Systems Of Banking
Unit banking is a system where the operations of a bank are confined to a single office located in a particular area. A unit bank has virtually no branches. In order to provide facilities to its customers in remittance and collection of funds, a unit bank resorts to correspondent banking system. In case of this system small banks serving small communities place deposits in nearby city banks which in turn hold deposits in giant banks located in giant cities. The gaint banks also hold reciprocal deposits of one another. Consequently, every bank gets connected directly or indirectly with each other and it can safely make payment on behalf of other banks.
Branch Banking is a system where a bank with a network of branches throughout the country carries out its banking operations. Sometimes branches are also opened outside the country. However, small banks may like to restrict their branches or offices to a certain region of the country.
The main features of branch banking system are as follows:
The bank is owned by a group of shareholders and controlled by a single Board of Directors.
The bank has a central office popularly termed as the Head Office of the bank which controls the operations of different branches.
Each branch is managed by a branch manager who manages the affairs of the branch as per the directives and policies of the Head office.
For external reporting the assets and liabilities of the branches and the Head Office are aggregated.
The branch banking system which developed in England is prevalent in most countries of the world including Australia, Canada, South Africa, India, Pakistan etc. In India the public sector banks, numbering 27 in all have more than 90% of the branches of all commercial banks. The also control more than 90% of the banking business in all.
Advantages of Brach Banking:
The protagonist of branch banking put forward the following arguments in favour of branch banking:
Economies of Scale: In case of branch banking the level of operations is quite large as compared to unit banking. As such the cost per unit of service in case of the former is lower as compared to the latter. Moreover, under branch banking system it is possible to hire more competent and qualified staff and have better division of work resulting in increase in overall efficiency.
Lower Cash Reserves: A large bank with a number of branches can manage its business with lower cash reserves since each of its branch can draw upon the resources of another branch or branches, if an emergency arises. However, a unit bank cannot confidently depend upon the resources of another unit bank. Hence, it may be required to keep higher cash reserves to run its operations smoothly.
Diversification of Risk: In branch banking industrial as well geographical diversification of loan risks is possible. As a result the loss suffered by branches on account of fall in industrial activity in a particular area may be more than compensated on account of profit made by branches in areas where there may be boom in business and industrial activity. This is not possible in case of unit banking where a bank is having its operation only in a particular area.
Better Customer Service: Branch banking provides better service to customers in remittance and collection of funds. Moreover, the objective of opening branches is to take banking service to the doors of the people who need them. Thus, service is cheap as well as convenient. Each branch has to handle a limited number of customers of the locality, hence the branch manger can personally look to their problems.
Greater Mobility of Capital: Branch banking permits better mobility of capital and thus bring more uniformity in interest rates. Surplus funds can be transferred from one area to another with convenience and speed and thus bring equilibrium in demand and supply of funds resulting in better returns to the investors.
Safety of Loans: While lending money, the branches of banks follow the policies as laid down by their Head office. The chances of favouritism are therefore reduced to the minimum. Moreover, loans beyond a particular limit are to be approved by the Head Office as per the prescribed procedure. This all ensured safety of loans and reduces the chances of banks suffering losses due to bad loans.
Emergence of Strong and Solvent Banks: Branch banks have large resources, better management; and greater diversification of risk. All this results in emergence of strong and solvent banks. The chances of bank failures are reduced to the minimum.
Disadvantages of Branch Banking
The protagonists of unit banking raise the following objections against branch banking:
Individual Needs Ignored: In case of branch banking the branches are guided by the policies laid down by the Head Office which is quite unaware of the individual needs. The Branch Manager has not much role to play, while a unit bank operates only in a limited area and hence it is possible for it to take personal care of the individual needs of each of its customers.
Red Tapism: In branch banking, a branch manager is required to take the instructions of the Head office from time to time. He cannot take several decisions at this level. Thus, there is bound to be red tapism and delay in processing loan applications etc. In unit banking all matters are decided at the unit bank level itself. Thus, there is quicker and better service.
Lack of Effective Control: In case of branch banking, the banks sometimes become unmanageable due to large increase in the number of branches. As a result, the control gets slackened and it increases the chances of frauds and manipulations.
Local Needs Ignore: Branch banks do not have attachment with a particular place. Branch managers are also not local people. They are subject to frequent transfers. The funds collected from local sources may be used for meeting the requirements of other places where the bank may find the investment more lucrative. Thus, local needs are not given that much of attention in case of branch banking as is done in case of unit banking.
Failure of Banks: In branch banking unremunerative and inefficient branches continue to exist at the expense of remunerative and efficient branches. In case this practice goes too far, it may cause failure of banks having repercussions throughout the country.
Concentration of Economic Power: The branch banks have huge resources raised from a wide spectrum of people. The Boards of Directors of these banks, therefore, possess immense economic power which they may use for promoting their own business interests. It may thus cause concentration of economic power in a few hands. As a matter of fact, this was one of the important reasons for the first phase of nationalisation of 14 major commercial banks in India.
Here we have explained the advantages and disadvantage of branch banking versus unit banking. A close perusal of the disadvantages of branch banking show that they are not too serious as they are made out to be. Proper orientation of lending policies, delegation of authority at different levels and proper fixation of priorities can improve the matter. As a matter of fact, branch banking is the logical development of growth of banking industry in any country.
Group Banking and Chain Banking
Chain Banking and Group Banking are the outcome of unit banking system devised to avail some of the advantages of branch banking system. They are both common in United State of America.
It is a system where two or more banks are controlled by a holding company. Thus, group banking is similar to chain banking except with the difference that instead of an individual or group of individuals or members of family, an incorporated company having a separate legal entity holds majority of the voting power in the companies of the group. Such holding company mayor may not be engaged in the banking business.
Chain Banking is a system where an individual or group of individuals or members of a family control the operations of two or more banks. The control is exercised either through holding majority of shares in each bank or inter-locking directorships. However, each bank retains its individual entity.
Chain banking or group banking brings the advantages of pooling of resources, economies of scale and reducing idle cash balances etc., to the member banks. However, it has the disadvantages of lack of effective control over member units, and misutilisation of resources of the member units particularly by the holding company. Moreover, it leads to concentration of economic power in a few hands. Due to these disadvantages, the system of chain banking or group banking is considered to be unworthy of adoption.