Banking can be defined as an umbrella term that covers all monetary affairs of accepting deposits from individual people or entities while simultaneously being able to hand out loans to other such customers in need. These activities are approved under a certain set of guidelines approved either by financial government bodies or RBI itself. Banks are the intermediary entities that allow performing these business activities. The appropriate use of banking can help cover expenses duly or even gain profits.
When a customer walks into a bank to perform any financial activity, He/She can either choose unit banking or branch banking.
Unit Banking vs. Branch Banking
The main difference between unit banking and branch banking lies in the number of branches the bank owns and its network distribution. Unit Banking is a banking system that comprises only a single office and serves a smaller community whereas Branch banking is a banking system that allows multiple outlets and branches of the bank in several different locations, thus having higher network distribution. This can eventually affect the respective banks’ customer bases as accessibility plays a major role in the acquiring of customers.
Difference Between Unit Banking and Branch Banking in Tabular Form
|Parameters of Comparison||Unit Banking||Branch Banking|
|Definition||A small company providing a single outlet for banking services||A relatively larger company owning multiple branches that provides banking services.|
|Accessibility and Network Distribution||Low accessibility and network distribution||High accessibility and network distribution|
|Operational Independence||No supervision by any higher authority, thus the bank enjoys a good amount of liberty of operations.||All operations are supervised by a head office of higher authority. Thus they have less liberty.|
|Expense of Supervision||Lesser expense by a large margin||Higher expenses|
|Delay in decisions||Saves time by quick decision making||Prolonged decision making due to higher supervision causes waste of time|
|Stability||Lesser stability due to higher susceptibility to failure||Higher stability due to backup from other branches in case of financial backlash.|
|Resources||The financial resources are limited.||There is a higher number of financial resources|
|Capital Distribution||Irregular distribution of capital and power||Structured distribution of capital and power|
|Interest Rates||The interest rates are decided by that particular bank as it has only a single branch.||The interest rates are decided by that bank’s particular head office or by RBI itself.|
|Specialization||Lesser potential to allow specialization||Higher potential to allow specialization|
|Division of Labour||Less division due to limited area||High division due to a widespread area|
What is Unit Banking?
A banking system where the bank has a single office and serves only a small, local community is known as unit banking. Thus all the operations are to be carried out by a single office. This kind of banking system does not have any head office and typically has its own governing body. This grants the banks under the unit banking system higher freedom of operations. Banks under this category can have a higher understanding and penetration of their customer base since they operate in small, local regions.
Let us look at some of the advantages one can enjoy while employing a unit banking system:
- Easier management and control - Due to the absence of multiple branches, there is higher coordination in the workplace and thus it is easier to manage and control the operations.
- Remains Localized - All the resources provided to the particular branch are only used to fund the local customers and will not be transferred to other bodies.
- Higher customer knowledge - Local banks are proven to possess higher parameters of information about their customers that help them know the needs and requirements of the borrower better.
- Better customer relations - banks operating in small and limited areas are bound to know their customers better and have better potential to possess friendly relationships with them. This helps the daily operations proceed smoothly.
- Quality of service - the above factors help the bank focus on the needs of the customer, thus helping them serve better.
While they help serve rural areas better, there are certain disadvantages to operating as a single office:
- Irregular interest rates -The rates of interest for a certain bank are set by the governing bodies of that particular bank and are different for every bank following a unit banking system.
- Lack of Backup - The bank does not have any other branches to help in case of any complications and thus is more susceptible to failure.
- Absence of competition - The lack of branches means that the bank company would not have any other competitors to form a healthy competition with.
- Limited resources - Banks under a unit banking system do not have a pool of resources to finance them, proving to be a disadvantage.
- No Large scale profits - There will not be any large-scale advantages that can be found in a branch banking system.
- The higher number of contacts - These banks are usually large companies, thus they have better reach and a larger customer base.
What is Branch Banking?
A banking system that allows a bank to have multiple offices at multiple locations, providing a higher coverage of the geographical area is known as Branch Banking. There exist multiple branches that are controlled by higher bodies of authority such as a head office. This main branch controls and supervises all the operations of the smaller offices. Thus, they might have lesser liberty of operations which can eventually lead to a delay in making decisions. Here is a list of advantages that a bank employing a branch banking system enjoys-
- Healthy competition - The bank company can have healthy competition among other branches of the same company and compete for growth with ease.
- Fewer chances of failure - There is the assurance of backup from other branches if there are any financial issues in any one branch.
- Uniform rates of interest - Every bank under this system is said to have their interest rates decided by either RBI or a head office. In addition to this, there is higher mobility of capital that allows uniformity in the rates of interest.
