Tuesday, April 12, 2016

Comprehensive Note on Unit Banking and Branch Banking

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:

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.
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.