Though the functions of banks are almost the same in every country, there are difference in the organizational set-up and the lending practices of banks in different countries. We can divide banking organization under two heads: (1). Branch Banking, (2). Unit Banking, depending upon the organization and scale of operations of the banks. Again, we can classify banking under two heads on the basis of the lending practices adopted by them: (1). Pure Banking, (2). Mixed Banking.
Branch Banking is that system under which a large bank carries on banking business through a large network of branches spread all over the country. The bank's huge financial resources enable it to carry on its activities on a large scale all over the country. Branch banking is popular in the U.K, Canada, Australia, India and Pakistan. In the beginning even the British Banks were developed as Unit Banks with only one office located in a town or a city. Later on, the small banks were amalgamated into a few big banking companies and opened their branches all over the country. At present, there are five major banks in the U.K. which have opened branches all over the Britain and even in foreign countries.
Advantages of Branch Banking
In the words of Prof. Sayers, "A comparison between Unit Banking and Branches Banking is essentially a comparison between small-scale and large-scale operations."Following are the main advantages.
1. Large-Scale Operations
A big bank possessing huge financial resources and having a number of branches, can enjoy certain advantages of large-scale operations. Its huge financial resources enable it to recruit skilled, qualified and experienced personnel to carry on its banking activities. It can also introduce the principle of division of labor in the field of management. The presence of an efficient managerial staff is always an asset with the bank. Moreover, a big bank with huge resources and a number of branches, comes to acquire public confidence an account of its standing among the people.
2. Geographical Spreading of Risks
The spreading of risks geographically is another importance advantage of the branch banking system. Since there is diversification of risks under branch banking there is no danger of failure to the bank concerned. Moreover, under branch banking, if certain losses are incurred in depressed areas they can be offset by earning profits in the prosperous areas. But in the case of a Unit Bank the danger of failure is ever present. If the unit bank suffers losses, they cannot be offset by profits earned elsewhere since there are no other branches of the unit bank.
3. Facilities Regarding Transfer of Funds
Since the branches of the ban, under branch banking, are spread all over the country, it is easier and cheaper for it to transfer funds from one place to another. But this advantage is not available to the unit bank.
4. Economy In Cash Reserves
Branch banking results in an economy of cash reserve. A huge bank, with a number of branches in different parts of the country, can afford to manage with a lower cash reserve ratio in each of its branches. A unit bank, on the other hand, is deprived of this advantage. It has to keep sufficient cash reserves to meet the requirements of its depositors. The keeping of large cash reserves naturally reduces the profitability of the unit bank.
5. Equality In Interest Rates
Branch banking has the additional advantage of bringing about equality in interest rates. If the demand for money goes up in a certain part of the country then, under branch banking, the funds can be transferred to it from another branches where there are excessive reserves. Thus, the rate of interest can be prevented form rising in the former place.
6. Proper Use of Capital
Under branch banking, the bank can make a proper use of its financial resources. If a branch of the bank happens to have a plenty of deposits, but no opportunities for investments, it can transfer its surplus funds to other branches which can make a profitable use of such funds for trade and industry.
7. Wider Scope For Selection of Securities
Branch Banking presents a wider scope for the selection of different types of securities and investments. This ensures a higher degree of safety and liquidity for the bank.
8. Increase In Banking Facilities
Under branch banking, the banking facilities can be made available to all cities, towns and even backward areas in the country. One the country, it is rather difficult to set up unit banks in smaller towns and underdeveloped areas in the country on economic grounds.
9. Greater Public Confidence
A bank, with huge financial resources and a number of branches spread all over the country, can command great public confidence than a small unit bank with limited resources and one or a few offices located in a particular area of the country.
10.More Effective Credit Control
Branch banking is conducive to a more effective implementation of credit controls by the central bank because, 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 regulate and control the credit policies of a few big banks than to regulate and control activities of a large number of smaller unit banks.
11. Better Training To Staff
Since the banking were becomes more extensive under branch banking, the employees and the officers of the bank get better opportunities to acquire knowledge and experience about the various aspects of banking business in the country.
12. Contracts 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.
Disadvantages of Branch Banking
Following are the disadvantages of branch banking:-
1. Difficulties of Management Supervision/ Control
Since there are hundreds of branches of a bank under this system, this leads to a number of difficulties in the management, supervision and control of banking activities. The management of the bank automatically gets concentrated at the Head office.
2. 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 first consulting the head office. This makes the banking system rigid and inelastic in its functioning.
3. Possibility of Monopoly
Under branch banking, there is always the possibility of the emergence of monopoly in banking. The reason is that the activities of all the branches are controlled by the head office. A handful of high bank officials dominate the entire working of the bank.
4. Continuance of Non- Profitable Branches
Under branch banking, weak and non-profitable branches continues to be fed by the stronger and profitable branches of the bank. On the contrary, under unit banking, if a bank suffers losses, it shall cease to exist automatically after some time.
5. Unnecessary Competition
The great disadvantage of branch banking that there arises under it unhealthy type of competition among different banks. Under this system, the branches of different banks get concentrated at certain places, particularly in big towns and cities in the country. This gives rise to unhealthy competition among them.
6. Duplication of Banking Facilities
There is unnecessary duplication of banking facilities when the branches of different banks are opened at the same place.
7. Expensiveness
This 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 coordinating their activities with each other. It naturally adds to the expenditure which is not in the interests of the bank.
8. Saving of Smaller Places Invested In Bigger Towns
Under branch banking, the savings collected from the smaller places and backward areas are transferred for purposes of investment to bigger industrial and commercial centers in the country. This hinder the economic development of smaller places and backward areas which are thus deprived of the use of their legitimate savings.
9. 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.
10. Difficulties In Foreign Countries
Under this system, a bank opening branches in foreign countries has to face a number of difficulties and problems. The reason is that the banking laws, trade conditions, monetary and credit policies are different in foreign countries. In addition, the bank has always to face the threat of nationalization of its branches by the governments of foreign countries.
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