What are the Merits and Demerits of Unit and Branch Banking?


1. Economies of Large Scale:

Branch banking enjoys the advantages and economies of large scale operations with greater applicability of the division of labour or ‘specialisation’.

The branch banks being big organisations are in a better position to apply effectively the principles of specialisation by employing better personnel on better salaries, engaging right men in right places.


Thus making management more efficient. Obviously, the scope of the applicability of such ‘specialisation’ in unit banking on account of its small scale operations is comparatively limited.

2. Economy of Cash Reserves:

Branch banking results in the economy of cash reserves. A branch bank can afford to hold a lower cash reserve in each branch office, for one branch office can draw on another. It is not easy for a .unit bank to draw on another unit bank.

3. Economy of Costs:


Branch banking has the advantage of effecting remittances of funds from one place to another with greater ease and at a lesser cost than unit banking, for inter-office indebtedness can be far more easily adjusted.

4. Risks-spreading Economy:

The spreading of risks geographically is another major advantage of the branch banking system. By averaging risk through diversification of the banking business, branch banking can reduce the danger of failure.

In branch banking, losses incurred in depressed areas can be offset by profits earned by the branches in prosperous areas.


But the business of a unit bank is highly localised and any adverse conditions in business in the area severely affect the bank. Again, the financial resources of branch banks are of great magnitude, so they can withstand greater shocks or serious crises.

5. Easy and Increased Mobility of Funds:

Branch banks increase the mobility of funds from one region to another which brings uniformity of interest rates in different localities.

The bankers under branch system can shift resources from branches situated in those localities where demand for money is relatively low and, therefore, the rate of interest is less to those branches situated in localities where the demand for money is relatively high and hence the rate of interest is also high.


Thus, supply of money and the demand for it is brought into equilibrium in both the areas, and hence the interest rates would tend to be equal in different regions.

6. Greater Safety and Liquidity:

Branch banking also offers a wider scope for the selection of diverse securities and varied investments, so that a higher degree of safety and liquidity can be maintained.

7. Provision of Complete Banking Service:


Branch banking makes complete banking services available to the smallest communities. In certain rural areas, branches may operate even at a loss which can be offset by the profit earnings of the urban branches. Thus, branch banking is very helpful in achieving a balanced growth of the country’s economy.

8. Convenient for the Central Bank’s Supervision:

Under a system of branch banking it is more convenient for the central bank or the government to regulate and supervise the activities of banks, as control becomes more effective and easier since only the head office is to be dealt with for the purpose.

9. Provision for Training the Personnel:

Finally, branch banking provides the best training ground for personnel. A person may be trained in a small branch Where the pressure of work is less and he may be transferred later to an active branch.

Disadvantages or Demerits of Branch Banking:

Needless to say that the disadvantages of branch banking are the advantages of unit banking. Branch banking generally suffers from the following drawbacks:

1. Greater Chances of Mismanagement:

Branch banking presents the difficulty of efficient management, supervision and control. Proper supervision and scrutiny become more and more difficult as the bank becomes more and more unwieldy.

A unit bank secures all the advantages of small scale operation, and hence there are less chances of mismanagement or incompetent management.

2. Delays in Decision-making:

The system of branch banking also suffers from red tape and delay on account of the inadequate authority of branch managers. Usually, application for big credits has to be referred to the head office by the branch manager. This causes delay and gives little initiative to branch managers.

3. Lack of Personal Contact:

A large bank tends to become more and more impersonal in its dealings. The general managers have hardly any personal contact with the local people or the staff of different branches.

4. Expensive:

As Prof. Basu points out, branch banking is very expensive, because with the opening of too many branches, establishment and maintenance charges of the branches are bound to be high and, as a result, profits may shrink.

5. Concentration of Monopoly Power.

It has also been argued that branch banking creates some sort of monopoly power. Such a monopoly power in the hands of a few big bankers is a source of danger to the community whose goal is a socialistic pattern of society.

It is often said in favour of the unit banking system that in it the manager can have direct personal contact with the local businessmen and borrowers, and their credit standing, reputation, etc., is thus known to him so that he is in a better position to check and scrutinise applications for loans.

But, as Sayers has pointed out, the personal contact of a unit bank may constitute a disadvantage. Because of social and friendly relations with customers, he may sometimes not be able to refuse a loan to an incompetent or dishonest person.

On the contrary, a branch bank manager is in a better position in this respect, since he has to refer each application to his head office and so “if there is occasion to refuse a loan, he can always thrust the unpleasant job to that remote abstraction, the ‘head office’ without jeopardising his social contacts with the customer.”

However, the disadvantages of branch banking are not insurmountable by careful planning, management and supervision.

Hence, we may conclude with Sayers that, “the advantages are thus overwhelmingly in favour of the branch banking system” and it is no wonder, therefore, that the banking system of most countries is tending towards branch banking.

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