About Branch Banking

About Branch Banking


About Branch Banking: Wikipedia says

A branch, banking center or financial center is a retail location where a bank, credit union, or other financial institution (and by extension, brokerage firms) offers a wide array of face-to-face and automated services to its customers.

Traditionally, the branch was the only channel of access to a financial institution’s services. Services provided by a branch include cash withdrawals and deposits from a demand account with a bank teller, financial advice through a specialist, safe deposit box rentals, bureau de change, insurance sales (where it is allowed by law), etc. In the early 21st century, features such as automated teller machines (ATM), telephone and online banking, allow customers to bank from remote locations and after business hours.

Investopedia says about Branch Banking

Definition of  ‘Branch Banking’

Engaging in banking activities such as accepting deposits or making loans at facilities away from a bank’s home office. Branch banking has gone through significant changes since the 1980s in response to a more competitive nationwide financial services market. Financial innovation such as internet banking will greatly influence the future of branch banking by potentially reducing the need to maintain extensive branch networks to service consumers.



Definition of Branch Banking Branch Banking has been defined under the provisions of Section 23 of the Banking Regulation Act, 1949 that banks can either open new branches or shift the location of existing branches. The banks have to seek a prior approval of RBI to open a new branch in India or abroad or in the same city or village where a branch already operates. RBI will grant such permission after it is satisfied about the financial condition of the demanding bank, robustness of its management, capital structure and general public interest behind such a move. The Banking Regulations Act, 1949, defines a ‘branch’ or ‘branch office’ of a banking company as a place where bank deposits are received, cheques cashed, money lent, any or all banking services are carried out. These exclude the bank call centres as they are typically calling facilities which do not have any customer interaction. A branch will include a full-fledged specialised branch, a satellite or mobile office, an extension counter, administrative office, control office, service branch, credit card centre etc.

Relevance of Branch Banking Branch banking has a lot of importance in India as it makes banking possible for people living in rural and remote areas. This is a true source of inclusive growth. The success of Pradhan Mantri Jan Dhan Yojana has been possible due to extensive branch networks of various banks. Branch banking makes management more responsive and efficient over centralised banking operations. Also, the risk is well spread across the branches and no single office has to suffer. This helps banks to offer more securities and investment options to its customers. Also, due to the wide geographic spread, a broader customer base, deposits used in one branch can be used profitably used as loans or investments in other branches. This type of banking system can easily reach people in backward areas. There are some negative points too which branch system faces like delays in decision-making due to limited powers of branches, influenced by local political leaders or administration etc.

Difference between Branch Banking and Unit Banking

The key difference between branch banking and unit banking is that while branch bank operates through branches; unit Bank is generally a single branch small bank, which provides financial services to the local community. In Branch Banking, the Branches in India are set up under Section 23 of Banking Regulations Act, 1949. A branch should cater to all banking services and include a specialised branch, a satellite office, an extension counter, an ATM, administrative office, service branch and a credit card centre for the purpose of branch authorisation policy. It helps in better management, more inclusion and risk diversification. On the other hand, Unit banking is a limited way of banking where banks operate only from a single branch (or a few branches in the same area) taking care of local community. Unit system of banking originated in the united States. In Unit system, the size of banks is small as compared to branch banking. Due to small scale of operations and quick decisions, the work is more efficient. These banks are involved in developmental works in the areas of operations. The management enjoys more autonomy and thus more discretionary powers. However, due to single units, the risk is not distributed or diversified. It may however encourage outside local influences. The following table differentiates between Branch and Unit Banking. Branch Banking Unit Banking Bank operates through branches connected to each other. Each branch provides usual banking services but the control is done by the head office or central office. Unit Bank is generally a single branch small bank, which provides financial services to the local community in which it operates. There are no branches or small branches in a limited locality only. Branch Banking is more stable and resilient to ups and downs in the local economy because of backing by other branches and head office. Unit banks are vulnerable to failure and are subject to heavy risk in case of failure of local economy. Branch Banking has less operational freedom. Unit Banking has more operational freedom. Branch banking has more financial resources at its disposal. The financial resources in unit banking are concentrated only in one unit. Since decision making is controlled by the head office, the process is slow in branch banking. Further, Branch banking involves higher costs of supervision. Decision making is fast due to all decision to be made in one unit. Unit banking involves lower cost of supervision. Branch banking goes hand in hand with the division of labour. Some branches may offer specialized services. Since there is one unit, there is no division of labour and no specialization in service.

