Banking is an essential part of modern economic activity. Doing large financial transactions is nearly impossible without a banking system. In many places, doing large financial transactions without a bank is also illegal. However, all banks do not operate in the same way.
Depending on their financial capacity, banks can be classified into different categories. Unit banking is one type of bank that operates on different principles than others. There are multiple benefits associated with these types of banking and a few drawbacks. Let’s look at this banking system and learn how it works.
- Unit banking refers to a banking system in which a single bank operates independently, without any branches or affiliates.
- Unit banks offer personalized service to their customers and can make quick decisions since there is no need for communication between different branches.
- Unit banking is less common in larger countries where branch banking is the norm, but it still exists in some small communities or rural areas.
How Does Unit Banking Work?
Unit banking is an independent type of banking system that works in a limited area and adopts policies to cater to the financial needs of a limited region. In most cases, these banks operate through a single branch office. The financial capacity of this type of banking is limited.
Therefore, these banks are unable to allocate big loans to anybody. Most of the time, they provide small loans to individuals and small business enterprises. Due to their small size, a unit bank can adopt aggressive policies, and compared to other banks, they can grant loans quickly. However, these types of banks are very dependent on the local economy.
The unit banking system first originated in the USA. These banks are quite popular in the Midwest and Southwest regions of America. These banks work with a limited number of employees, and establishing good customer relationships is essential in this business.
Compared to other banking systems, the unit banking system uses less paperwork. As a result, these banks can operate with a low overhead cost. These employees also offer personalized service to the customer. However, transferring funds through unit banking can be a little hassle. Due to their limited reach, these unit banks often charge extra fees to the customer.
Advantages of Unit Banking
Compared to other banking systems, unit banking operates in a local region. Hence, this banking system inherits many advantages by default. Here are some advantages associated with unity banking.
- Fast operation: Unit banking systems offer quick operation to the customer.
- Less corruption: Chances of fraud and financial irregularities is low.
- Promote local economy: Unit banking systems cater their services to enhance local economic activity.
- Customized service: Highly customized banking service for the individual customer.
- No Monopoly: Unit banking systems always operate without a monopoly.
Disadvantages of Unit Banking
Even though there are multiple benefits associated with unit banking, some disadvantages are also associated with it. Here are some disadvantages of unit banking.
- Small capital: Due to its limited capital resource, Unit banking systems cannot offer anyone a big loan.
- Transfer of funds: The customer must pay extra fees for fund transfers to other banks.
- Uneven Interest Rates: Aggressive policies make interest rates different for each customer.
- Limited Scope: As regional banks, these banks have a limited scope of growth.
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Chara Yadav holds MBA in Finance. Her goal is to simplify finance-related topics. She has worked in finance for about 25 years. She has held multiple finance and banking classes for business schools and communities. Read more at her bio page.