Branch Banking : Definition, Functions With Examples

Branch Banking :

Branch Banking is a system of banking where a relatively big commercial bank undertakes banking activities with a network of branches . A bank under branch banking system may open branches both within and outside the country of its origin. Thus branch banking is de-localised banking system where a banking has its presence throughout the country and even outside the country.

The main features of Branch Banking :

  1. There is a separation of ownership and management of the banks -ownership lies with the shareholders and the management lies with the single board of directors.
  2. The bank under this system has a head office and the Head Office controls the activities of all the branches .
  3. There is a branch manager for each of the branches of the bank who is responsible for managing the affairs of the branches.
  4. In the matter of preparation of financial statements, the assets and liabilities of the head office and the branches are arranged.

Branch banking system originated in England and over the years it has become the most popular and prevalent banking system in the world. In since, since the introduction of organised banking institutions, branch bankings system is being followed.

Advantages Of Branch Banking :

The growth and huge popularity of branch banking system throughout the world is due to the following advantages of system.

  1. Benefits of large scale operation : Branch banking reaps the benefits of large scale operations. Due to the large scale operation, the cost per unit of service in case of this system is low.
  2. Specialisation and division of labour : Lower cost of services enables a bank under the system to use modern mechanical devices and employ highly competent and qualified staff. Thus, under this system it is possible to realise the benefits of specialisation and division of labour by carrying out Seperate banking operations under specialised staff.
  3. Economy of cash reserve : In branch bankings system, it is possible for the banks to operate with low cash reserve and hence avoid large amount of idle cash reserves. It is because of necessity, cash can be transferred from one branch to another.
  4. Diversification of risks : There is a geographical diversification of risks under branch banking system. As a result the banks face lesser risks. Moreover , banks have greater capacity to meet the risks. The losses incurred by a branch are made up by the profits earn by other branches. Thereafter, the possibility of bank failure is remote in branch banking system.
  5. Greater mobility of capital : There is a greater mobility of capital in branch banking system. It is because, it is easier and cheap to transfer funds one region to another. This brings equilibrium in demand and supply of funds and ensure uniformity of interest rates.
  6. Better customer services : The customers of a bank can avail of better service under branch banking system. Because of the large number of branches, each branch is required to deal with a limited number of customers and hence the bank personnel can provide better personalised service to the customer.
  7. Public Confidence : Branch banking system has inspired greater public confidence on the bankings system by virtue of its large scale operations and huge financial resources.
  8. Effective central bank control : The central bank of the country can effectively and easily regulate the activities of banks in his system. Due to the presence of few big banks in the banking system, the central bank can easily implement it’s policies and attain it’s desired objectives.

Disadvantages of Branch Banking :

The brach banking system is also criticised because of the following disadvantages of the system :

  1. Monopolistic tendencies : In branch banking system there is the danger of concentration of resources in a few hands. The big banks in this system with their network of branches may dominate and control the whole banking system
  2. Problem of management : Effective management and control of banks under branch bankings system is difficult and the degree of difficulty increases as the number of branches goes on increasing. It increases the possibilities of fraud and other malpractices.
  3. Delay in decision making : In branch banking system there is usually a delay in talking decisions. It is because the branch manager has to decide in consultation with the head office which creates inordinate delays.
  4. Continuance of inefficient branches : In branch bankings system one can find the existence of inefficient or loss making branches along with the program making branches. These loss making branches continue to exist because their losses are compensated by the profits of efficient branches.
  5. Ignorance of local needs : The branches are managed by the branch managers according to the policiesaid down by the head office. The branch manager and the head office may not be aware of the local conditions and special needs.
  6. Expensive Banking : Branch banking is an expensive bankings because of high establishment and maintenance cost of the large number of branches of a bank. This might result in shrinking of profits.
  7. Transfer Of Funds : Banks, in branch bankings system have branches in both developed and underdeveloped areas or regions. As a result there might be transfer of funds collected from underdeveloped regions to the developed regions where profitability is high. This would create regional imbalances in the country.

Related : BANKING SYSTEM IN INDIA

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