The Banking system of England originally offered an example of the branch banking system, where each commercial bank has a network of branches spread throughout the country. In the initial stages of banking development, each bank in England consisted of a single office with few branches.
In the process of evolution, banking organisation developed in the direction of branch banking. As a result of continuous process of amalgamations and consolidation, today there exist only a few banks, of which the “Big Five” the Midland, the Lloyds, the Barclays, the Westminster and the National provincial” are most important. The Big Five of England have more than 10,000 branches and cover about 75% of the banking resources of the country.
Most of the Indian Banks are falling under this category. They are having large number of branches. All the Public Sector banks, i.e., nationalized banks and State Bank of India and its subsidiary banks put together have nearly 60,000 branches. Banks in India require a license from Reserve Bank of India under Banking Regulation Act to open a branch as well as to start a bank itself.
Thus, branch banking consists of a few big banks with numerous branches spread over wide geographical areas. These branch banks operate under their head offices. Branch banking is also known as “delocalized banking”.
In India, the State Bank of India has emerged as one of the biggest banks with large number of branches all over the country. Its important indicators as on March 1999 were as follows:
Organizational Structure of Branch Banking
The organizational structure of the branch banking in the country is given below:
Advantages of Branch Banking
The following are the advantages of branch banking:
(i) Benefits of large-scale operations.
(ii) Wider spreading of risks.
(iii) Efficient management.
(iv) Economy in remittance.
(v) Economy of cash reserves.
(vi) Diversification of deposits and assets.
(vii) Uniformity of interest rates.
(viii) Reduce seasonal stringency.
(ix) Fullest and proper use of resources.
(x) Extension of banking facilities to backward areas and weaker sections.
(xi) Acquiring diverse types of securities.
(xii) Provide long-term loans and advances.
(xiii) Greater mobility of organisation.
(xiv) Loans and advances made on merit.
(xv) Possibility of division of labour and specialization.
(xvi) Economic conditions can be studied better.
(xvii) Bank failures will be minimised.
(xviii) Effective control by Central Bank.
(xix) Greater convenience to trade.
(xx) Public confidence.
(xxi) Equitable distribution of employment opportunities.
Let us discuss these points one by one.
(i) Benefits of large scale operations:
A branch bank has all the advantages of large scale operations. It has large resources when compared to a unit bank. It can appoint experts paying high salary and it can use modern mechanical devices in its offices for efficient working.
(ii) Wider spreading of risks:
A branch bank operates over a wide area with different types of economic development. The losses of branches of one region if any can be set off against the profit of branches in other regions. In this way this risks are distributed geographically. Thus, its capacity to withstand times of depression is more than that of unit banks.
(iii) Efficient management:
The branch banking system makes for greater efficiency in management. The staff members of a branch bank are more efficient and more experienced when compared to those of a unit bank. The head office arranges transfers of staff from branch to branch. Each staff member has the opportunity to work in various branches, understanding men and matters of different localities. Besides the above, the expertise at head office will be made available to all branches. In this way, the system of branch banking ensures efficient management.
(iv) Economy in remittance:
Branch banking has the benefit of economy in remittance of funds. As it has branches in different localities, it need not physically transfer cash from one place to another. It can provide remittance facilities to its customers by mere transfer entries in the books of its branches. It makes the operation easy, quick and cheap.
(v) Economy of cash reserves:
Branch banking has the merit of economy of cash reserves. Cash can be transferred from one branch to another whenever necessary. Therefore, branch can operate with lower cash balances and they avoid large amount of idle reserves/ balances.
(vi) Diversification of deposits and assets:
Under branch banking system, there is greater diversification of deposits and assets because of wider geographical co-verage. Diversification here means that a bank need not specialise in any particular area or particular industry. Deposits are mobilised from the area where savings are in plenty and loans are extended in the areas where funds are scarce and interest rates are high.
(vii) Uniformity in interest rates:
Branch banking system ensures uniformity in interest rates. Uniformity in banking policies and easy transfer of funds to places where there is demand, results in uniform interest rates.
(viii) Reduce seasonal stringency:
In agricultural countries like India, there is greater demand for funds during the seasons of agricultural operations. By a wide network of branches and transfer of funds, branch banking will be in a position to relieve such seasonal scarcity of funds.
(ix) Fullest and proper use of resources:
Under branch banking, there is great scope for economic use of funds. The head office analyses the demand for funds in various localities and freely transfers its resources among its branches. At no branch, funds are kept idle. This enables it to earn high profits by employing its funds most economically and profitably.
(x) Extension of banking facilities to backward areas and weaker sections:
Under branch banking, the banking facilities are not restricted to profitable localities only but they are extended to the backward areas also. The loss arising from such localities can be compensated by the profits from other developed areas. Besides, because of the availability of resources, the requirements of weaker sections of the society are also satisfied.
