Unit Banking: Meaning, Types, and function

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What is Unit Banking?

Unit banking is a system of banking that has just one office with virtually no branches. Unit banking is a system where an independent isolated bank undertakes banking functions in a particular area.

 

The operation of a bank in this system is confined to a particular area and hence this system is also known as Localised Banking.

It provides collection and remittance facilities to its customers by taking the help of other banks. The unit banking system originated and developed in the USA under the patronage of the government.

Advantage of Unit Banking System :

The unit banks being independent and one office banks possess certain advantages stated below :

A) Easy management and control: The management and control of unit banks are much easier and effective due to the small size and operations of the banks.

B) Quick Decision: In this system, there is an on the spot decision making by the bank management because there is no necessity of any consultation and approvals from external authority.

C) Prevention Of Monopoly: Monopolistic tendencies are absent in-unit bankings system. The banking resources are distributed between a large number of small bank’s and hence there is no danger of concentration of economic power.

D) The satisfaction of Local needs: Unit bankings being localized banking can serve to fulfil local needs. The banks are aware of the local problems and needs and thus are in a better position to satisfy the local expectations.

E) Personalised Services: A unit bank has personal knowledge of each of his customers and thus can provide personalized services.

F) Local Utilisation of deposits: In the unit banking system, there is no possibility of the transfer of resources by banks. The deposits mobilized by a unit bank in a particular are is utilized for the development of the same area. So, there is no chance for regional imbalances under this system.

G) No inefficient branches: In this system, inefficient loss-making banks are automatically eliminated, and only the profit earning banks survive. There is no system of providing protection or compensate for the losses of inefficient banks.

Disadvantages Of Unit Banking :

Unit banker system suffers from the following limitation:

A) No distribution of risks: There is no possibility of diversifying the risks of business in the unit banking system. It is because the operations of a bank are confined to a single office in a particular area.

B) Less ability to face a crisis: The changes in bank failure are more in the unit banking system. The capacity of the banks to face a crisis is adversely affected by limited resources, limited area of operation and lack of diversification of risks.

C) Lack of division of labour and specialization: Uneconomic and small size of unit banks hamper the introduction of division of labour and specialization. It also renders the use of modern equipment in banking invisible and thereby affects the efficiency of banks.

D) The disparity in interest rate: In this system, there is a disparity in interest rates because of the no transferability of funds from surplus areas to deficit areas. Different banks charge different rates of interest depending on the demand and supply of funds in the area of operation.

E) Lack of banking facilities in backward areas: Under the unit banking system, the backward areas continue to remain unbanked areas. A unit bank due to its limited resources and in view of its profit motive cannot be opened in backward areas.

F) Costly remittance of funds: Transfer of funds from one place to another is very costly and inconvenient in the unit banking system because of the absence of branches of unit banks. 

Conclusion :

The analysis of the advantages and disadvantages of branch banking and unit banking systems revels that branch banking has more advantages and it’s better than unit banking.

Moreover, the disadvantages of branch banking are not too serious and can easily be overcome under the supervision of the Central Bank.

Frequently Questions And answers :

1. From where the unit banking system originated?

Ans: Unit Banking system originated in the United States of America (USA) under the patronage of the government.

2. Which banking System is known as localized banking?

Ans: Unit Banking is known as localized banking.

3. How many branches under unit Banking?

Ans: Under the Unit banking system has just one office with virtually no branches.

4. Which banking system is an independent banking system?

Ans: The unit banking system is an independent banking system.

5. In which year principles of limited liability was first applied?

Ans: In 1860 the principle of limited liability was first applied to banks in India.

6. Which bank provides personalized services to his customers?

Ans: The unit banking system provides personalized service to its customers.

7. What is the main demerit of the unit bank?

Ans: The main demerits of unit banks are No distribution of risks.

8. Which banking has an easy management system?

Ans: Unit banking has an easy management system.

9. Which bank has a right to provide a quick decision?

Ans: The unit banking system has a right to provides quick decisions without taking approval from external authority.

10. Why unit banking is known as satisfaction is of needs?

Ans: Unit bankings being localized banking can serve to fulfill local needs. The banks are aware of the local problems and needs and thus are in a better position to satisfy the local expectations.

11. Why Unit Bank do not provide any transfer facility?

Ans: In unit banking system, there is no possibility of the transfer of resources by banks. The deposits mobilized by a unit bank in a particular area is utilized for the development of the same area. Hence, there is no chance for regional imbalances under this system.

Related:

WHAT IS GROUP BANKING AND TYPES OF GROUP BANKING?

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