India’s determined digital drive, which linked its villages to the internet at breakneck speed, also prompted what now seems to be rather premature obituaries of branch banking. More banks, contrary to expectations, are busy building brick-and-mortar presence across the country for access to something that has defined banking since it began: Deposits.
“Thanks to core banking, a lot of things can be done at the back end. But, at the same time, the proximity to customers is something which always works well in terms of enhancing trust and confidence of customers,” said Dinesh Khara, chairman of the State Bank of India, the country’s biggest mass lender.
To be sure, there is competition for savers’ funds. Earlier, banks had a captive depositor base in the absence of viable alternatives for financial savings. But technology – and India’s rapid ascent up the global economic leaderboard – have altered the dynamics. Mutual funds have simplified access to securitised instruments, cornering for themselves an increasing share of savings.
So, to build a new customer base for deposits, banks must be visible in areas where they want to draw customers. That explains the addition of more than 3,500 branches in the past two years by just the top four private banks in the country.
HDFC Bank, which recently merged its home-financier parent with itself, is the leader among them to help correct the assets-liability mismatch temporarily spawned by the union. That has set off a round of competition among lenders to be ‘seen’ on the ground.
Last year, HDFC Bank’s branch network expanded by 27%, up from 13% a year earlier. ICICI Bank’s branches climbed 8% last year, from 2.3% a year ago. Axis Bank was the slowest among big private lenders, with a 3% growth in branches last year.
While customers are content with doing transactions in the digital mode, a lot of complicated transactions such as investments, transfer of funds overseas and loans, still require visits to the branches.
“Yes, India is going more digital and customers use internet banking, but it is not as if customers do not come to our branches,” said Rajiv Anand, deputy managing director of Axis Bank. “They come to our branches for the more complex, complicated transactions or, in many cases, to have a cup of tea with our branch heads.”
Balance Queries
A March 2023 survey of 49,000 customers by Accenture said 63% of the consumers’ mobile banking logins concerned checking account balances and most consumers used the digital channel for simple functional tasks only.
“The physical location of a bank is certainly something that enhances trust,” said SBI’s Khara. “Second, there are certain age groups of people who would like to be serviced only at a branch. Third, there are a certain set of customers, although perhaps blessed in terms of education, still do not want to use the technology.”
Branches are among the most expensive pieces of infrastructure for banks as the rental and maintenance costs are high in many localities. The payback period is longer in many cases. For HDFC Bank, most of the branches begin to break even in two years and its past experience shows that 90% of the branches have broken even in about 20-21 months.
Banks do a deep analysis with the market and credit teams doing the rounds before choosing a location as a wrong step would cost money.
“The team scans the geography in the country to determine our presence and certain other banks’ presence in the vicinity and maps it with the potential – not just of deposits but also of advances,” said HDFC Bank’s chief financial officer Srinivasan Vaidyanathan in an investor call.
Besides helping banks attract customers, the branches also serve as a tool to impart financial education to those less aware. The scope for cross selling of mutual funds, and insurance to people in the hinterland is also aiding the growth of branches.
“When it comes to financial literacy, our physical branches are in a position to offer that kind of service to explain the products. So, this is a very important component if financial literacy in the country has to improve,” said Khara.
