Disadvantages of Unit Banking

Disadvantages of Unit Banking

The following are the disadvantages of unit banking system:

1. No. distribution of Risks: Under unit banking, the bank operation highly localized. Therefore, there is little possibility of distribution and diversification of risks in various areas and industries.

2. Inability to Face Crisis. 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.
3. No Banking Development in Backward Areas. Unit banks, because of their limits resources, cannot afford to open uneconomic banking business is smaller towns and rural area. As such, these area remain unbanked.
4. Lack of Specialisation. Unit banks, because of their small size, are not able to introduce, and get advantages of, division of labour and specialisation. Such banks cannot afford to employ highly trained and specialised staff.
5. Costly Remittance of Funds. A unit bank has no branches at other place. As a result, it has to depend upon the correspondent banks for transfer of funds which is very expensive.
6. Disparity in Interest Rates. Since easy and cheap movement of does not exist under the unit banking system, interest rates vary considerably at different places.
7. Local Pressures. Since unit banks are highly localised in their business, local pressures and interferences generally disrupt their normal functioning.
8. Undesirable Competition. Unit banks are independently run by different managements. This results in undesirable competition among different unit banks.
Conclusion: Although both branch banking system and unit banking system have their relative merits and demerits, but the merits of the former outweigh those of the latter. There has grown a general tendency in favour of the branch banking system mainly because of large financial resources, economies of large operations and effective control by the central bank. Experience has shown that unit baking system in hampered by limited resources and does not work under economic depression. Today, the branch banking system is specially suitable for the underdeveloped countries. The entire banking system in India has developed on the lines of branch banking system.

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