Disadvantages of Unit Banking

Following are the main disadvantages of unit banking:

1. No Economies of Large Scale: Since the size of a unit bank is small, it cannot reap the advantages of large scale viz., division of labor and specialization.

2. Lack of Uniformity in Interest Rates: In unit banking system there will be large number of banks in operation. There will be lack of control and therefore their rates of interest would differ widely from place to place. Moreover, transfer of funds will be difficult and costly.

3. Lack of Control: Since the number of unit banks is very large, their co-ordination and control would become very difficult.

4. Risks of Bank’s Failure: Unit banks are more exposed to closure risks. Bigger unit can compensate their losses at some branches against profits at the others. This is not possible in case of smaller banks. Hence, they have to face closure sooner or later.

5. Limited Resources: Under unit banking system the size of bank is small.

Consequently its resources are also limited. Hence, they cannot meet the requirements of large scale industries.

6. Unhealthy Competition: A number of unit banks come into existence at an important business centre. In order to attract customers they indulge in unhealthy competition.

7. Wastage of National Resources: Unit banks concentrate in big metropolitan cities whereas they do not have their places of work in rural areas. Consequently there is uneven and unbalanced growth of banking facilities.

8. No Banking Development in Backward Areas: Because of unlimited resources, Unit banks cannot afford to open uneconomic branches in smaller towns and rural areas. As such, these areas remain unbanked.

9. Local Pressure: Since unit banks are highly localized in their business, local pressures and interferences generally disrupt their normal functioning.