Definition: The Concentration Banking is the arrangement used by the firms, wherein the funds from all the regional banks in different locations gets concentrated or collected into the single bank account.
In other words, a firm has its operations in several parts of the country and in order to ease the complexity of handling multiple bank accounts at different locations, the firm may opt for a concentration banking service, whereby all the funds from different regional banks gets forwarded to a single bank account called as a concentration account.
Although the organizations can have many accounts in different banks, but they usually have a single account in which major transactions take place, such account is called the concentration account and the bank in which the account is held is called the concentration bank.
How does the Concentration Banking operate?
- First of all, the places are identified where company’s major customers are placed and then the local bank accounts are opened at each location.
- Once the accounts are opened, the local collection center (agents) or the bank branch is identified where all the cheques are collected from the customers at the respective locations.
- The remittances from the customers can be collected either in person or through the post. Once the cheques are collected are deposited in the local banks for the clearance.
- On the realization of cheques, the funds are transferred to the head office bank account (concentration account) through any telegraphic/electronic transfer schemes.
The concentration banking helps the organizations in reducing the mailing float. Since the remittances from the customers are either collected in person or by local post, the mailing float has substantially reduced. Also, it has reduced the cheque processing float at company’s office, as the detailed list of all the remittances received is sent to the company’s head office as a credit advice.
Through concentration banking, the banking processing float has also been reduced considerably, as the cheques are cleared locally and the funds are readily made available. Thus, the time required for the clearance of the outstation cheques have reduced manifold.