The rising digital transactions reduce cash dependence and, thus, deposit leakage at the macro level, while helping banks tap digitally savvy new-age customers and their transaction flow, leading to better customer float/deposit growth.
However, branches remain the indispensable source of deposit mobilization, not only in India but also in foreign countries, highlighted a latest report by Emkay Global Financial Services.
This is evident in the strong positive correlation between Branch-Deposit market-share gains for banks even in the current digital world. Branches also help banks deepen the retail lending business in non-metros and, thus, feed it back into retail deposit growth.
Additionally, though metros remain key contributors of deposits, their share is on a steady decline; hence, we believe banks focusing on Urban + SURU branches (including ‘Hindi Heartland States’ given their long-term potential on credit/deposit front) will benefit in the long term.
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According to Emkay Institutional Equities, PVBs (HDFC Bank, ICICI Bank, Axis, IndusInd Bank, and IDFC Bank) are in a branch expansion mode and have identified their niche focus areas to mobilize retail deposits, but PSBs (except the likes of SBI and BOB) still lag and could, thus, suffer in the long run.
RBL, IndusInd & HDFC Bank leads in branch additions
Unlike PSBs, private sector banks have been adding branches at a faster pace, thus, as the war for retail deposits intensifies PVBs could be the winners in the long run. In FY23, approximately 3386 branches were added by PVBs while only 148 branches were added by PSBs, maintaining a stark difference.
The State Bank of India has hardly added any branches in the past five years, while HDFC leads the pack among large private sector banks.
In terms of 5-year branch expansion CAGR, RBL Bank had the highest branch expansion of about 13 per cent from December 2018 to December 2023. Following the lead, IndusInd Bank recorded about 12 per cent and HDFC Bank recorded about 10 per cent branch expansion CAGR over the past 5 years, said the report.
Following HDFC Bank, Axis Bank and ICICI Bank recorded the most branch expansion growth of about 5 per cent each, thereafter followed by Kotak Mahindra Bank, Federal Bank and State Bank of India, the report added.
Banks need to capture grey spaces with small branches
Post-2013, the Reserve Bank of India has liberalized a branch licensing policy, whereby four branches opened in Tier-6 areas automatically qualify the bank to open one branch in Tier-I and so on.
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This policy has led to higher branch expansion in unbanked/underbanked areas, thereby fulfilling the RBI’s goal of financial inclusion, but it has led to a gap in branch expansion and deposit market share gain, highlighted the Emkay report.
However, most of the unbanked or underbanked areas were in the central region, including UP, Bihar, and MP, which are considered to be the Hindi Heartland and possibly the new growth engines for decades to come.
Thus, despite weak branch economics in the near term, banks need to focus on branch addition (though smaller in size) or adopt a low-cost BC model or partnership model, the report added.
