Wednesday, 11 May 2016

Know about Branch Banking-Study Notes for Bank Exams

What is Branch Banking?

Branch Banking is still an integral part of Indian banking system as most Indians still believe in cash transactions and prefer to visit banks in person for routine banking operations. Bank branches are the face of the banks where customers can visit and talk to the officials for getting better insights into new policies, investment schemes, other banking services etc. On top of it, the personal touch in every service leaves a great impact on the minds of customers. However, banking in India has changed its facets and ways of doing business over the years especially after the onslaught of technology and its manifestations. People have started to drift towards latest modes of banking like e-banking, mobile-banking etc. but the acceptance percentage is low as compared to other countries. These innovations hold promising future and branches have to continually evolve to remain relevant in coming times.

Definition of Branch Banking

Branch Banking has been defined under the provisions of Section 23 of the Banking Regulation Act, 1949 that banks can either open new branches or shift the location of existing branches. The banks have to seek a prior approval of RBI to open a new branch in India or abroad or in the same city or village where a branch already operates. RBI will grant such permission after it is satisfied about the financial condition of the demanding bank, robustness of its management, capital structure and general public interest behind such a move. The Banking Regulations Act,  1949, defines a ‘branch’ or ‘branch office’ of a banking company as a place where bank deposits are received, cheques cashed, money lent, any or all banking services are carried out. These exclude the bank call centres as they are typically calling facilities which do not have any customer interaction. A branch will include a full-fledged specialised branch, a satellite or mobile office, an extension counter, administrative office, control office, service branch, credit card centre etc. Relevance of Branch Banking Branch banking has a lot of importance in India as it makes banking possible for people living in rural and remote areas. This is a true source of inclusive growth. The success of Pradhan Mantri Jan Dhan Yojana has been possible due to extensive branch networks of various banks. Branch banking makes management more responsive and efficient over centralised banking operations. Also, the risk is well spread across the branches and no single office has to suffer.  This helps banks to offer more securities and investment options to its customers. Also, due to the wide geographic spread, a broader customer base, deposits used in one branch can be used profitably used as loans or investments in other branches. This type of banking system can easily reach people in backward areas.  There are some negative points too which branch system faces like delays in decision-making due to limited powers of branches, influenced by local political leaders or administration etc.

Advantages of Branch Banking

Rapid growth and wide popularity of branch banking system in the 20th century are due to various advantages as discussed below.
1. Economies of Large Scale Operations:
Under the branch banking system, the bank with a number of branches possesses huge financial resources and enjoys the benefits of large-scale operations,
(a) Highly trained and experienced staff is appointed which increases the efficiency of management,
(b) Division of labour is introduced in the banking operations which ensures greater economy in the working of the bank. Right persons are appointed at the right place and specialisation increases,
(c) Funds are made available liberally and at cheaper rates,
(d) Foreign exchange business is done economically,
(e) Large financial resources and wider geographical coverage increases public confidence in the banking system.
2. Spreading of Risk:
Another advantage of the branch banking system is the lesser risk and greater capacity to meet risks,
(a) Since there is geographical spreading and diversification of risks, the possibility of the failure of the of the bank is remote,
(b) The losses incurred by some branches may be offset by the profits earned by other branches,
(c) Large resources of branch banks increase their ability to face any crisis.
3. Economy in Cash Reserves:
Under the branch banking system, a particular branch can operate without keeping large amounts of idle reserves. In time of the need, resources can be transferred from one branch to another.
4. Diversification on Deposits and Assets:
There is greater diversification of both deposits and assets under branch banking system because of wider geographical coverage,
(a) Deposits are received from the areas where savings are in plenty,
(b) Loans are extended in those areas where funds are scarce and interest rates are high. The choice of securities and investments is larger in this system which increases the. safety and liquidity of funds.
5. Cheap Remittance Facilities:
Since bank branches are spread over the whole country, it is easier and cheaper to transfer funds from one place to another. Inter-branch indebtedness is more easily adjusted than inter-bank indebtedness.
6. Uniform Interest Rates:
Under branch banking system, mobility of capital increases, which in turn, brings about equality in interest rates. Funds are transferred from areas with excessive demand for money to areas with deficit demand for money. As a result, the uniform rate of interest prevails in the whole area; it is prevented from rising in the excessive demand area and from falling in the deficit demand area.
7. Proper Use of Capital:
There is proper use of capital under the branch banking system. If a branch has excess reserves, but no opportunities for investment, it can transfer the resources to other branches which can make most profitable use of these resources.
8. Better Facilities to Customers:
The customers get better and greater facilities under the branch banking system. It is because of the small number of customers per branch and the increased efficiency achieved through large scale operations.
9. Banking Facilities in Backward Areas:
Under the branch banking system, the banking facilities are not restricted to big cities. They can be extended to small towns and rural as well as underdeveloped areas,. Thus, this system helps in the development of backward regions of the country.
10. Effective Control:
Under the branch banking system, The Central bank than have a more efficient control over the banks because it has to deal only with few big banks and nor with each individual branch. This ensures better implementation of monetary policy.

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