- Higher financial resources - These banks have a larger pool of financial resources to be provided, giving them an advantage over unit banking.
The other side of this coin is-
- Difficulties in management - As the number of branches increases, it becomes harder to control and manage all of these branches. Supervision of larger companies can prove to be quite a task.
- Higher Expenses - The cost of supervision can add up to overall expense and result to be costlier than banks under a unit banking system.
- Regional issues - Due to regional differences, there might arise complications and unnecessary troubles that don’t prevail unit banking system.
- Lesser knowledge of localities - While banks under unit banking tend to have a higher knowledge of the customers, their needs and business requirements, banks under branch banking systems have a higher potential to attract a larger and more diverse customer base which can be difficult to manage. This can lead to a decrease in the quality of customer-employee relationships. Higher the number of branches, lesser the knowledge of the locals and the money-borrowers.
- Delayed Decisions - Since every large bank company that owns several branches will always appoint a head office to make important decisions, it is obvious that any decision that anyone branch will have to take must go through the head office’s supervision and approval. While Unit banking can take quick decisions, given any situation, it remains the complete opposite for branch banking systems, where there is always the possibility of a delay.
Some of the major banks in India that follow branch banking
- State Bank of India(SBI) - SBI is by far the largest bank company in India while speaking in the terms of assets. The bank has established branches worldwide, across over 36 countries, chiefly in the United States, Nigeria and The United Kingdom. It owns over 24,000 branches in India alone. It owns a whopping 54,560 ATMs.
- Bank of Baroda - Established in 1908 by a Maharajah nonetheless, Bank of Baroda owns over 5000 branches in India and close to a hundred branches overseas. It has a decent number of 8030 ATMs. It stands as the second-largest bank in India to SBI in terms of assets and the number of branches.
- ICICI bank - As of 2017, ICICI bank holds the third-largest number of assets that a bank owns. With 4,450 branches in total, the bank owns up to an enormous number of 13,900 branches around the globe.
- Punjab National Bank(PNB) - One if the oldest banks in India, PNB was founded in 1895 before the partition. Based in Lahore, the bank was one of the 14 banks that were nationalized in 1969. The bank now has over 6,500 branches and owns up to 8348 ATMs across the country.
Main Differences between Unit Banking and Branch Banking in Points
- Unit Banking allows a single outlet of a relatively smaller bank while Branch banking allows multiple branches in multiple locations of a relatively larger banking company.
- Unit banking allows higher freedom of operations as it operates independently and doesn't need to report to any higher authority whereas a branch banking system has lesser operational freedom. They operate under the supervision of a head office that holds control of all the branches the bank owns.
- The cost of supervision adds extra expenses to branch banking whereas this doesn't prevail in unit banking since it does not have a head office.
- The factor of supervision comes with an additional factor of decision delay. Unit banking doesn’t have any time wastage while making decisions since the single branch makes its own decisions without any supervision as opposed to the branch banking system, which needs to consult higher authorities to make decisions, delaying the financial operations.
- Unit banking systems are prone to higher rates of failure as they operate as a single branch. They possess lesser stability whereas the branch banking system can always depend on other branches to fall back on in case of complications in any branch. Thus, they are highly stable.
- The financial resources that a unit banking system possesses are limited to a single outlet since there are no multiple branches. A branch banking system has a higher number of financial resources and higher distribution of the resources due to multiple branches.
- Unit banking lacks competition as it doesn’t have any branches whereas branch banking has competes among its branches.
- Unit banking allows the bank the freedom to fix the rates of interest that goes along their set of guidelines. Banks that follow the branch banking system allow government entities such as RBI to determine the rates of interest of that bank.
- Branch banking has a better structure and thus allows proper distribution of capital whereas unit banking is relatively poor-structured and thus has an irregular distribution of power and capital.
- Any profit made by the bank is used to develop and improve the bank in a unit banking system whereas all the profits made in a branch banking system are to be divided among all the branches that are owned by the bank.
- Unit banking has lesser potential to allow specialization since it does not have multiple branches whereas branch banking allows specialization due to its widespread network distribution.
- Unit banking has a lesser reach and limited resources and thus has almost no contribution to resource distribution. Branch banking can easily achieve this through their multiple branches to achieve a larger operational reach
From the listed differences, we can observe that the unit banking system is more suited for rural areas while the branch banking system in more developed areas. However easy it may be to use a unit banking system, it is much more comfortable to use a branch banking system since it is more accessible in case of transfers to another city or complications at a single branch.