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August 04, 2014

Branch Banking System

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In most of the countries, commercial banks have adopted branch-banking system. Under this system, a commercial bank can open its own branches at any place within the country or abroad, of course, with the prior permission of the central bank and / or the concerned federal and / or local government. All the branches will be allowed to transact the banking business in general. The commercial banks under this system can also open specialized branches to transact special transactions such as home-loans, foreign exchange, etc.

Merits of Branch Banking System

The branch banking system has many advantages, which make this system superior to the unit baking system. The following are the major advantages of branch banking system.
  1. Increase in Banking Facilities : Under branch banking system, a commercial bank can open its branches in cities, towns and rural areas in the country. On the contrary, it is rather difficult to set up unit banks in smaller towns under developed areas in the country. 
  2. Transfer of Funds : Under branch making system it is easier and cheaper for it to transfer funds from one branch to another branch, since the branches of the banks scattered all over the country under branch banking system. 
  3. Large Scale Operations : Branch banking can enjoy the advantages of large-scale operations. Large-scale operations result in divisions of labor and specialization and productivity of banks greatly increases. Moreover, a big bank with huge resources and a number of branches can create confidence among the public. This in turn enables a commercial bank to strengthen its operations. 
  4. Geographical Spread of Risks : Under branch banking system, losses suffered in one branch can be offset by or adjusted by profits of the profit making branches of the same bank. Under this system the large size banks can withstand for a longer time with huge losses and adverse circumstances. 
  5. Large Financial Resources : The important merit of branch banking system lies in the advantages derived from the large financial sources. The branch banking system can easily meet the requirements of big customers. Further the failure of borrowers in any area, however big they may be, need not lead to failure of the bank. Infact, one of the important merits of branch banking is its financial strength and ability to meet any crisis. 
  6. Economy in Cash Reserve : A commercial bank, with a number of branches in different parts of the country, can afford to manage with a lower cash reserve ratio in each of its branches. If there is a shortage of cash in one branch it can be drawn from another branch of the same bank if it have it excess cash reserves. 
  7. Diversification of Business and Assets : Since the branch banking system covers a wide geographical area; there exists possibilities of diversification of business and assets.
  8. Efficiency in Management : Under this system the officers branch managers can be carefully trained and offered with greater opportunity for promotion for those who produce better results. The services of experienced officers at head quarters will also be available to all branches. 
  9. Wider Scope for Selection of Securities : Branch banking offers a wider scope for the selection of diverse securities and varied investments so that a higher degree of safety and liquidity can be maintained. .
  10. Effective Central Bank Control : Under Branch banking system, all the branches of a bank will be controlled by their head office and / or regional office. These banks in turn, will be controlled by the central bank of the country very effectively. 
  11. Proper use of Capital : Under this system the bank can make a proper use of its financial resources. If a branch of the bank happens to have plenty of deposits but no opportunities for investments, it can transfer its surplus funds to another branches, which can make a profitable use of such funds for trade and industry.
  12. Common Interest Rates : Branch banking has an additional advantage of bringing about equality in Interest Rates. If the demand for money goes up in a certain part of the country then, under branch banking, the funds can transferred to it form another branch where there are excessive reserves, thus the rate of interest can be prevented from rising in the former place. 
  13. Economy in Banking : Besides efficiency in management, the branch banking system ensures great economy in its working capital is made available in plenty and at cheaper rates internal and foreign exchange business can be held economically; and even small isolated towns and village, where no independent bank can survive, can be provided with adequate and comprehensive banking facilities.
  14. Contracts with Whole Country : Under branch banking system, hte bank maintains regular contacts with all parts of the country. Undoubtedly it helps to acquire correct and reliable knowledge about economic conditions in various parts of the country. It helps the bank to make proper and profitable investments of its surplus funds.

Demerits of Branch Banking System 

The following are the major disadvantages of branch banking system. Actually, the disadvantages of Branch Banking are the advantages of Unit Banking System.
  1. Duplication of Banking Facilities : Under this system different banks may open their branches in the same area, town or city resulting in duplication of banking facilities. 
  2. Unhealthy Competition : Under this system the branches of different banks may compete with each other in the same areas, towns and cities that may lead to unhealthy competition among the banks. 
  3. Delay in Decision Making : Under branch banking system, the branch managers of commercial banks will be entrusted with a limited decision making powers, especially in case sanctioning of huge amount of loans. They refer these types of matters to their respective head officer's or / and regional offices for their decision or recommendation. This may take more time causing a lot of inconvenience to the loan seekers. 
  4. Inefficient Branches : In this system, the weak and unprofitable branches continue to operate on one pretest or the other. 
  5. Ineffective Control over Branches : Since commercial banks open more branches in different parts of the country, it is difficult to every commercial bank to control, manage and supervise all the activities of all of its branches effectively.
  6. Lack of Initiative : The branch managers usually are reluctant to undertake risk in taking important decision pertaining to their branches due to their own apprehensions about their superior officers at head office. 
  7. Lack of Personal Contact : A large bank tends to become more and more impersonal in its dealings. The general manager has hardly any personal contact with the local people or the staff of different branches.
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