What are the main reasons for the development of Unit Banking?


Unit banking is originated and developed in U.S.A. In this system, small independent banks are functioning in a limited area or in a single town i.e., the business of each bank is confined to a single office, which has no branch at all. It has its own board of directors and stockholders. It is also called as “localized Banking”.

According to Solomon and whilst, a unit bank is, “a corporation that operates one office and that is not related to other banks through either ownership or control”.

The main reason for the development of unit banking in America is said to be the fear ot monopoly in banking.


Advantages of Unit Banking

The unit banking system has the following advantages:

(i) Easy Establishment

(ii) Easy management and control


(iii) Quick – decisions

(iv) Local Development

(v) Personalized services

(vi) No chance for regional disparities


(vii) Promotes efficient working

(viii) Inefficient banks cannot survive

(ix) No chance for monopoly

(x) Suitable for the countries aiming at unity in diversity.


Let us discuss these items one by one.

(i) Easy establishment:

The unit bank operates on small scale basis. Hence, it requires less capital to promote a unit bank. Besides, the formalities, rules and regulations are com­paratively easy with that of branch banking.

(ii) Easy management and control:


The size and operations of the bank under unit bank­ing system will be small. Therefore, management, supervision and control will be easier.

(iii) Quick decisions:

Under unit banking system, the manager can take quick decisions regarding loan sanctioning, etc., and he need not wait for the instructions and approval from the head office.

(iv) Satisfaction of local needs:

Unit banking is the localized banking. The entire opera­tions of the unit bank are confined to a particular area. Therefore, banks have the specialized knowledge of the local problems, their requirements, etc., and can serve to fulfill those needs. In this way, local needs are better satisfied than branch banking.

(v) Personalized services:

The unit banking gives an opportunity for the bankers to inti­mately know his customers. The manager has personal knowledge of each of his customers and establishes greater personal contact. This ensures personalized service which is not possible in the case of branch banking where the staff is frequently transferred.

(vi) No chance for monopoly:

Under unit banking, the size of the bank will be small and limited to a small area. Each bank is independent by itself. Therefore, monopolistic trend in banking cannot arise.

(vii) Promotes efficient working:

Too much expansion as in the case of branch banking leads to a reduction in efficient working. The overall control on all branches becomes diffi­cult. It may result in red-tapism, mismanagement and corruption in branches. But it is not so in the case of unit banking since, the size of operation is limited. It ensures efficient working through effective control and supervision.

(viii) Inefficient banks cannot survive:

Under branch banking system, the running of one branch leads to the running of all other branches. A weak branch cuts into the profit of the concern as a whole. The loss arising from the weak branch will be adjusted against the profits from other branches. This type of adjustment is known as Cross-subsidization. Hence, the weakness or inefficiency of a branch can be carried forward for years. But, it is not possible in the case of unit banking. In this system efficient banks can only survive, i.e., the survival of the fittest.

(ix) No chance for Regional Disparities:

Unit banks have no countrywide branches. Hence, the funds collected in one place will not be transferred to other places. The funds collected from the people in an area will be utilized for the benefit and development of that area only. In this way, the unit banking system ensures regional balance and there is no chance for regional disparities.

(x) Suitable for the countries aiming at unity in diversity:

Unit banking is more suitable for the countries where there are differences in local laws, languages spoken, habits and cus­toms, etc.

Disadvantages of Unit Banking

The following are the disadvantages of the Unit Banking System.

(i) No ability to face crisis:

Limited resources, Limited area of operation and non-diver­sification of investments reduce the ability of unit banks to withstand losses. They cannot face any financial crisis.

(ii) No geographical distribution of risks:

Under unit banking system the area of opera­tions of a bank is limited to a particular place only. If there is any business depression in that place, the bank also suffers losses. Because of its localized operations, the unit bank cannot distribute the risks over a wider area.

(iii) Variation of interest rates:

There may not be uniformity of interest rates under unit banking. Different banks may charge different rates of interest, since there is no possibility for the transfer of funds to other areas, the availability of funds influences the rates of interest.

(iv) Lack of diversification of deposits and assets:

The main factor that affects the survival of a unit bank is its lack of diversification of deposits and assets, loans and advances will be concentrated in the industries located in the area, any difficulty in these industries will automatically affect the bank also.

(v) Not able to provide adequate banking facilities:

Because of its restricted areas of opera­tions and limited financial resources, unit banks are not able to provide the entire range of banking facilities as provided by branch banking.

(vi) Inconvenience in the remittance of funds:

The unit banks have no branches in other place. Therefore, transfer of funds from one place to another becomes costly and inconve­nient.

(vii) No importance to backward areas:

Unit banking banks may not be started in places where they do not have enough business opportunities because it is unprofitable and un­economic. But under branch banking, branches can be opened even if it is uneconomical because the losses in one place can be compensated by profits in another place.

(viii) Weaker sections may be neglected:

Even in the towns and cities where the unit banks are operating, the weaker sections of the society i.e., poor people may be neglected because of limited resources of the banks.

(ix) Influence of local pressures:

The unit banker, being a local man may have to follow local considerations, etc., in granting loans and advances. Because of his legitimacy with the local customers, he may be compelled to violate the basic economic principles.

(x) Lack of division of labour and specialisation:

Generally the size of unit bank is small. So there is not much scope for the introduction of division of labour and specialisation. Be­cause of this, it cannot adopt the modern methods of banking. Thus, the efficiency of the bank will be affected which in turn affects the profitability of the bank.

(xi) Unhealthy Competition:

The unit banks are run by different groups of people i.e., the multiplicity of ownership. This may create unhealthy competition among them which will affect the economy adversely.

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