Unit Banking - it's Merits and Demerits

The Unit Banking system is that system of banking under which an individual bank carries on banking business either through a single office or through a few offices operating within a limited area  (Note :unit = single, remember like that) . In this system, independent, isolated units perform banking business. The size and are of operation of unit banking are much smaller when compared to branch banking. Unit bankin gsystem originated and grown in the U.S.A. Different unit banks in the U.S.A are linked with each other financial centers in the country through "Correspondent Banking".

Merits / Advantages of Unit Banking :3
The unit banking enjoys the following advantages.

1. No Problem of Mismanagement : Each bank is small scale unit hence there is no problem of management and supervision. A unit bank secures all the advantages of small scale operaions and hence there are less chances of mismanagement or incompetent management.
2. No delay in Taking Decisions : In unit banking system every bank is an independent unit, hence there will be no delay in taking decisions.
3. Personal Contact with the Customers : Unit Banking system being a small scale independent unit can maintain good personal contacts with the customers for efficient management of the bank. It is said that in case of unit banking system the manager can maintain good personal contact with the customers and businessmen. 
4. Low Overhead Cost : In case of unit banking system the over head cost will be low than in case of branch banking system.
5. No Concentration of Monopoly Power : With the help of unit banking system it is possible to create socialistic pattern of society which is a policy of Indian Government.
6. Promotes Regional Balance : Under unit banking system, there is no transfer of resources from rural and backward areas to the big industrial and commercial centers. This tends to reduce regional imbalance.
7. Initiative in Bank Business : The bank officers, under the unit banking system, are fully acquainted with the local problems. SO they can take initiative in taking important decisions on the various issues confronting the bank. This makes the banking system more elastic.
8. Discontinuance of Inefficient Branches :Under unit banking system, weak, inefficient and non-profitable branches are automatically eliminated. No prtection is provided to such banks. 
9. No Diseconomies of Large-Scale Operations : Unit banking is free from the diseconomies and problems of large-scale operations which are generally experienced by the branch banks.
10. More Operational Freedom : The managers of the unit banking system are given more discretionary powers so that they can study the problems of local customers and provide better services to them on merit.

Disadvantages or Demerits of Unit Banking System :

Generally speaking the advantages of Branch banking are the disadvantages of Unit Banking.  Following are the important disadvantages of Unit Banking System.

1. Lack of Economies of Large Scale : Unit banking system being operated on small scale, is deprived of economies of large scale operations.
2. More Case Reserve : When compared to branch banking system, the banks operating under unit banking system must have more case reserve. In unit banking system it is not easy to a unit bank to draw on another unit bank.
3. High Cost of Operations : In case of Branch banking system the remittance of funds from one place to another is of great ease and at a lower cost than unit bank. It is not easy to adjust the interoffice indebtedness in case of Unit Banking system.
4. High Risk bearing : In case of unit banking system, the business is highly localized and any adverse conditions in business in the area severely effect the bank. The banks under unit banking system cannot withstand greater shocks or serious crises.
5. Lack of Mobility of Funds : In case of unit banking system the concentration of funds is at one region. There is no possibility of movement of funds between the regions and localities resulting in different interest rates at different places.
6. Does not Provide Complete Banking Service : The bank operating under unit banking system does not provide complete banking service to its customers as done in case of Branch banking system.
7. Problem of Supervision by Central Bank : It becomes very difficult to supervise each and every bank operating under unit banking system. 
8. Absence of Division of Labor and Specialization :  Unit banks because of their small size and limited financial resources are not able to introduce and get advantages of division of labour and spel\socialization. Such banks cannot afford to employ highly trained and specialized staff. 
9. Inability to face cirsis : Limited resources of the unit banks also restrict their ability to face financial crisis. These banks are not in a position to stand a sudden rush of withdrawals. Inability to face economic crisis was the reason why hundreds of unit banks failed in the U.S.A during the great depression of 1929.
10.  No Banking Development in Backward Areas : Unit Banks, because of their limited resources, cannot afford to open uneconomic branches in smaller towns and rural areas. As such, these areas remain unbanked.
11. Costly Remittance of Funds : A unit bank has no branches at other places. As a result, it has to depend upon correspondent banks for transfer of funds from one place to another. This makes the movement of funds more expensive and inconvenient for the businessmen. 
12. Disparity in Interest Rates : Since easy and cheap movement of funds does not exist under the unit banking system, interest rates tend to vary considerably in different places.
13. Local Pressures : Since unit banks are highly localized in their business, local pressures and interferences generally disrupt their normal functioning.
14. Undesirable Competition : Unit banks are independently run by different managements. This results in undesirable competition among different unit banks.