It means a system of banking in which a banking organisation works at more than one place. The main place of business is called head office and the other places of business are called branches.
The head office controls and co-ordinates the work at branches. The day-to-day operations are performed by the branch manager as per the policies and directions issued from time to time by the head office.
This system of banking is prevalent throughout the world. In India also, all the major banks have been operating under branch banking system.
Advantages of Branch Banking
Better Banking Services
Such banks, because of their large size can enjoy the economies of large scale viz., division of work and specialisation. These banks can also afford to have the specialised services of bank personnel which the unit banks can hardly afford.
Branch banking can provide extensive service to cover large area. They can open their branches throughout the country and even in foreign countries.
Decentralisation of Risks
In branch banking system branches are not concentrated at one place or in one industry. These are decentralised at different places and in different industries. Hence the risks are also distributed.
Uniform Rates of Interest
In branch banking, there is better control and coordination of the central bank. Consequently interest rates can be uniform.
Better Cash Management
In branch banking there can be better cash management as cash easily be transferred from one branch to another. Therefore, there will be lesser need to keep the cash idle for meeting contingencies.
Better Training Facilities to Employees
Under branch banking the size of the bank is quite large. Therefore, such banks can afford to provide better training facilities to their employees. Almost every nationalised bank in India has its separate training college.
Easy and Economical Transfer of Funds
Under branch banking, a bank has a widespread of branches. Therefore, it is easier and economical to transfer funds from one branch to the other.
Better Investment of Funds
Such bank can afford the services of specialised and expert staff. Therefore they invest their funds in such industries where they get the highest return and appreciation without sacrificing the safety and liquidity of funds.
Effective Central Bank Control
Under branch banking, the central bank has to deal only with a few big banks controlling a large number of branches. It is always easier and more convenient to the central bank to regulate and control the credit policies of a few big banks, than to regulate and control the activities of a large number of small unit banks. This ensures better implementation of monetary policy.
Contacts with the Whole Country
Under branch banking, the bank maintains continual contacts with all parts of the country. This helps it to acquire correct and reliable knowledge about economic conditions in various parts of the country. This knowledge enables the bank to make a proper and profitable investment of its surplus funds.
Greater Public Confidence
A bank, with huge financial resources and number of branches spread throughout the country, can command greater public confidence than a small unit bank with limited resources and one or a few branches.
Disadvantages of Branch Banking
Following are the disadvantages of branch banking:
Difficulties of Management, Supervision and Control
Since there are hundreds of branches of a bank under this system, management, supervision and control became more inconvenient and difficult. There are possibilities of mismanagement in branches. Branch managers may misuse their position and misappropriate funds. There is great scope for fraud. Thus there are possibilities of fraud and irregularities in the financial management of the bank.
Lack of Initiative
The branches of the bank under this system suffer from a complete lack of initiative on important banking problems confronting them. No branch of the bank can take decision on important problems without consulting the head office. Consequently, the branches of the bank find themselves unable to carry on banking activities in accordance with the requirements of the local situation. This makes the banking system rigid and inelastic in its functioning. This also leads to “red-tapism” which means “official delay.”
Branch banking encourages monopolistic tendencies in the banking system. A few big banks dominate and control the whole banking system of the country through their branches. This can lead to the concentration of resources in the hands of a small number of men. Such a monopoly power is a source of danger to the community, whose goal is a socialistic pattern of society.
Under the branch banking system, the financial resources collected in the smaller and backward regions are transferred to the bigger industrial centres. This encourages regional imbalances in the country.
Continuance of Non-profitable Branches
Under branch banking, the weak and unprofitable branches continue to operate under the protection cover of the stronger and profitable branches.
Branch banking is delocalised banking, under branch banking system, the branches of different banks get concentrated at certain places, particularly in big towns and cities. This gives rise to unnecessary and unhealthy competition among them. The branches of the competing banks try to tempt customers by offering extra inducements and facilities to them. This naturally increases the banking expenditure.
Branch banking system is much more expensive than the unit banking system. When a bank opens a number of branches at different places, then there arises the problem of co-ordinating their activities with others. This necessitates the employment of expensive staff by the bank.
Losses by Some Branches Affect Others
When some branches suffer losses due to certain reasons, this has its repercussions on other branches of the bank. Thus branch banking system as well as unit banking system suffer from defects and drawbacks. But the branch banking system is, on the whole, better than the unit banking system. In fact, the branch banking system has proved more suitable for backward and developing countries like India. Branch banking is very popular and successful in India. A comparison between unit banking and branch banking is essentially a comparison between small-scale and large-scale operations.