What is Unit Banking?

March 17, 2015 June 28, 2017

Unit Banking is a system of banking wherein a bank operates in a limited area, does not open any branches in other places and is more responsive to local needs. These independent and isolated units have to take care of the entire banking operations and maintain good health. They thus have to raise their capital and deposits locally. They are more efficient as they have a limited scale and lack of any gap between decision-makers and executives.

Unlike, branch banking, where policies are framed taking a larger context in mind, decisions are quicker and more suitable to the customers. These bankers focus on development of the local area and better community service. These baks have their own board of directors and stockholders. The concept originated in USA.

Relevance of Unit Banking

It is better known as localised banking as banks are more close to the local conditions and have specialised information about the local problems, drawbacks and needs. The funds are thus channelized to cater to local issues only and don’t have to be transferred to other areas. As there is no transfer of funds from rural areas to other urban commercial centres, so the developmental initiatives undertaken help to reduce regional disparities over a period of time. The management is more effective and comparatively easy.

Due to quick decisions as the management has more operational freedom and timely implementation, these banks have a great rapport with their customers. In addition, there small size of operations reduces possibilities of any monopolistic tendencies. On the flip side, the unit system of banking has its own set of drawbacks. The foremost is that due to intense local operations and lack of branches in other areas, risk also becomes highly concentrated and severe. There are no sister branches to divide the same. This makes these banks highly vulnerable to financial shocks such as a sudden run on the banks.

The limitations of resources pose a grave threat to the survival of such banks. As there is not much at disposal after the routine banking services are carried out so there is little scope for such banks to enter the poorer pockets of the country and ensure banking to all. Another major lag is the lack of specialised staff which only caters to one set of services. The shortage of funds does not allow management to resort to such divisions of labour and most of the officers take care of multiple types of tasks.

They have to depend on correspondent banks for transfer of funds at higher prices. Also, as these banks operate under different independent managements so there is a unhealthy and unwarranted competition between different unit banks. This often leads to waste of valuable resources and time.