Unit Banking System

Unit Banking System


In Unit Banking System, individual bank's operations will be carried out through a single office only. The size and area of operation of a unit bank are smaller as compared to commercial banks. Under this system no branch will be opened. These banks are more prevalent in U.S.A. These banks are usually linked with each other and with the financial centers in the country through correspondent banks. The unit banking system also known as localized banking system.




Advantages of Unit Banking System
Unit Banking system has the following major advantages.

1. Less chances of miss-management : The management and supervision of a unit bank is much easier, and more effective since the size of the bank is small. There are fewer chances of fraud and irregularities in the financial management of the unit banks. Wastage can also be controlled more effectively. 
2. Initiative in Banking Business : Unit bank will be familiarized with the local conditions and environment and hence, will be able to respond to the banking needs of the people.
3. Local development : Under this system, the funds of the unit banks will be utilized for the local development only and are not transferred to other areas.
4. No delay in decision-making : The local officers of the unit bank themselves are competent to take decisions on various problems pertaining to banking business without delay.
5. No monopolistic tendencies : Under this system there is no possibility of generating monopolistic tendencies. 

Demerits of Unit Banking System
The following are the major disadvantages of Unit Banking System

1. Costly Remittance of Funds : As the unit bank has no branches at other places, it has to depend upon the correspondent banks for transfer of funds, which is very expensive and inconvenient for the businessmen. 
2. Inability to Face Crisis : Limited resources of the unit banks restrict their ability to face financial crisis. 
3. Lack of Specialization : Unit banks, because of their small size, are not able to introduce, and get advantage of division of labor and specialization. Such banks cannot afford to employ highly trained and specialized staff.
4. Undue Local Pressure : Since unit banks are highly localized in their business, local pressures and interference may unduly affect the decision making of their officials. 
5. Undesirable Competition : Different managements independently runs Unit banks. This results in undesirable competition among different unit banks. 
6. No banking development in backward areas : Unit banks, because of their limited resources cannot afford to open uneconomic banking business in smaller towns and rural areas. As such, these areas remain unbanked. 

As we have seen above, both the systems suffer from defects, but the branch banking system is better than the unit banking system. But despite this it is unit banking system which has developed in U.S.A. The reason is that the economic conditions in U.S.A are more conductive to the development of unit banking. Branch Banking system has proved more suitable for a backward and under developed country like India. Branch banking system has large financial resources and economies of large operations and competent to face the economic depressions than the unit banking system.