Banking refers to a business activity in which the entity accepting deposits from the customers, safeguards it and lends it to those who need it, and earns a profit. Different countries of the world adopt different types of the banking system . Basically there are two types of banking system prevalent in most of the countries, which are unit banking and branch banking. A unit banking is a banking system in which one bank, generally a small independent bank that renders banking services to its local community.
On the other hand, a branch banking, as the name suggests, is one in which a bank has more than one office in a country or outside at different locations and renders banking services to the customers of that area.
In this article, you may find all the important differences between unit banking and branch banking. Take a read.
Content: Unit Banking Vs Branch Banking
|Basis for Comparison||Unit Banking||Branch Banking|
|Meaning||Unit banking is that system of banking in which there is a single small banking company, that provides financial services to the local community.||Branch banking is a banking method wherein a bank operates in more than one place to provide banking services to customers, through its branches.|
|Local economy||Affected by the ups and downs of the local economy.||It is not affected by the ups and downs of the local economy.|
|Independence of operations||More||Comparatively less|
|Supervision Cost||Low||Comparatively high|
|Financial Resources||Limited financial resources||Large pool of financial resources|
|Competition||No or little within the bank||Exist between the bank branches|
|Rate of interest||Not fixed, as the bank has its own policies and norms.||Fixed by the head office, and directed by the central bank.|
|Decision making||Quick||Time Consuming|
Definition of Unit Banking
Unit Banking implies a banking practice wherein the banking operations are carried out by only one office, which is situated in a specified location. It is managed by its own governing body or the Board members. It has an independent existence, as it is not under the control of any other individual, bank, or body corporate.
A unit bank has no branches at all and for the purpose of providing facilities related to remittance and collection of funds, a unit bank takes recourse of the correspondent banking system. A correspondent bank refers to a financial institution, which enters into an agreement with another bank to render services to the customers as a representative of the latter.
The unit bank serves a limited area, and so it possesses an expert knowledge of the problems and basic needs of the localities and aims at resolving them.
Definition of Branch Banking
Branch Banking implies a banking system wherein a banking organization, through its wide network of branches provides banking services to its customers throughout the country and even in abroad.
It has a central office called as the head office and other offices which are set up at different locations to serve the customers are called as branches. The branches are controlled and coordinated by the head office, with the help of their regional or zonal offices.
The bank is under the control of the Board of Directors (BOD) and it is owned by shareholders. Each bank branch has a manager who looks after the management of the concerned branch of which he/she is the incharge, as per the policies and instructions laid down from time to time by the head office.
For the purpose of financial reporting at the end of the financial year, the assets and liabilities of all the branches and the head office are summed up.
Key Differences Between Unit Banking and Branch Banking
The points given below explain the difference between unit banking and branch banking in detail:
- Unit banking is a type of banking system adopted in many countries wherein there is a single independent small bank that caters a particular locality. On the other hand, branch banking can be defined as a banking practice wherein a bank has several branches that operate throughout the country and even in foreign countries, to provide services to its customers.
- While unit banks are not influenced by ups and downs of the local economy, branch banks remain unaffected by the ups and downs of the local economy, however, they are hit by the changes in the national economy.
- A unit bank has more independence of operations, as compared to the branch bank.
- When it comes to supervision cost, it is higher in case of a unit bank than a branch bank.
- A branch bank has a large pool of financial resources, at its disposal. Conversely, in a unit banking system, the financial resources are limited to the particular unit only.
- If we talk about competition, there is a high level of competition between the bank branches to sell its products and provide services to the customers. On the contrary, in the unit banking system, the competition hardly exists within the bank.
- In the unit banking system, the rate of interest is not fixed as the unit bank has its own policies and guidelines. As against, in a branch banking, the interest rate is decided by the head office, as per the directions of the central bank.
- As a unit bank is an independent one, it does not need to rely on any other body for taking important decisions. In contrast, in a branch banking system, the decision making is time-consuming, as it has to rely on the head office.
In a unit banking, the profits earned by the bank is used either for the development of the bank or for fulfilling the needs of the local community. On the other extreme, in a branch banking system, the profits of the banks are shared between the branches and also used for increasing their presence.
Ankita bora says
Very simple answer, thank you for this help