What is Branch Banking?
Branch Banking is still an integral part of Indian banking system as most Indians still believe in cash transactions and prefer to visit banks in person for routine banking operations. Bank branches are the face of the banks where customers can visit and talk to the officials for getting better insights into new policies, investment schemes, other banking services etc. On top of it, the personal touch in every service leaves a great impact on the minds of customers. However, banking in India has changed its facets and ways of doing business over the years especially after the onslaught of technology and its manifestations. People have started to drift towards latest modes of banking like e-banking, mobile-banking etc.
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.
Difference between Branch Banking and Unit Banking
The local bank you walk into every day for your financial service needs is either a branch bank or unit bank in nature. On many key points, the branch banking, and unit banking system differs from each other.
Banking systems encourage either small, independent banks or banks that are theoretically independent but are in fact owned by a bank holding company.
The unit banking of a particular locality utilizes its resources for the development of its own locality only and does not transfer them to other localities like branch banking.
Branch banking refers to a single bank which operates through various branches in a city or in different locations or out of the cities.
Branch Banking vs. Unit Banking
| Branch Banking | Unit Banking | |
|---|---|---|
| About | A bank that is connected to one or more other banks in an area or outside of it. Provides all the usual financial services but is backed and ultimately controlled by a larger financial institution. | Single, usually small bank that provides financial services to its local community. Does not have other bank branches elsewhere. |
| Stability | Typically very resilient, able to withstand local recessions (e.g., a bad harvest season in a farming community) thanks to the backing of other branches. | Extremely prone to failure when local economy struggles. |
| Operational Freedom | Less | More |
| Legal History | Restricted or prohibited for most of U.S. history. Allowed in all 50 states following the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994. | Preferred form of banking for most of U.S. history, despite its tendency to fail. Proponents were wary of branch banking's concentration of power and money. |
| Loans and advances | Loans and advances are based on merit, irrespective of the status . | Loans and advances can be influenced by authority and power. |
| Financial resources | Larger financial resources in each branch. | Larger financial resources in one branch |
| Decision-making | Delay in Decision-making as they have to depend on the head office. | Time is saved as Decision-making is in the same branch. |
| Funds | Funds are transferred from one branch to another.Underutilisation of funds by a branch would lead to regional imbalances | Funds are allocated in one branch and no support of other branches.During financial crisis,unit bank has to close down.hence lead to regional imbalances or no balance growth |
| Cost of supervision | High | Less |
| Concentration of power in the hand of few people | Yes | No |
| Specialisation | Division of labour is possible and hence specialisation possible | Specialisation not possible due to lack of trained staff and knowledge |
| Competition | High competiton with the branches | Less competition within the bank |
| Profits | Shared by the bank with its branches | Used for the development of the bank |
| Specialised knowledge of the local borrowers | Not possible and hence bad debits are high | Possible and less risk of bad debts |
| Distribution of Capital | Proper distribution of capital and power. | No proper distribution of capital and power. |
| Rate of interest | Rate of interest is uniformed and specified by the head office or based on instructions from RBI. | Rate of interest is not uniformed as the bank has own policies and rates. |
| Deposits and assets | Deposits and assets are diversified,scattered and hence risk is spead at various places. | Deposits and assets are nt diversified and are at one place,hence risk is not spread. |
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