DIGITAL TRANSACTIONS grew more than four times between 2018 and 2022. But this hasn't deterred customers from visiting bank branches. Bankers say even though a significant number of account holders are using UPI for smaller transactions, they still visit a branch for human touch. "Visiting a bank branch is a ritual for Indian customers. They, especially senior citizens, plan for it, get ready for it. It's like a social outing. Technology enabling transactions doesn't mean the customer doesn't want conversations," says Ravi Narayanan, group executive and head, branch banking, retail liabilities and product, Axis Bank. The Mumbai-headquartered bank reported a 3.31% rise in number of branches in FY23. The number of branches run by private sector banks grew 8.7% from 14,893 to 16,189 in FY22, according to S&P Global Market Intelligence. "Fixed deposits, term deposits, recurring deposits, SIPs (systematic investment plans), have gone digital, but when it comes to home loan or (large) investments, people still want to meet physically. Even when customers want to borrow for their business, they want more physical interaction," says Shanti Ekambaram, whole-time director, Kotak Mahindra Bank.

It's no surprise then that banks, especially in the private sector, are expanding physical presence aggressively as they seek to onboard salaried customers, farmers and businesses outside metro and Tier-1 cities. The bulk of the increase was accounted for by HDFC Bank and Axis Bank. Last financial year, HDFC had reported the highest growth (23%) in number of branches among big banks. In 2021, the bank had said that it wanted to double its rural reach to two lakh villages through a combination of branch network, digital outreach platforms, business correspondents and business facilitators. Its rural business had expanded to 1.65 lakh villages by end of last financial year.

"Every institution is in a different place in terms of life cycle. Any bank which says it wants to expand via brick and mortar route believes there are white spaces it can cover. These can be within a large metro such as Bengaluru or Delhi or at district or state level," says Narayanan.

That is perhaps why large public sector banks have been less keen to expand their branch network. The number of branches of state-owned banks fell to 59,236 in FY22 from 61,031 in FY21. State Bank of India, for example, registered only 1.2% growth in number of branches in FY23, while the number of Punjab National Bank branches fell about 1% to 11,270 during the year. Union Bank saw the steepest dip of 3.35% among public sector banks. This difference with private sector banks can be attributed to two reasons. First, reach of state-owned institutions like State Bank of India, which has 25,087 branches and 65,627 ATMs, is way more than their private sector counterparts; they, in fact, already cover large parts of the country. Second, there was branch rationalisation after 10 public sector banks merged into four in 2020. Both private and state-owned banks, though, are working on multiple sales channels for different products. "Mapping the right channel with the right product for the right client, that's the metric a number of banks are trying to figure out. For non-financial transactions like enquiry, general information about products and services or low-ticket transactions, digital channels are much more efficient. But complex products are better sold in person," says Monish Shah, partner, consulting, Deloitte India.

Product Match

India has some unique characteristics that make the presence of bank branches a must. For instance, it continues to be a big market for gold and jewellery, making bank facilities such as lockers important. These facilities can be accessed only in branches even if banks encourage consumers to invest in instruments like mutual funds online.

India also needs branches as it continues to be a cash-heavy economy despite push for online transactions. Digital transactions jumped from 2,071 crore in FY18 to 9,192 crore (till December) in FY23. However, cash in circulation increased to ₹30.88 lakh crore, about 72% higher compared with November 2016, when government withdrew ₹500 and ₹1,000 notes from circulation. "With cash in circulation going up, for retailers and small and medium enterprises, a relationship with a branch where they can deposit cash at the end of the day becomes imperative," says Anuj Aggarwal, banking industry leader, India, Capgemini. He believes with coming of India Stack (government-backed application programming interfaces, or APIs, which allow third parties like businesses, governments and start-ups to build software), and initiatives like Open Network For Digital Commerce, digital transactions will rise. But as cash in circulation is increasing, both digital banking as well as physical branches will coexist. However, experts see the number of branches continuing to grow in the short to medium term before plateauing.

Different Strokes

An interesting result of spread of banking via physical and digital channels is evolution of branches in terms of size, layout or services they focus on. Ekambaram says Kotak has branches ranging from 1,000 to 2,000 square feet depending on location and catchment area. For example, in areas where most accounts are savings, branches offer locker services, but not in areas where the bulk of the business comes from current accounts. The bank is also adding digital lobbies which offer a range of services like cash withdrawal and cash/cheque deposit. "We have rolled out various formats. These will be fine-tuned. Machine-based branches will, however, take time to be adopted in India. Assisted digital will be the way to go. You will have digital branches but people will need assistance because not everybody is up to date (with digital)," she says.

Axis' Narayanan says they are implementing changes in branch formats in areas where they are expanding. For example, in more rural areas, branches will have areas where people can be gathered and educated about products related to agriculture or government schemes. "This is unlike in the past when there was a standard layout whether you are in Dibrugarh or Delhi. When you enter an Axis Bank branch, you will recognise it as accessible, but the layouts will differ depending on the market," he says.

The way banks leverage physical and digital channels will decide whether they gain market share and attract new consumers towards investment, wealth management and credit products. "Where India has reached in its economic cycle, and the way we are likely to grow, there will be a huge demand for mass wealth products like small-ticket mutual funds. Those who leverage both physical distribution and digital channels for lowering the cost of admission will emerge winners in this race for fee-based income," says Deloitte's Shah.

Even though banks added branches, many large banks reduced number of ATMs in 2023, but not everyone. Kotak Mahindra, for example, saw a 7.5% increase in number of ATMs. HDFC Bank saw 5.95% growth. Axis Bank, however, reduced number of ATMs by 1.6%. Overall growth in number of ATMs for domestic scheduled commercial banks and small finance banks together was just 1% in last financial year.

Axis' Narayanan says cost of running ATMs has risen as a result of regulatory changes and shift towards UPI in last few years. "The cost has become a little prohibitive. And most of us feel that looking at ATMs may not be appropriate at this point in time. Rationalisation has started. There isn't going to be anything drastic (in terms of number of ATMs)," he says.

But the branch network, it seems, is here to stay.

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