Group banking is that system of banking in which two or more banks are directly or indirectly controlled by an association, trust or business corporation.
The banks function as a subsidiary of the holding or parent company. The holding company may be a banking or non-banking company.
The individual banks may be unit banks, or banks operating with branches or a combination of the two. Through the holding company controls and manages the banks in the group, each bank continues to have its own separate identity.
Participating banks have their own Board of Directors which is responsible to the holding company and depositors for the proper management of the banks.
Group banking developed in the USA and was very popular between 1925 to 1929. However, during the Great Depression of 1929, most of these banking groups failed and thereafter popularity and importance of group banking as a system declined.
Advantages Of Group Banking system :
This banking system has the following advantages :
A) Economics of large scale operations: The participating banks can avail of the benefits of large scale operation. E.g. Economy in the advertisement, purchasing stationeries.
B)Broader Market: It offers a broader market to the member banks. This helps the member bank’s to improve their earning capacity and network.
C) Diversification of Risks: There is the possibility of diversifying and distributing risks of business under this system.
D) Lower cash reserves: A bank can operate with lower cash reserves and thus reduce it’s idle cash reserves in a group banking system. It is because, in case of a shortage of cash, it can be easily transferred from one member bank to another.
E) Enhanced operational efficiency: In this system there operational efficiency of participating bankers is enhanced through shared knowledge and experience. The holding company also provides specialized services and advice to the participant’s banks.
F) No Wasteful competition: Since all the banks operate in a group under one holding company, there is no wasteful competition among the banks.
Disadvantages of Group Banking System:
This Banking also suffers from certain defects which follow:
A) The concentration of economic power: Group banking is a step towards monopoly banking. In this system, there is the possibility of a concentration of economic power in a few hands.
B) Ineffective management and control: This system suffers from inefficient management. The control of the holding company is directly and more flexible.
The participant banks may not follow the instructions and policies of the holding company.
C) Chain Reaction: In this system, there is a chain reaction. In other words, the failure of one bank in the group adversely affect other member banks.
D) Misutilisation of resources: There is the danger of diversion of funds of the participants’ bank’s by the holding company to promote its own interests. In such a situation the member banks would face a shortage of resources adversely affecting their operations.
Differences between group banking and unit banking:
1. In a group banking system two or more banks are directly or indirectly controlled by an association.
In the unit banking system, an individual bank operates through a single office.
2. In a group banking system lower risk and greater capacity to meet risk.
Under the unit banking system, bank operation is highly localized. Therefore, there is a little possibility of distribution and diversification of risks.
3. In this system of banking, the bank sometimes becomes an unmanageable number of groups.
The management and supervision of unit banks are much easier and hence there are fewer chances of fraud and other irregularities.
4. In a group banking system, there is greater mobility of capital which in turn brings about uniformity in interest rates.
Since easy and cheap movements of funds do not exist in this system.
5. In this system, there is a delay in decision making.
In this system, there is on the spot decision making by the bank management.
Frequently Questions And Answers :
1. Where is the origin of Group Banking?
Ans: Group banking origin and developed in the United States of America.
2. When did group banking become popular?
Ans: Group banking become popular between 1925 to 1929.
3. How many banks require for group banking?
Ans: Banking in which two or more banks are directly or indirectly controlled by an association, trust or business corporation.
4. What are the Advantages of Group Banking system?
Ans: Economics of large scale operation.
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