Even as digital banking finds more and more takers, major banks in India continue to also favour the time-tested brick-and-mortar model and have been stepping up branch expansion of late.
This trend is common to both private and public sector banks, although the former appear to be racing ahead for now.
After India’s largest private sector bank, HDFC Bank, had merged the financial services company HDFC Ltd into itself in July 2023, the bank is fast-tracking branch expansion to replace the maturing liabilities of the erstwhile HDFC with retail deposits and lower the credit-deposit ratio.
However, its competitors do not want to let this move go unchallenged, lest they lose market share.
HDFC Bank added over 900 branches in FY24 and will add more in the current financial year, says MD and CEO Sashidhar Jagdishan in the bank’s latest annual report. It currently has 8,851 branches.
ICICI Bank, India’s second largest private sector bank, is treading a similar path. Its branch count grew by 64 in the first quarter of FY25 to reach 6,587.
State Bank of India (SBI) plans to add 600 new branches in the current financial year to tap business opportunities in emerging areas, including large residential townships, said Chairman CS Setty in a recent interview with a wire agency.
India’s largest bank added 40 branches in the first quarter, taking the total to 22,580.
Of the 137 new branches added last fiscal, 59 were in rural areas.
There are many reasons driving bank branch expansion. Boston Consulting Group (BCG), in its latest report, notes that in the evolving banking landscape, shaped by open banking and digital public infrastructure, the distribution medium has changed significantly over the years.
“However, for a diverse nation like India, with pronounced digital divides, the relevance of physical branches in fostering customer trust remains crucial,” it says.
Advisory centres
BCG flags three key requirements for banks: transforming branches into advisory-led centres rather than product pushers; aligning services with channels tailored to specific customer segments; and adopting a ‘phygital’ approach.
This hybrid model, balancing digital capabilities with physical interaction, not only optimises the cost-income ratio but also extends the reach of banks.
The report observes that the digital-only approach is not successful globally. Digital banks saw a lower deposit base compared to traditional banks.
BCG emphasises that physical touchpoints build customer trust, are vital to educate and engage customers, are preferred by the elderly and non-tech savvy customers, and serve as a bridge to unbanked areas.
There is a clamour to mobilise deposits because credit growth is outstripping deposit growth. Aggregate bank credit and deposits grew robustly at 14.4 per cent and 12 per cent, respectively, as on September 20, 2024.
Deposit retention
Though narrowing, the gap between bank credit and deposits persists (bank credit and deposits expanded year-on-year by 15.3 per cent and 12.3 per cent, respectively, as on September 22, 2023).
Karthik Srinivasan, Senior Vice President and Group Head, ICRA, points to the fall in the share of retail deposits in overall bank deposits.
“Even if somebody opens a digital savings account, the deposit is more likely to remain with the bank as a term deposit at a higher cost, unless the bank offers a higher rate on savings deposits.
“However, the retention of such savings deposits remains sensitive to interest rates. So, banks are going back to increasing branch network to mobilise stable deposits, while offering other banking services as a value-add proposition,” he says.
Srinivasan observes that following the merger of a non-bank with a large bank and the restrictions on another bank’s digital customer acquisition, there is an even greater need to rapidly ramp up the deposit base.
“So branch network must be expanded even more rapidly to mobilise deposits. Now, when large banks become aggressive in mobilising deposits, other banks also have to re-strategise their business plans,” he says.
Product basket
Banks are expanding their product basket and focusing on fee-based income through sale of insurance, mutual funds, and so on.
In rural areas, this can be done more effectively through a brick-and-mortar branch, as compared to digital marketing.
“The focus on financial inclusion and schemes like Pradhan Mantri Jan Dhan Yojana (PMJDY) has have proved to be ‘viable’ for many banks, and branch expansion will give us last-mile connectivity,” says a senior economist of SBI.
Compared to private sector banks, public sector banks are slower with branch expansion, especially after the mega consolidation of 10 public sector banks into four in 2020
Household behaviour
According to Reserve Bank of India data, the number of public sector bank branches has fallen from 87,892 in FY20 to 86,311 in FY21 and 84,258 in FY22. However, the number of branches nudged up to 84,404 by March 2023.
Branches of private sector banks, on the other hand, increased from 34,794 in FY20 to 41,426 in FY23.
There are newer currents in the banking industry. As observed by BCG, households’ savings behaviour is changing, as they are becoming net borrowers from the banking industry — driving pressure on margins and liquidity.
So, banks will need to think up more innovative ways of attracting more deposits.