Advantages of Branch Banking

Rapid growth and wide popularity of branch banking system in the 20th century are due to various advantages as discussed below.

1. Economies of Large Scale Operations:

Under the branch banking system, the bank with a number of branches possesses huge financial resources and enjoys the benefits of large-scale operations,

(a) Highly trained and experienced staff is appointed which increases the efficiency of management,

(b) Division of labour is introduced in the banking operations which ensures greater economy in the working of the bank. Right persons are appointed at the right place and specialisation increases,

(c) Funds are made available liberally and at cheaper rates,

(d) Foreign exchange business is done economically,

(e) Large financial resources and wider geographical coverage increases public confidence in the banking system.

2. Spreading of Risk:

Another advantage of the branch banking system is the lesser risk and greater capacity to meet risks,

(a) Since there is geographical spreading and diversification of risks, the possibility of the failure of the of the bank is remote,

(b) The losses incurred by some branches may be offset by the profits earned by other branches,

(c) Large resources of branch banks increase their ability to face any crisis.

3. Economy in Cash Reserves:

Under the branch banking system, a particular branch can operate without keeping large amounts of idle reserves. In time of the need, resources can be transferred from one branch to another.

4. Diversification on Deposits and Assets:

There is greater diversification of both deposits and assets under branch banking system because of wider geographical coverage,

(a) Deposits are received from the areas where savings are in plenty,

(b) Loans are extended in those areas where funds are scarce and interest rates are high. The choice of securities and investments is larger in this system which increases the. safety and liquidity of funds.

5. Cheap Remittance Facilities:

Since bank branches are spread over the whole country, it is easier and cheaper to transfer funds from one place to another. Inter-branch indebtedness is more easily adjusted than inter-bank indebtedness.

6. Uniform Interest Rates:

Under branch banking system, mobility of capital increases, which in turn, brings about equality in interest rates. Funds are transferred from areas with excessive demand for money to areas with deficit demand for money. As a result, the uniform rate of interest prevails in the whole area; it is prevented from rising in the excessive demand area and from falling in the deficit demand area.

7. Proper Use of Capital:

There is proper use of capital under the branch banking system. If a branch has excess reserves, but no opportunities for investment, it can transfer the resources to other branches which can make most profitable use of these resources.

8. Better Facilities to Customers:

The customers get better and greater facilities under the branch banking system. It is because of the small number of customers per branch and the increased efficiency achieved through large scale operations.

9. Banking Facilities in Backward Areas:

Under the branch banking system, the banking facilities are not restricted to big cities. They can be extended to small towns and rural as well as underdeveloped areas,. Thus, this system helps in the development of backward regions of the country.

10. Effective Control:

Under the branch banking system, The Central bank than have a more efficient control over the banks because it has to deal only with few big banks and nor with each individual branch. This ensures better implementation of monetary policy.

Disadvantages of Branch Banking

Following are the main disadvantages and limitations of branch banking system:

1. Problem of Management:

Under the branch banking system a number of difficulties as regards management, supervision and control arise:

(a) since the management of the bank gets concentrated at the head office, the managers can afford to be lax and indulgent in their duties and are often involved in serious irregularities while using the funds.

(b) Since the branch manager has to seek permission from the head office on each and every matter, this results in unnecessary delay and red- tapism in the banking business.

2. Lack of Initiative:

Branch managers generally lack initiative on all-important matters; they cannot take independent decisions and have to wait for. The clearance signal from the head office.

3. Monopolistic Tendencies:

Branch banking encourages monopolistic tendencies in the banking system. A few big banks dominate and control the whole banking system of the country through their branches. This can lead to the concentration of resources into a few hands.

4. Regional Imbalances:

Under branch banking system, the financial resources collected in the smaller and backward regions are transferred to the bigger industrial centres. This encourages regional imbalances in the country.

5. Adverse Linkage Effect:

Under branch banking system, the losses and weaknesses of some branches also have their effect on other branches of the bank.

6. Inefficient Branches:

In this system, the weak and unprofitable branches continue to operate under the protection cover of the large and more profitable branches.

7. Other Defects:

Other defects of branch banking system arc as follows:

(a) Preferential treatment is given to the branches near the head office,

(b) Higher interest rates are charged in the developed area to compensate for the lower rates charged in the backward areas,

(c) There is concentration and unhealthy competition among the branches of different banks in big cities,

(d) Many difficulties are faced when a bank opens branches. In foreign countries.

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About Branch Banking

About Branch Banking

About Branch Banking

About Branch Banking

About Branch Banking

About Branch Banking

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