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August 03, 2014

Group Banking System

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Friends, in our last post we have discussed about the Unit Banking System. Now we shall discuss abuot the Group Banking System. The group banking system refers to the system of banking under which two or more banks are directly or indirectly controlled by an association, trust or corporation. This type of banking was very common in the USA between 1925 and 1929. The holding company may or may not be a banking company. Although each bank maintains its separate entity, but its business is managed by the holding company. It is not uncommon for such a holding company to be affiliated with larger banks, in which case that bank influences the policies of the whole group.

Advantages of Group Banking

The following are the major advantages of group banking system.
  1. Transfer of funds : This system ensures liquidity of financial resources. If a member bank falls short of cash, it can GET it from the other member's bank. Further it is not necessary to maintain a large cash resource by each and every bank of the group banking system.
  2. Economies of Large-Scale operations : This system also results in an economy in advertisement expenditure. The cooperation controlling the member banks can insert joint advertisements in the newspapers. Economies of large-scale operations can also be achieved by cutting down operating cost, by purchasing supplies in bulk and improving the efficiencies of the management.
  3. Maintaining Separate identity : Under this system, every member's bank retains its own separate identity and maintains its own board of directors. The central administrative office controlling the various members of the group can take steps to improve the level of efficiency in their day to day working.
  4. Availability of Experts Services : Since the corporation controlling the member banks in a big sized corporation it can easily obtain the services of experts in the management of the business of the member banks. This helps the member banks to place their investments and banking business on sound lines. 
  5. New business : Under this system, the corporation can also take several steps to secure new business for its member banks. 

Disadvantages of Group Banking

The system of group banking also suffers from certain defects. The major defects are discussed as under.
  1. Unsound policies : Under the system, a banking corporation as well as a non banking corporation may be subsidiaries of the same holding company and the holding company, in its efforts to secure more profits may overlook sound banking principles, thus landing into troubles. 
  2. Lack of efficiency : This system may not be conductive to the achievement of a high level of efficiency in management, because the central administrative office is generally not in a position to enforce codes of discipline on member banks.
  3. Corruption : This system also gives rise to corruption because all this stores, etc for the member banks are purchased by one common purchasing organization, which may succumb to pressure, exert by unscrupulous firms. 
  4. Emergence of Monopoly : The group banking system may lead to monopolistic tendencies in banking industry.

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