Assignment

on
Principles of Banking
Topic :
1. Discussion on merits and demerits of group banking and chain banking

2. Discussion on merits and demerits of Unit banking and Branch banking

Submitted To : Sayeeda Jabeen Sany

Lecturer
BBA, FBA, USTC

Submitted By
Name : Rabiul Karim
ID : 1600
Semester : 5th Semester
Batch : 43rd Batch

Submission Date: 24/02/2020

Faculty of Business Administration

University of Science and Technology Chittagong
 Merits and Demerits of group banking and chain banking

Group Banking: Group banking is that system of banking in which an association, trust or business
corporation directly or indirectly controls two or more banks. The banks function as a subsidiary of the
holding or parent company. The holding company may be a banking or non-banking company. The
individual banks may be unit banks, or banks operating with branches or a combination of the two. Through
the holding company controls and manages the banks in the group, each bank continues to have its
own separate identity.

Key Points:

 Group banking is a plan offered by banks to large groups of people such as employees at a
company.
 Potential incentives for group banking can include low- or no-fee checking accounts, lower
interest rates, special benefits, and discounts.
 Plan participants generally have better benefits than they would otherwise be able to get on
their own.

Merits of Group banking:

 Centralized Administration: The participating banks enjoy the benefits of centralized

administration
 Enhancement of operational efficiency: Because of Group banking system, the operational
efficiency of participant banks is enhanced through shared knowledge and experience.
 Mobility and transfer of resources: In the case of crisis, the funds are transferred among
participating banks. This helps them to face the financial crisis if any, more effectively
 Large-scale operation: Group banking paves the way for large-scale operation. The member banks
can get the economies of large scale operation

Demerits of Group banking:

 Lack of effective management and control: Under Group banking system the control and
management is not effective because the control is indirect and more flexible. It cannot offer
specialized management.
 Inefficiency of member banks protected: The inefficiency of one participating bank affects the
other participating banks.
 Fewer facilities: This system cannot provide all the facilities offered by branch banking.
 Cannot mobilize funds: Group banking does not have the capacity to mobilize funds as in the case
with branch banking
Chain Banking: Chain banking is a form of banking when a small group of individuals controls three or
more banks, which are independently chartered. Individuals secure enough stocks to get the controlling
interest in the banking corporations involved. The management can also be established via a board of
directors that can effectively create a network and undertake supervision of banking activities. Chain
banking systems took shape in USA around 1925 when 33 chains were co-existing having ownership of
933 banks. The purpose was to maximize profit and goodwill in the market. The banks, which entered into
chains within a community, had little scope of competition from other banks operating in the same area.
The investors ensured that each bank in the chain catered to the interests of different segments in the market
so that there was no overlapping of interests and the returns were not compromised. There is generally no
holding company to control the interests of banks. Thus, the underlying principles of chain banking are:

1. A small group of persons own and control a number of independent banks

2. Each bank carries its operations independently without any external interference by any holding
company.
3. Every member of the chain retains its independent ident

Key Features and relevance of Chain Banking: Chain banking at the time of its growth and
emergence offered amazing services to the customers due to targeted approach, to the investors in form of
consistent returns and complete control. The investors made sure that there was an optimum utilization of
resources, which will maximize the profits and potential. It provided for quick decision-making due to
centralized and unified control, which trickled down to customers in form of efficient service. However,
the system lost significance with the introduction of more liberal banking laws as the banks, which were
part of chains, opened more to offer more services to their customers. On the other hand, chain banking
introduced non-flexible controls and risk of speculations. There were cases of maladministration and frauds.

Merits of Chain banking:

 Limits risks for a community: Chain banking limits risks for a community, making it possible
to expand local needs for credit.
 Access banking facilities when limited resources are present: Chain banking system
makes it possible to access banking facilities when limited resources are present.
 Better financial control: It provides an efficient system of management for better financial
control
 Unnecessary risks: Chain banking system rarely take on unnecessary risk.
Demerits of Chain banking:

 It limits overall profitability: Profits occur when risks are taken within the financial sector.
Risks may also lead to steep losses, which chain banking cannot afford to take. For that reason,
banks managed in this fashion often take a very conservative approach to investing.
 There is little engagement regarding the social welfare needs of the community: Many
banks use their profits in a way that betters the welfare needs of their local communities. Because
there are fewer profits available within the system of chain banking, these institutions are rarely
active in social improvement activities. Their focus is to maintain the status quo, create profits
where possible, and effectively manage themselves in communities where there m ay be limited
resource availability.
 It creates a centralized structure where one person may control the wealth: Many
chain-banking systems create a centralized structure where one entity, or even one person, pulls the
strings of wealth management for a series of banking locations.
 Chain banking concentrates control of credit authorization: The goal of chain banking is
to expand opportunities for the average person to use financial tools and lending products. When
banks are controlled by a common set of stakeholders, however, this structure also concentrates
who is in control of credit line authorizations.

