward areas
continue to be neglected and remain over backward.
The difference between branch banking and unit banking are as follows:
Basis
|
Branch
Banking
|
Unit
Banking
|
1. Operate
|
Under branch banking a big bank with a
single institution and under single ownership operates through a network of
branches.
|
Under unit banking an individual bank
operators through a single office.
|
2. Decision
|
There may be undue delay to take the decision
centrally in branch banking.
|
The unit banking, the bank can take the
decision quickly.
|
3. Risk
|
Risk can be spread geographically by the
system of branch banking.
|
The risk cannot be spread geographically
this unit banking system.
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4. Managerial costs
|
Managerial costs are high in Branch Banking
system.
|
Managerial cost is comparatively less in
Unit Banking.
|
5. Funds
|
Funds are transferred from
one branch to another.
|
Funds are allocated in one
branch and no support of other branches.
|
6. Deposits and assets
|
Deposits and assets are
diversified, scattered and hence risk is spread at various places.
|
Deposits and assets are not
diversified and are at one place, hence risk is not spread.
|
7. Specialisation
|
Division of labour is
possible and hence specialisation possible.
|
Specialisation not possible
due to lack of trained staff and knowledge
|
8. Rate of interest
|
Rate of interest is
uniformed and specified by the head office or based on instructions from RBI.
|
Rate of interest is not
uniformed as the bank has own policies and rates.
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