1.

3 Types of Banking Organizations or Structures (Banking Systems)

Generally, Banks are classified on the basis of their functions and operations such as
Central Banks, Development Banks, Investment Banks, etc.

Similarly, the Banking systems are classified on the basis of it’s organization structure or
management style, such as Branch Banking, Unit Banking, Group Banking, Chain Banking,
Correspondent Banking, etc.

The structure of Banking is designed on the basis of traditional, socio-economical and

political environment in the country. Socialist countries prefer public sector Banks while
capitalist countries allow the private sector Banks. On the same lines some countries give
weightage to the merits of economies of large scale business and prefer Branch Banking
while other countries want to eliminate monopoly power and invite independent small units
to do the Banking business.

Branch Banking System is found in the mixed economy countries like India. Government
owned Banks are largely found in the countries with Socialism and Communism whereas the
Banking systems like Unit Banking, Group Banking, Chain Banking, Correspondent
Banking, etc. are mainly found in the Capitalist country like India.

Following are the types of Banking systems all over the world:-

1) Branch Banking System

Under Branch Banking system, each Bank works as a legal entity, having one Board of
Directors, on group of shareholders and operates through a network of number of branches
spread throughout the area of operation which could be a district, a state or the whole
country depending upon the size of the Bank. The head office of a Bank is generally located
in a big city or state capital.

Branch Banking system stared in England. Majority of the Banking business in England is
in the hands of big four Banks, popularly known as ‘Big Four’, namely The Midland, The
Lloyds, The Barclays and The National Westminster. There branches are working all over the
country.

Branch Banking system also exists in other countries like India, South Africa, Canada,
Japan, Germany, Russia, etc.

Advantages of Branch Banking

i) Economies of large scale of operations.
ii) Geographical spreading of risks
iii) Remittance facilities
iv) Economy in cash reserves
v) Equity in interest rates.
vi) Profitable use of funds
vii) Large financial resources
viii) Loans and advances and investments on securities
ix) Increase in Banking facilities
x) Greater public confidence
xi) Mobilization of deposits
xii) Efficiency in Management
xiii) High Banking standards
xiv) More effective credit control
xv) Greater contacts

Disadvantages of Branch Banking

i) Difficulty in Management, Supervision and Control

ii) Possibility of Monopoly
iii) Unnecessary competition
iv) Expensiveness
v) Continuance of Non-profitable branches
vi) Savings of rural places are transferred to urban places.
vii) Lack of local knowledge
viii) Transfers
ix) Competition

2) Unit Banking System

Unit Banking is a system in which Bank operates in a specified area - a town or a city
which is smaller and limit one and functions within it’s limited resources.Unit Bank operates
through a single office. Unit Banks are also called as Localized Banking.

Unit Banking system is found in USA. Unit Bank may have a link with Correspondent
Bank in the city, if available, to enable the inter-bank transaction and the remittance of funds
through it. The county banks (Unit Banks working in small towns) deposit their money and
reserves with the City Banks in the nearby town or city e.g. the Unit Banks in New York
were permitted to open branches within the city of New York only while Bank of California
could open branches anywhere in the State of California.

If at all there are branches of Unit Banks, they are very few in number. Earlier Unit Banks
were popular in USA till World War II. There ae total 14,000 Unit Banks working in USA,
out of which 12,000Unit Banks are not having any branches.

Advantages of Unit Banking

i) Local Interest and specialized knowledge of the locality.
ii) Upholding the local interest (Local funds to local needs)
iii) Convenience of management, supervision and control
iv) Check on the formation of monopolies
v) Quick Baking service and efficiency
vi) Initiative in Business
vii) Personal contacts
viii) Merits of small scale (low operational costs)

Disadvantages of Unit Banking

i) Inability to finance large-scale development

ii) Absence of division of labour
iii) Inability to face financial crisis
iv) Failure to provide protection to small units
v) Inconvenience in remittance of funds
vi) Inequality in Interest Rates
vii) Yielding to influences and pressures
viii) Limited resources

3) Group Banking System

Under Group Banking System, two or three separately incorporated Banks are brought
under the control of a Holding Company. Each member Bank retains it’s separate existence.
Member Banks may be the Unit Banks or Branch Banks or both. Even the subsidiaries could
be the Banking and Non-Banking companies.

Business activities of all the Member Banks are coordinated by the Holding Company.
Centralized Management of the Member Banks is the feature of Group Banking System.

Group Banking enjoys the economies of large scale of operations. All the members need
not carry large amount of reserves. The reserves can be easily transferred from one Bank to
another as per the requirement.

Group Banks are commonly found in USA. They are regulated by strict rules, special
investigation and control of US authorities. It is seen in the history of Banking that several
Banking companies were liquidated during the great depression. Loss incurred by Member
Bank or NBFC has to be transferred to the efficient Member Banks is one of the drawbacks
of the Group Banking System.

Advantages of Group Banking System

i) Pooling of resources
ii) No need of large resources
iii) Efficiency
iv) Economies of large scale
v) Preservation of separate entity
vi) Elimination of competition

Disadvantages of Group Banking System

i) Monopoly
ii) Inefficiency
iii) Anti-effects
iv) Self-interest of the Parent Bank (Holding Company)
v) Absence of effective control
4) Chain Banking System

Under Chain Banking System, the separately incorporated Banks are brought under the
common control by a device other than Holding Company. Chain Banks are formed by the
Common Stock ownership without any intervention by Holding Company.

Some group of persons may own three or four Banks or some persons may be directors of
several Banks. These Member Banks work as a Banking Chain. Each Member Bank in the
Chain retains it’s separate entity. There is no intervention in the working of the Chain Banks
by any central organization.

This type of Banking system was existed in USA on a large scale before the Great
Depression.

5) Correspondent Banking System

When the Unit Banks in small towns are linked with the big Banks in the metropolitan
cities, the system is called as the Correspondent Banking System. The big Banks working the
cities act as the correspondent Banks to the several Unit Banks working in that area.
Correspondent Banking System is very commonly found in U.S.A.

Unit Banks maintain some deposits and reserves with it’s Correspondent Bank in the city.
The Correspondent Bank, in return, provides following services to the Unit Banks:-

i) Accepting the surplus funds from the Linked Unit Bank for it’s business.
ii) Remittance facilities are made available to the Linked Banks.
iii) Collection of Cheques, Drafts, Bills, etc. on behalf of the Linked Banks.