Merits and Demerits of Unit banking and Branch banking

Unit Banking: Unit banking is a system of banking wherein a bank operates in a limited area, does not
open any branches in other places and is more responsive to local needs. These independent and isolated
units have to take care of the entire banking operations and maintain good health. They thus have to raise
their capital and deposits locally. They are more efficient as they have a limited scale and lack of any gap
between decision-makers and executives.
Unlike, branch banking, where policies are framed taking a larger context in mind, decisions are quicker
and more suitable to the customers. These bankers focus on development of the local area and better
community service. These baks have their own board of directors and stockholders. The concept originated
in USA.

Merits of Unit banking:

 Efficient Working: A unit bank works very efficiently and provides prompt service to its
customers. For, like a departmental store in a locality, it has competitors in other unit banks.
 Personal Relations: Since its organizers and other staff are generally local people, they have
personal relations, which help in mobilizing larger resources for bank.
 Quick Decisions: They are able to meet the financial requirements of the people promptly and
efficiently. There is always on-the-spot decision-making by the bank management.
 Less Irregularity: there are fewer chances of fraud and irregularities under the unit banking
because of the close supervision and control of the management.
Demerits of Unit banking:

 No. Distribution of Risks: Under unit banking, the bank operations are highly localized.
Therefore, there is little possibility of distribution and diversification of risks in various areas and
industries.
 Inability to Face Crisis: Limited resources of the unit banks also restrict their ability to face
financial crisis. These banks are not in a position to stand a sudden rush of withdrawals.
 No Banking Development in Backward Areas: Unit banks, because of their limits resources,
cannot afford to open uneconomic banking business is smaller towns and rural area. As such, these
areas remain unbanked.
 Lack of Specialization: Unit banks, because of their small size, are not able to introduce, and
get advantages of, division of labor and specialization. Such banks cannot afford to employ highly
trained and specialized staff.
 Costly Remittance of Funds: A unit bank has no branches at other place. As a result, it has to
depend upon the correspondent banks for transfer of funds, which is very expensive.

Branch Banking: Branch banking is the most prevalent banking system in the majority of countries.
Under this system, a big bank has a number of branches in different parts of the country and even many
branches within a cosmopolitan city like Dhaka, Chittagong. Khulna

Small commercial banks also carry on branch banking operations within a state or region. In the USA,
branch banking is confined to the states. Accordingly, a number of banks have merged under a holding
company to carry on branch banking business efficiently and profitably.

Key Points:

 Branch banking refers to the operation of storefront spinoffs that offer the same key services as the
institution's flagship home office.
 Since the 1980s, branch banking has undergone significant changes in response to a more
competitive national market, deregulation of financial services, and the growth of internet banking.
 If you use a branch bank today, it is most likely to be one of the Eastern bank, Dutch Bangla bank,
City bank,

Merits of Branch banking :

1. Economies of Large Scale operations: Branch banking enjoys the advantages and economies of large
scale operations. Under branch banking system economies can maintained through large scale of operations
and wider geographical coverage increase public confidence in the banking system.

2. Economy of Cash Reserves: Under branch banking system a particular branch can operate without
keeping large amounts of reserves. In time of need, resources can be transferred from one branch to another.
It is not easy for a .unit bank to draw on another unit bank.
3. Proper use of capital: There is a proper use of capital under the branch banking system. Since the
resources are transferred from one branch to another. So the capital can be properly used by investing in
the profitable branches.

3. Economy of Costs: Branch banking has the advantage of effecting remittances of funds from one place
to another with greater ease and at a lesser cost than unit banking, for inter-office indebtedness can be far
more easily adjusted.

4. Risks-spreading Economy: The spreading of risks geographically is another major advantage of the
branch banking system. In branch banking, losses incurred one branch can be offset by profits earned by
the profit making branches, which is not possible in case of unit banking.

5. Easy and cheaper transfer of funds: Since the branches of bank under branch banking are spread all
over the country, it is easier and cheaper, for it to transfer funds from one place to another.

6. Greater Safety and Liquidity: Branch banking also offers a wider scope for the selection of diverse
securities and varied investments, so that a higher degree of safety and liquidity can be maintained.

7. Balanced economic growth: Under branch banking, the banking facilities can be made available to all
cities, towns, and even backward areas in the country. Thus, branch banking is very helpful in achieving a
balanced growth of the country's economy.

Demerits of Branch banking:

1. Danger of Mismanagement: Under the branch banking system a number of difficulties as regards
management, supervision and control, a number of branches undue expansions lead the danger of
mismanagement.

2. Delays in Decision-making: The system of branch banking also suffers from red tape and delay on
account of the inadequate authority of branch managers. Usually, application for big credits has to be
referred to the head office by the branch manager. This causes delay and gives little initiative to branch
managers.

3. Lack of Personal Contact: A large bank tends to become more and more impersonal in its dealings.
The general managers have hardly any personal contact with the local people or the staff of different
branches.

4. High operating and maintenance expenses: Branch banking is very expensive, because with the
opening of too many branches, establishment and maintenance charges of the branches are bound to be
high and, as a result, profits may shrink.

5. Concentration of Monopoly Power in the hands of few banker: Branch banking sometimes creates
monopoly power in the hands of few large bankers. Such a monopoly power in the hands of a few big
bankers is a source of danger to the community whose goal is a socialistic pattern of society.

6. Lack of initiative: Branch banking lacks initiative. No branch office can take independent decisions
and also branch manager has limited powers.