The banking system is the pillar on which the financial system of the country is built and unit banking is one of the banking systems. Unit banking in simple words refers to that banking system where each bank operates as an independent, standalone unit rather than being part of a larger network of the bank. In the case of unit banking, each bank often caters to a particular neighbourhood and has its own administration, board of directors, and resources. Unit banks primarily concentrate on providing basic banking services including savings accounts, checking accounts, and loans to local residents and small businesses. In order to get a better idea about this concept one should look at some of the advantages and disadvantages of unit banking –
Advantages of Unit Banking
Neighbourhood Friend
The biggest advantage of unit banking is that it acts like a neighbourhood friend for people of the area where the unit bank is because when it comes to unit banking, unit banks frequently prioritise serving their neighbourhood communities above a larger, more diverse customer base. This local focus can have a number of advantages, including better customer service, a deeper comprehension of regional needs and preferences, and a greater commitment to regional projects and causes. Locally owned and run unit banks may also be more closely connected to their communities, which may boost client loyalty and trust. Additionally, the unit bank’s local emphasis might aid in keeping money in the community because revenues are reinvested there rather than being sent elsewhere.
Flexibility
Another benefit of unit banking is that it has greater flexibility when one compares it with larger centralized banks because unit banking can respond to changing conditions or circumstances rather quickly. Unit banks are independent entities and thus they are able to make decisions and respond to customer needs more quickly and efficiently as they have more freedom to alter their products and services to the specific needs and preferences of their local neighbourhood. This increased flexibility can allow unit banks to better meet the changing needs of their customers, which can result in increased customer satisfaction and loyalty.
Unit Banking gives Boost to Local Economy
Unit banking has a stronger focus on community involvement compared to larger, more centralized banks and hence unit banking supports the local economy by doing various activities like supporting local initiatives and causes, sponsoring community events, or participating in local government and civic organizations. Unit banking in a way remains connected to the local needs and preferences of the people thus allowing unit banking to tailor its products and services to meet the changing needs of its customers apart from providing local employment opportunities to the people of that area. In simple words, unit banking through its community involvement can play an important role in supporting as well as strengthening the local economy
Disadvantages of Unit Banking
Limited Services
The biggest disadvantage of unit banking is that they provide limited services in the sense that they offer a limited range of products and services when compares it with a big bank which offers multiple services to its customers. Hence a customer may have limited options when it comes to loan products, deposit products, insurance products, investment options and digital banking options. These limitations can limit the ability of unit banks to meet the diverse needs of their customers, which may result in customers choosing to open their bank accounts with larger, more established banks.
Unit Banking Lacks Economies of Scale
Another problem with unit banking is the lack of economies of scale. Unit banks may not be able to take benefit from economies of scale because of their smaller size and constrained resources. Unit banks may struggle to provide the same range of services and products at the same prices as larger banks, which may lead to reduced profitability and competitiveness for them. Unit banks may find it challenging to remain competitive in a market that is constantly evolving if they are unable to invest in new technology, goods, or processes due to a lack of economies of scale.
Susceptibility to Economic Shocks
Unit banks may be particularly susceptible to local economic shocks or downturns because in the case of unit banking the operations of unit banking are dependent on a single location or locality. Hence for example a local economic downturn can result in a rise in loan defaults, a drop in fixed deposits or saving deposits, and a decline in the profitability of unit banks. Hence in simple words during times of economic hardship, unit banks could be more prone to collapses or financial problems when one compares it with a large diversified bank having a wider client base and activities in several regions.
As one can see from the above unit banking has pros as well as cons but when it comes to the overall economy and financial reach to smaller areas unit banking plays an important role in ensuring that all sections of society have access to banking channels.