UNIT AND BRANCH

BANKING
SESSION 2

LEARNING OUTCOME

Understand the meaning of unit banking and branch banking

Understand the characteristics of unit banking and branch banking

Understand the differences between unit banking and branch banking

Advantages and disadvantages of branch banking

UNIT AND BRANCH BANKING Meaning

Unit bankingrefers to a bank that is a single, usually small bank that

provides financial services to its local community. A unit bank is independent
and does not have any connecting banks branches in other areas.

Branch banking refers to a bank that is connected to one or more other

banks in an area or outside of it; to its customers, this bank provides all the
usual financial services but is backed and ultimately controlled by a larger
financial institution.

UNIT AND BRANCH BANKING Characteristics

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.

UNIT AND BRANCH BANKING Characteristics

BRANCH BANKING

UNIT BANKING

Operational
Freedom

Less

More

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 Decisionmaking is in the same

branch

UNIT AND BRANCH BANKING Characteristics

BRANCH BANKING

UNIT BANKING

Funds

Funds are transferred from one

branch to another.
Underutilization 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 Yes
power in the
hand of few
people

No

UNIT AND BRANCH BANKING Characteristics

BRANCH BANKING

UNIT BANKING

Specialisation

Division of labour is possible and Specialisation not possible

hence specialisation 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

UNIT AND BRANCH BANKING Characteristics

BRANCH BANKING

UNIT BANKING

Distribution of
Capital

Proper distribution of capital and No proper distribution of

power.
capital and power

Rate of interest

Rate of interest is uniformed and Rate of interest is not

specified by the head office or
uniformed as the bank has
based on instructions from RBI
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

ADVANTAGES OF BRANCH BANKING

Reduce the Population Per Branch Ratio

Branch banking reduces the population per branch ratio. Therefore, the more
branches a bank has means the more capability it has to provide banking
services to the public

Use the Banks Resources More Effectively

If branch banking was not permitted, a bank would have to open new banks to
penetrate new markets. This would involve enormous and overlapping
resources. With branch network, a bank can expand into new markets through
more effective use of financial, operation and human resources

ADVANTAGES OF BRANCH BANKING

Diversify the Assets and Deposits of Banks

By having customer base and geographic diversification, a bank is able
to have a mixed portfolio of loans and mixed portfolio of deposits. Such
diversification of assets and deposits can reduce the banks risk.
For example, a bank with many branches can spread out its credit risk

by procuring customers of different professions, needs etc. compared to a

bank that has to focus on certain specific groups of customers only due
to its limitation in the number of branches and locations of its operation.

ADVANTAGES OF BRANCH BANKING

Mobilize Funds More Effectively

There are branches which can attract more deposits than giving out

and

loans,

there are branches which receive more loan applications than their

deposits

base can cover. By having branch banking, the branch network can

overcome this problem by moving the excess deposits from one branch to a
branch with deposit deficiency. Insufficiency in branch network will result in
opportunity cost, i.e. loss of customers due to failure to meet the needs for
loans which in turn results in deficiency of deposits.

ADVANTAGES OF BRANCH BANKING

Provide Better Services

With adequate branch network, customers need not change bank or open a new
account in another bank upon changing job or moving house. Moreover,
customers need not worry when working outside their areas as banking activities
can be conducted anywhere.

Provide Competitive Edge

A bank with many branches has a competitive edge over those with fewer
because
bank branches are profit generating centers for banks. Furthermore, the
robustness of a bank is associated with the size of its branch network. This is
evident from the
fact that the majority of the large commercial banks in Malaysia
have large branch networks.

DISADVANTAGES OF BRANCH
BANKING

The fundamental feature of branch banking is that the operations of

branches are controlled by the head office.

There are many differences in terms of power given to branch managers.

These differences can cause various problems in the management of branch

banking.

The imbalance in power between the bank officers at head office and
those at branches also contributes to management problems.

The excellence and quality of banking services offered to customers depends

on the solution to these problems.

PROBLEMS OF BRANCH BANKING

Operational problem

Staff problems

Relationship problems between head office and branches

Problems pertaining to business promotion

Problems pertaining to branches performance

OPERATIONAL PROBLEM

Staff-related Problems - affect staff morale which in turn influences the banks
quality of service delivered to customers. Indirectly, they affect the banks
profitability.

Leave

Staff Shortage

Quality of Staff

Computer-related Problems

Computer Breakdown and Downtime

Dissatisfaction with Electronic Data Processing (EDP) Department

OPERATIONAL PROBLEM

Customer-related Problems

Customer-related problems revolve around customers dissatisfaction with the banking

services provided by the branch

customers always complain about the slow service during lunch time, pay days and
festive seasons.

customers are not satisfied as their requests or appeals for exemption from the banks
guidelines, rules and conditions get rejected by the management

STAFF PROBLEM

Absenteeism

Motivation

Inexperienced staff

RELATIONSHIP PROBLEMS BETWEEN

HEAD OFFICE AND BRANCHES

Sharing of resources

Different goals

Interdependent work activities

Differences in value and perception

Communication problems

PROBLEMS PERTAINING TO BUSINESS

PROMOTION

Manpower Shortage

Competition

Products Ability to Compete

Policies and Rules

PROBLEMS PERTAINING TO
BRANCHES PERFORMANCE

Evaluation Criteria

Performance Measurement