Banks are single most important financial institutions in the economic development of a country. Well functioning and sound banking system is necessary for sustained economic growth. Banking a service industry plays important role in financial intermediation. It provides services through its outlets spread over in different geographical areas or in a specific area. These outlets are known as branches. Branches play important role in information gathering and matching the needs of depositors and borrowers.
Commercial Banking System:
Banking system operating in different countries can be classified into two broad categories as under.
Unit Banking
Branch Banking
1- Unit Banking
In Unit banking system banks operations are restricted to a limited area. Unit banking is dependent on its localized customer base. In Unit banking there are high “ Convenience Cost” for residents of the area. Unit bank has to raise and utilize its capital, deposits locally. Under unit banking the number of banking offices that a town can support is a function of minimum of deposits, loans where as under branch banking it is a function of the sum.
Local area banks and Regional Rural banks in India are the replica of Unit banking.
Advantages of Unit Banking: -
Due to limited and restricted area of operations, unit-banking system enjoys certain inherent advantages.
· In unit banking, a bank is well versed with local conditions, local needs etc. Being well versed with the economic problems, financial requirements of the masses and of business community, bank is able in designing and marketing financial products to suit the needs of all segments.
· Bank develops an image of friendly and caring bank, which ultimately helps in developing business and customers’ loyalty. Which enables bank in building long lasting relationship with customers and in cross selling of products.
· The operating cost of unit bank is much lower than the banks following branch-banking system.
· The employees of a unit bank are like a close-knit society, which helps in building mutual trust and confidence. This creates congenial environment at the work place and enhances employees’ productivity.
· Bank is able to have direct supervision and control over its operations, thus reducing if not eliminating the chances of losses arising due to frauds, forgeries, etc.,
Disadvantages of Unit Banking:
· Restricted area of operations poses limitations on business, and
exposes banks to various types of risks and shocks.
· It can provide only limited range of services to its clients.
· Business depends on the economic conditions and business prospects
of the area.
· It has to utilize services of its correspondent banks for providing
services to its customers outside the area of operations.
2- Branch banking
As per Banking Regulations Act 1949 “branch" or "branch office", in relation to a banking company, means any branch or branch office, whether called pay office or sub‑pay office or by any other name, at which deposits are received, cheques cashed, or moneys lent and for the purposes of Sec. 35 includes any place of business where any other form of business referred to in sub‑section (1) of Sec. 6 is transacted.
Thus a branch is an office where banking transaction viz. accepting of money for the purposes of lending or investment and any or all the banking services are carried out. Branch banking is multi-office banking spread over to a vast geographical area.
Advantages of Branch Banking: -
Branch banking has advantages over unit banking system.
· Since, there are no geographical bindings on doing business, it has broader customer base.
· There are no constraints in mobilization of recourses and their utilization.
· Business risk is well spread over.
· Losses arising in an area are taken care by the earnings in other area, which neutralize risk, and bank is protected from setbacks. Branching has two separate effects on a bank’s portfolio. It reduces risk inherent to a given type of asset through diversification, and helps bank in adjusting their assets and liability.
· In branch banking banks can make proper deployment of resources. There are places where a branch receives more deposits than it makes advances. Deposits received by one branch can be profitably used as loans or investments by another branch. There are centers where the deposit accretion is low, where as demand for advances are high surplus funds gathered at one location can be utilized by the. Unless the supply and demand for capital is exactly the same across locations, branches will specializes to some degree in either collection of deposits or disbursement of loans and advances.
· A branch banking system may be able to support more banking offices in a particular location and thus the extent of local monopoly power is likely to be lower.
Disadvantages of Branch Banking: -
· In comparison to unit banking system, it has high cost of operations.
· Since the branches are spread over vast geographical area, effectiveness and efficacy of supervision and control mechanism gets diluted which exposes the bank to various types of risks.
· Banks have to open controlling and supervision centers at different locations, which enhances cost of supervision.
Need for Branch Banking system:
There are a number of factors that over the years have made banks to establish multiple offices. A few of them are given below.
