Indian private sector lenders, including HDFC Bank, plan to open more branches.

Source: HDFC Bank

Several Indian private sector banks including HDFC Bank Ltd. and Axis Bank Ltd. are expanding their local branch networks, contrary to expectations that digitalization would obviate the need for physical branches.

The number of branches operated by private sector banks grew to 16,189 in the year ended March 31, from 14,893 a year ago, according to data from S&P Global Market Intelligence. HDFC Bank and Axis Bank accounted for the bulk of that growth, with HDFC Bank's branches expanding to 6,342 from 5,608, and Axis Bank's branches increasing to 4,758 from 4,594.

"The larger private sector banks are adopting a multi-sales channel model, investing in both branches and technology," said Nilanjan Karfa, executive director for banks and financials equity research at Nomura.

Private sector banks continue to be in expansion mode in India, riding on economic growth that is among the fastest in the world. Even as they add branches, they lack presence in certain geographies, such as rural locations. In contrast, state-owned banks, which dominate the banking landscape, are trimming their branch networks to improve financial efficiencies.

Getting physical

HDFC Bank, India's biggest private sector lender by assets, said July 16 it plans to nearly double its branch network over the next three to five years by adding 1,500 to 2,000 new branches annually.

Singapore-headquartered DBS Group Holdings Ltd., which purchased The Lakshmi Vilas Bank Ltd. in 2020 to become the biggest foreign lender by branches in India, also plans to expand to smaller cities currently dominated by government-owned lenders such as State Bank of India.

Another private sector lender, Kotak Mahindra Bank Ltd., said it is seeking to grow its digital footprint "exponentially," but will also offer access to branches as the human touch is important for many customers.

"While the consumer wants the comfort of a brand and convenience of digital alternatives, some physical presence helps reinforce customer trust," said Virat Diwanji, group president and head of consumer banking at Kotak Mahindra Bank. "[The] human touch is significant for many customers, especially those in smaller cities."

As the Indian economy still uses a high quantum of cash, the need for physical branches is imperative for small businesses and traders, Diwanji said. "We see this as a continuing trend and hence we work on a philosophy that Kotak Mahindra Bank needs to be digital when customers need it and be physical when the customer wants it," Diwanji added.

While younger Indians are embracing mobile phone apps, older generations and people in smaller towns prefer to deal with bank executives even for routine tasks such as checking account balances or opening deposit accounts.

"Private sector banks have been trying to increase their branch network to enhance their reach and customer connect," Krishnan Sitaraman, senior director and deputy chief ratings officer at rating and research firm CRISIL, said.

That could entail more costs, although not necessarily more hiring, since banks can also reallocate staff from closed branches or upskill them to provide the required services at branches, Nikita Anand, associate director at S&P Global Ratings, said. "Generally, a physical network will be more expensive due to infrastructure costs such as real estate, utilities, etc."

State banks shrinking

State-owned banks are reducing their branch footprint, mainly because they are consolidating amid the government's move to reduce its presence in the industry. For example, Central Bank of India plans to shrink its branch network by 13% to improve its financial health, Reuters reported in May. The bank is looking to close or merge 600 branches by March 2023.

The diverging trends on branch networks for public and private sector banks can be attributed to the mergers that saw 10 public sector banks become four big banks in 2020. Public sector banks have closed some branches to achieve synergies from the mergers, said CRISIL's Sitaraman. The mergers have led to some duplication and overlap of branches in certain geographies and closing these branches are likely to result in operational efficiencies, Sitaraman added.

Total branches of state-owned banks declined to 59,238 by March 31, from 61,031 at the end of the previous fiscal year, according to data from Market Intelligence.

Globally, bank branches are tracing this trend: Banks in developed economies closed 9% of their branches in 2021, a response to pandemic-fueled changes in consumer behavior toward digital channels, a July 13 report from McKinsey & Co. said.

Digital growth

Both private and public sector lenders in India continue to focus on digital apps, allowing customers to conduct basic banking operations without having to step out of their homes. Digital banking also got a boost from the COVID-19 pandemic, which forced lockdowns in several parts of the country.

"Over time, I am sure the need for branch visits would come off," Nomura's Karfa said. Higher mobile banking adoption and noncash transactions will reduce the need for customers to visit bank branches. "I am not very certain whether we will witness massive reduction in branches, but I think the size of bank branches will come off and they will be manned by fewer people," Karfa said.

Most banks in India are investing in their digital businesses despite technical setbacks. State Bank of India, the nation's largest bank by assets, was reportedly looking to revamp its current mobile application, Yono, as it prepares to launch a completely digital bank. State Bank of India had not responded to Market Intelligence queries at the time of publication.

Customers still value physical touch points, according to Capgemini's "World Retail Banking Report" for 2022. Customer surveys showed 75% of respondents valued branches as a way to interact with banks, about the same importance as they attached to mobile apps.

The McKinsey report said 28% of customers prefer to meet their servicing needs at branches and that share increased to 50% for complex situations such as fraud or financial advice.