On July 19, 1969, the then government, headed by Indira Gandhi, nationalised 14 major commercial banks in the country with the aim of extending banking facilities to unbanked and underbanked areas. The benefits of this move have been evident on multiple fronts, including a significant increase in the number of branches, especially in rural areas, and substantial growth in deposits and credit during the post-nationalisation period.
Over the past decades, the number of branches of all scheduled commercial banks has witnessed a substantial increase, from 8,321 in 1969 to 162,904 in 2023. However, the Covid-19 pandemic, the rise of AI-based fintech services, and the entry of non-traditional players have redefined the role of branches and raised the question of whether there will be a need for branches in the future. With the stupendous rise in digital banking transactions, which have grown more than four times during 2018-2022, tech protagonists even raise a question: Do we need brick and mortar banking? Customers meet most of their banking needs through mobile and internet banking, branches will lose their identities in the long run, they argue.
However, the reality differs. Despite the reliance on digital transactions, many customers still prefer to visit branches for a human touch and value the social aspect of in-person interactions.
While digitalisation has transformed most deposit-oriented services, banks continue to offer branch-specific products, particularly complex ones. Physical interaction remains crucial for individuals seeking big-ticket loans. According to a global digital banking survey conducted by the Deloitte Center for Financial Services, branches remain the most preferred channels worldwide for new product offerings.
In India, 57 per cent of customers rely on branches for home loans and rural customers heavily depend on branches for jewel loans. The availability of safety locker facilities within branches also attracts numerous customers, considering India’s significant market for gold and jewellery. Many bankers aver that customers still prefer to visit branches at least once a month.
Although the RBI asserts that “cash is king but digital is divine,” India continues to be a cash-oriented economy. The evidence lies in the numbers, with the currency in circulation experiencing a substantial rise from ₹16.73 trillion in 2016 to over ₹33 trillion by 2023.
With the increase in cash circulation for retail business units, maintaining a relationship at the branch level becomes inevitable for depositing significant amounts of cash at the end of the day. Frequent failures of cash deposit machines, particularly in public sector banks (PSBs), are another underlying reason for branches becoming cash hubs. However, technological advancements expected soon, such as India Stack and an open network for digital commerce, may change this trend.
There are other reasons behind the need for branches. People across the globe, be it in developed or developing nations, prefer bank branches due to the trust factor. According to a global survey conducted by Accenture, nearly two-thirds of the 49,000 bank customers surveyed, irrespective of geographies and age groups, pointed out that the proximity of a physical bank branch authenticates the stability and availability of their bank.
During a crisis, customers long for familiarity and certainty, and trusting intangible assets becomes highly challenging. For this class of customers, branches act as ambassadors and provide tangible proof of real relationship banking beyond a screen. Branches are also seen as important nodal points for resolving customers’ complaints and issues. As call centres and dispute resolution agencies, especially in the case of PSBs, are not too familiar to customers, branches become the primary interaction points for in-person dispute resolution.
In light of these, banks in India are actively re-evaluating their branch expansion strategies. Major PSBs such as SBI, PNB, and UBI have displayed limited interest in opening new branches. SBI, for instance, experienced a mere 1.2 per cent growth in branch numbers during FY23, while PNB and UBI witnessed declines of 1 per cent and 3.5 per cent, respectively, during the same period. This can be attributed to their already extensive presence across the country and the rationalisation measures resulting from the bank merger in 2020, which led to the closure of certain branches.
Conversely, private banks have embraced a distinct strategy when it comes to branch expansion. HDFC Bank, the largest private player in the sector, has made an impressive addition of 1,500 branches, while ICICI Bank and Axis Bank have opened 480 and 240 branches, respectively, in FY23. These private banks are proactively expanding their physical footprint in Tier 2 cities and rural areas, with a specific focus on serving the salaried class, farmers, and small businesses.
New avatar
Although many branches have been closed in India’s post-nationalisation journey for viability reasons and due to the entry of digital outlets, Indian commercial banks are still reluctant to completely abandon bank branches. Branches continue to play a vital role in ensuring access and availability of banking services, which are the twin cornerstones of financial inclusion.
While a physical-digital blend of banking is expected to dominate in the future, experts predict a short-term increase in the number of branches, with their layouts undergoing significant transformations based on location. Fully automated branches, though a distant reality, may give way to new formats of digitally-assisted branches in the Indian banking landscape.
The primary challenge for banks in the days ahead will be finding the optimal balance between physical and digital channels to minimise costs while maintaining enduring customer relationships. However, one thing remains certain: branches will retain their importance in the marketing mix of a bank, but in a different avatar.
Alamelu is Senior Professor, and Abinaya is Research Scholar, Department of Banking Management, Alagappa University
People across the globe, be it in developed or developing nations,
prefer bank branches due to the trust factor.