(xi) Acquiring diverse types of securities:
Branch banking has the advantage of acquiring diverse types of securities from different regions in employing funds. It can invest its funds by lending against securities of agricultural commodities, industrial goods, gold, stock, etc. It can choose a variety of securities from different localities. But a unit bank does not have this facility.
(xii) Provides long-term loans and advances:
Due to its wider area of operations, they may mobilise large resources which can be used to provide loans and advances on long-term basis which is not possible in case of unit banking.
(xiii) Greater mobility of organisation:
The branch banking has the greater mobility of organisation. It can spread its activities to new localities by opening branches with ease.
(xiv) Loans and advances made on merit:
Under the system of branch banking loans and advances are made purely on merit and not on other considerations. The branch manager is not influenced by local pressures in granting loans and advances. He can refuse a loan to an undesirable person, without any obligation, fixing the responsibility on the head office. This is not possible in the case of a unit bank.
(xv) Possibility of division of labour and specialisation:
Because of the availability of large resources and large scale operations it is possible to adopt division of labour which leads to specialisation. In this way branch banking ensures the overall efficiency of the organisation.
(xvi) Economic conditions can be studied better:
Under branch banking, a network of branches spread all over the country. Thus, it can have a comprehensive knowledge of the entire economic conditions of the country It helps the banks to make proper investment^.
(xvii) Bank failures will be minimized:
In the case of heavy withdrawal of funds in one branch, it can be met by transferring funds from other branches. Thus, bank failures can be avoided.
(xviii) Effective control by Central Bank:
Branch banking does not make the control by Central Banking more difficult, as it has to deal only with the Head Offices of Banks, and not with each branch.
(xix) Greater convenience to trade:
The traders of one area can get in touch with traders in other parts of the country with ease. If the bank has branches in foreign countries, they can contact the traders in foreign countries also. This helps them to promote their business considerably
(xx) Public confidence:
The large scale operation and the financial viability of branch banking gains public confidence which is the foundation stone for the banking business.
(xxi) Equitable distribution of employment opportunities:
A vast network of bank branches at various places offer local employment opportunities and help local people in getting jobs.
Disadvantages of Branch Banking
Even though, the branch bank has many advantages as mentioned above, it is not free from criticisms. The following are the disadvantages of Branch Banking:
(i) Difficulty in management and control
(ii) Less initiative
(iii) Regional disparities
(iv) Adjustment of losses
(v) Concentration of economic power
(vi) Continuance of inefficient branches
(vii) Heavy overhead charges
(viii) Unhealthy competition
(ix) Delayed decision-making
(x) Local needs may not be satisfied in full
(xi) Other defects.
We shall explain these items one by one.
(i) Difficulty in management and control:
Since the bank has many branches, spread over different places, supervision, management and control become more difficult.
(ii) Less initiative:
The branches of the bank are not allowed to make their independent decisions. They have to follow the directives of the head office. Besides they have to refer to the matters to the head office for approval. Therefore, the branch managers cannot take initiative.
(iii) Regional disparities:
In the case of unit banking system the funds are used for the particular locality alone. It cannot be transferred to other places. But, in the case of branch banking funds collected from backward areas and the villages may be transferred to the places where the profitability is high. This tendency creates regional imbalances in the country.
(iv) Adjustment of losses:
In branch banking, the losses of one branch may be adjusted against the profit earned by another branch. This will affect the profitability of the organisation as a whole, as loss making branches will continue to eat into the profits of efficient branches.
(v) Concentration of economic power:
Under branch banking system, the financial resources may accumulate in the hands of a few who control big banks with large number of branches. This will cause concentration of economic powers in few big banks. It leads to monopoly.
(vi) Continuance of inefficient branches:
Under unit banking system, the inefficient branches cannot survive. But, in the case of branch banking, the inefficient branches may continue to operate because the losses of these branches are compensated by the profits of some other strong branches. In this way, under this system, inefficiency is protected.
(vii) Heavy overhead charges:
Establishment of branches in new areas incurs heavy overhead charges. This will affect the operational efficiency of the banks.
(viii) Unhealthy competition:
Under branch banking, many banks may operate their branches in a particular locality where business prospects are very bright. It may create unhealthy competition among various branches of banks.
(ix) Delayed decision-making:
In branch banking the manager of a branch cannot take the decision on his own. He has to refer to the matter to the head office seeking permission or approval. This creates redtops in the organization.
(x) Local needs may not be satisfied:
As the branch manager is not connected or familiar with local conditions, the local needs may not be attended and satisfied in full.
(xi) Other defects:
(i) Preferential treatment may be shown to firms situated near head offices.
(ii) The lower rates charged in developing regions may be adjusted by charging high rates of interest in developed regions.
(iii) There are possibilities for mismanagement in branches, like frauds, misappropriation of funds, etc.
As Sayers remarks, “a comparison between unit banking and branch banking is essentially a comparison between small scale and large scale operations”. The natural growth is always towards large scale branch banking. Branch banking has more advantages than unit banking. That is why; it is adopted by most of the countries in the world.