Know about the Unit Banking System

Unit banking means a system of banking under which banking services are provided by a single banking organisation. Such a bank has a single office or place of work. It has its own governing body or board of directors.

It functions independently and is not controlled by any other individual, firm or body corporate. It also does not control any other bank.

Such banks can become member of the clearing house and also of the Banker’s Association. Unit banking system originated and grew in the U.S.A. Different unit banks in the U.S.A. are linked with each other and with other financial centres in the country through “correspondent banks.”

Advantages of Unit Banking

Following are the main advantages of unit banking:

Efficient Management

One of the most important advantages of unit banking system is that it can be managed efficiently because of its size and work. Co-ordination and control becomes effective. There is no communication gap between the persons making decisions and those executing such decisions.

Better Service

Unit banks can render efficient service to their customers. Their area of operation being limited, they can concentrate well on that limited area and provide best possible service. Moreover, they can take care of all banking requirements of a particular area.

Close Customer-banker Relations

Since the area of operation is limited the customers can have direct contact. Their grievances can be redressed then and there.

No Evil Effects Due to Strikes or Closure

In case there is a strike or closure of a unit, it does not have much impact on the trade and industry because of its small size. It does not affect the entire banking system.

No Monopolistic Practices

Since the size of the bank and area of its operation are limited, it is difficult for the bank to adopt monopolistic practices. Moreover, there is free competition. It will not be possible for the bank to indulge in monopolistic practices.

No Risks of Fraud

Due to small size of the bank, there is stricter and closer control of management. Therefore, the employees will not be able to commit fraud.

Closure of Inefficient Banks: Inefficient banks will be automatically closed as they would not be able to satisfy their customers by providing efficient service.

Local Development: Unit banking is localised banking. The unit bank has the specialised knowledge of the local problems and serves the requirement of the local people in a better manner than branch banking. The funds of the locality are utilised for the local development and are not transferred to other areas.

Promotes Regional Balance: Under unit banking system, there is no transfer of resources from rural and backward areas to the big industrial and commercial centres. This tends to reduce regional imbalance.

Disadvantages of Unit Banking

No Economies of Large Scale

Since the size of a unit bank is small, it cannot reap the advantages of large scale viz., division of labour and specialisation.

Lack of Uniformity in Interest Rates

In unit banking system there will be large number of banks in operation. There will be lack of control and therefore their rates of interest would differ widely from place to place. Moreover, transfer of funds will be difficult and costly.

Lack of Control

Since the number of unit banks is very large, their co-ordination and control would become very difficult.

Risks of Bank’s Failure

Unit banks are more exposed to closure risks. Bigger unit can compensate their losses at some branches against profits at the others. This is not possible in case of smaller banks. Hence, they have to face closure sooner or later.

Limited Resources

Under unit banking system the size of bank is small. Consequently its resources are also limited. Hence, they cannot meet the requirements of large scale industries.

Unhealthy Competition

A number of unit banks come into existence at an important business centre. In order to attract customers they indulge in unhealthy competition.

Wastage of National Resources

Unit banks concentrate in big metropolitan cities whereas they do not have their places of work in rural areas. Consequently there is uneven and unbalanced growth of banking facilities.

No Banking Development in Backward Areas

Unit banks, because of their limited resources, cannot afford to open uneconomic branches in smaller towns and rural areas. As such, these areas remain unbanked.

Local Pressure

Since unit banks are highly localised in their business, local pressures and interferences generally disrupt their normal functioning.

Leave a Reply

Be the First to Comment!

Notify of