· The demand for banking facilities has accelerated due to population explosion, economic growth, and development of new commercial areas. These have resulted into expansion of branch network.
· Bankers feel that it is difficult, to expand business and increase profits if they are tied to one central location.
· As major portion of Indian population is dependent on agriculture. This section of society lives in rural areas, which has resulted into establishment of business enterprise in and around suburban belts. It is but natural that bank would like to tap growing business opportunities.
· Migration of population to new areas has also necessitated the demand for banking facilities.
Branch banking a perspective: -
Branch banking allows banks to regionally diversify their assets. Regional diversification reduces the variability of an asset portfolio by insuring against localized shocks or general shock, which increases the stability of banking system.
Branching has two separate effects on a bank’s portfolio. It reduces risk inherent to a given type of asset through diversification, and helps bank in adjusting their assets and liability.
Correspondent Banking: -
Correspondent bank is a bank that acts as an agent to another bank. Thus a bank without physical presence in a location can provide banking services to its customers in overseas by entering into reciprocal arrangements.
Chain banking: -
The term "chain-banking" refers to a situation in which informal groups own or control more than one bank.
Any Branch Banking:
Banks having centralized databases are offering their customers facilities wherein they can operate their accounts from any branch of the bank. This has become possible with the implementation of ‘Core Banking’.
Local Area Bank:
With a view to providing institutional mechanisms for promoting rural savings as well as for the provision of credit for viable economic activities in the local areas, Reserve Bank of India has decided to allow the establishment of new local banks in the private sector. This is expected to bridge the gaps in credit availability and enhance the institutional credit framework in the rural and semi-urban areas. The object of setting up of local area banks in private sector is to cater to the credit needs of the local people and to provide efficient and competitive financial intermediation services in their area of operation.
Offshore Banking Units:
An Offshore Banking Unit (OBU) of a bank is a deemed foreign branch of the parent bank situated within India, and shall undertake International Banking business involving foreign currency denominated assets and liabilities. The Reserve Bank of India has given permission to certain select Banks in India, fulfilling certain criteria, to set up OBUs in “ Special Economic Zones” (SEZ).
An OBU is an entity, which intermediates, in financial transactions between non-resident borrowers and lenders for facilitating exports from India.
Organizational Structure
Organisational structure is the unique management arrangement. It is a hierarchical chart that is devised by an institution to enable it to
· Provide competent and sound management and effective leadership.
· Perform the business in an effective and planned manner.
· Control, supervise and monitor the operations.
· Control and supervise
· Organizational Structure helps in the design of management concept. It entails not only a horizontal integration but also vertical integration and helps in a sound corporate governance mechanism.
Board of directors: -
Board of Directors manage banks. Boards are constituted in accordance with section 9(3) of the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1970 and as per the Central Government Gazette Notification Ref. No. F 4/1/94-BO.I (1) dated 3.4.1995.
Presently the Board comprises 2 whole time Directors the Chairman & Managing Director and the Executive Director, appointed by Central Government, 1 Government Nominee Director, 1 RBI Nominee Director, 1 Workmen Employee Director and 1 Officer Employee Director nominated by Central Government, 1 Chartered Accountant Director nominated by Central Government, and 4 elected Shareholder Directors.
All the Directors of the Bank except the Chairman & Managing Director and the Executive Director/s are non Executive Directors. The Chairman & Managing Director presides over the Board. The general superintendence, direction and management of the affairs and business of the bank are vested in the Board of Directors of the bank. Board is the apex management body. Unlike companies where Chairman of Board is selected by stockholders, in banks, Chairman is appointed by Ministry of Finance, who heads the Board. Even executive director/s are appointed by Ministry of Finance
Meetings of the Board shall ordinarily be held at least 6 times in a year and at least once in a quarter in accordance with Nationalised Banks (Management and Miscellaneous Provisions) Scheme, 1970.
The board has the responsibility of determining policies for smooth running of banks.. It not only makes decisions on major policy and directional issues, but also oversees and supervises the operations through various board -level committees. The system clearly defines the accountability and responsibilities of the Board and management, and the relationships between the two.
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