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GROWING LEANER

Why opening new branches is no longer a priority for Indian banks

By Nupur Anand

Indian banks are going slow on branch expansion, focusing instead on digitisation and reducing their toxic-loan pile.

For the year ended March 2018, the number of bank branches in the country increased by a meager 1% from the previous year, according to a report by Kotak Institutional Equities released on March 07. In comparison, over the past five financial years, it has grown at a compounded annual growth rate (CAGR) of 7%.

“Growth in (the number of) branches was flat in urban areas (in financial year 2018) after witnessing 10% year-on-year (yoy) growth in fiscal 2017, while rural areas saw a slight pickup…(up 2% yoy) after a decline of 3.5% in fiscal 2017,” the report noted.

This near freeze goes against the grain as Indian consumers are known for their obsession with cash and inertia against digital payments. Yet, with profits under pressure due to non-performing assets (NPAs), the lenders have no choice but to hold their expansion plans, according to Kotak.

Government-owned banks, which account for a higher share of NPAs, have added far fewer branches than their private sector peers. A lot of them had also been under the central bank’s prompt corrective action (PCA) framework, which restricted such plans anyway.

And it is not just branches, banks have also applied the brakes on ATM expansion. Their unfavourable cost dynamics had compelled lenders to place a cap on free withdrawals. Instead, they are pushing digital transactions. For, besides their growing popularity among urban customers, digitisation helps lenders cut cost per transaction by up to 50%, an industry report says.

Private banks lead

Their slowing rate of branch expansion saw government banks lose out to private lenders, the Kotak report notes.

“Since FY2010, they (government banks) have been losing market share of 50-70 basis points (bps)—one basis point is one-hundredth of a percentage point—on average each year, and most of the gains moved to private banks,” the report said.

On the deposit side, state-owned banks’ market share has declined 770 bps since financial year 2011, with things worsening in the past few years. In 2018 alone, the market share of PSBs fell by 250 bps. “(PSBs) lag far behind their private peers in terms of leveraging technology to gain customers and, hence, productivity has been constantly declining since fiscal 2013,” the report said.