What is Unit Banking | Working, Merits and Demerits

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Unit Banking

Banking is an essential part of modern economic activity. Doing large financial transactions is nearly impossible without a banking system. In many places, it is also illegal to do large financial transactions without a bank. However, all banks do not operate in the same way.

Depending upon their financial capacity, banks can be classified into different categories. Unit banking is one type of bank, which operates on different principles than others. There are multiple benefits associated with these types of banking and a few drawbacks. Let’s take a closer look at this type of banking system and learn how it works.

How Does Unit Banking work?

Unit banking is an independent type of banking system, which 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 sizes, 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 was 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 making good relationships with the customer is very 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.

  1. Fast operation: Unit banking systems offer quick operation to the customer.
  2. Less corruption: Chances of fraud and financial irregularities is low.
  3. Promote local economy: Unit banking systems cater their services to enhance local economic activity.
  4. Customized service: Highly customized banking service for the individual customer.
  5. No Monopoly: Unit banking systems always operate without a monopoly.

Disadvantages of Unit Banking

Even though there are multiple benefits associated with unit banking, but there are some disadvantages associated with it too. Here are some disadvantages of unit banking.

  1. Small capital: Due to its limited capital resource, Unit banking systems cannot offer anyone a big loan.
  2. Transfer of funds: The customer needs to pay extra fees for fund transfer to other banks.
  3. Uneven Interest Rates: Aggressive policies make interest rates different for each customer.
  4. Limited Scope: Being a regional bank, these banks have a limited scope of growth

References

  1. https://www.sciencedirect.com/science/article/pii/0304393284900175
  2. https://www.jstor.org/stable/1056432