Private Banks Focus on Branch Expansion to Connect with Customers and Secure Retail Deposits

Most private banks have started adding more bank branches in order to establish a stronger connection with customers. Emkay Global Financial Services predicts a competition for retail deposits and suggests that bank branches can aid in mobilization in the long term. The brokerage firm also suggests that the Hindi heartland, which has the highest number of unbanked districts, could be a strategic area for branch expansion.
In today’s era of digital banking, there are limited reasons to physically visit a bank branch. Even if someone decides to go to their nearest branch for a sense of human connection, most bank officials advise customers to use phone banking or app-based transactions to access services. Therefore, in urban areas, having many bank branches on every major street may seem redundant.
However, according to a report by Emkay, the importance of well-staffed physical banks has not diminished. The report states that even digitally savvy customers require a “branch connect” beyond a certain point, while millennials and Gen Z prefer banks that offer nearby branch services.
While serving customers is a key aspect of a bank, branches also play a crucial role in attracting retail loans and deposits. They build trust, interact with customers daily, and are essential for Know Your Customer (KYC) compliance. “Branches know their depositors,” says Anand Dama, a senior analyst at Emkay.
Most banks have recognized the importance of branches. Although branch expansion had slowed down in recent years due to consolidation among public sector banks (PSBs) and private banks focusing on digital services and reducing branch openings, the tide is now turning. The report states that most private banks have resumed branch expansion, targeting areas where there is a lack of banking services or where PSBs have a presence.
Physical branches will become a crucial tool in the upcoming deposit war in the market and will contribute to long-term growth.
India has seen significant borrowing activity due to increasing consumerism, resulting in credit growth of around 16.5% in the past two fiscal years. While it is expected to moderate, credit growth is projected to remain in the double digits at around 12-14%. This growth is beneficial for Indian banks, which are in the lending business. However, there is a catch.
While credit demand is increasing, the growth in bank deposits has been slowing down. The deposit growth rate has been around 13.3% in the past two years. The slowdown in bank deposits raises concerns about the overall banking system.
Factors such as slow growth in household savings, preference for investing in equities and mutual funds instead of fixed deposits, and leakage of deposits into small savings schemes have contributed to the decline in bank deposits. Additionally, increased interbank competition from new banks has resulted in a scramble for deposits. If banks do not grow their deposit base at a faster rate, they will struggle to meet the demand for credit, causing them to lose business.
Emkay suggests that this could lead to a fierce competition for retail deposits in the next decade, with private banks taking the lead. While higher deposit rates will play a role in convincing Indians to opt for long-term deposits, having a strong branch network will also help in mobilizing deposits. A research paper by the Reserve Bank of India (RBI) also highlights a positive relationship between a bank’s branches and its deposit base.
The report argues for bank branch expansion in unbanked areas to increase deposit mobilization in the long run. While higher interest rates may attract some deposits, the loyalty and economic value of such customers or deposits remain questionable, according to Emkay.
Banks must also expand their reach beyond metropolitan areas and focus on the Hindi heartland to stimulate loan and deposit growth. Emkay suggests that concentrating on expanding the branch network in metro, semi-urban, and rural areas, with a particular focus on the Hindi heartland due to its growth potential, could be a viable solution.
Uttar Pradesh, Bihar, Madhya Pradesh, Chhattisgarh, and Uttarakhand have the highest proportion of unbanked and underbanked districts. Establishing brick-and-mortar branches could be an effective way to connect with customers in these regions and attract walk-ins, which is difficult to achieve through mobile apps alone.