Despite a wider reach across India and a larger customer base than private and foreign banks, public sector banks continue to spend more on transaction costs because they are still dependent on so-called branch infrastructure. This has an impact on their profitability.
Unlike private and foreign banks that extensively use automated teller machines, and other direct banking channels such as the telephone and the Internet, most public sector banks still transact most of their business at branches. The cost of a transaction at a bank branch ranges from Rs40-60, depending on the location while an ATM transaction could cost as little as Rs15. The cost of transacting through phone and Internet is even lower, between Rs2 and Rs5.
Foreign and private sector banks have been able to reduce operational costs substantially by using direct banking channels. Off-site transactions account for 80-90% of all transactions for private and foreign banks but only 10-20% for public sector banks.
M.B.N. Rao, chairman, Canara Bank, and also the chairman of Indian Banks Association, an industry body, however says that ATMS are only a “delivery channel,” while “a bank branch is the hub”. Despite the growing number of ATMs, he adds, “for advanced enquiries like opening a new account, mutual fund advice, etc, customers have to come to banks.” Large private sector lenders such as ICICI Bank Ltd, HDFC Bank Ltd and Axis Bank Ltd conduct close to 90% of their transactions outside branches. In comparison, large public sector lenders such as the State bank of India, which is making some effort to catch up with private and foreign banks in terms of direct banking channels, still conduct only 35% of their transactions done off site. SBI has the largest customer base among banks in India, about 100 million.
Hemant Kaul, president and head of retail banking at Axis Bank, a Mumbai-based private sector lender, says banks have to “hand-hold customers as they migrate to direct banking channels.” The ratio of ATMs to branches is about 5:1 for Axis Bank, which according to Kaul, is the highest in the banking sector. In comparison, public sector banks are still heavily dependent on shared ATMs and have two branches for every ATM they do.
A top official at a public sector bank justifies the situation and says this is because banks such as his have been in the business longer than their private and foreign counterparts.
Private banks started issuing ATM cards in the mid-1990s. Around the same time, foreign banks started discouraging their customers from visiting their branches. The offficial claims that over the past few years, public sector banks have been aggressively issuing debit cards that double up as ATM cards. He claims public sector banks have been growing their card usage at more than 50-60% (year-on-year).
Robin Roy, associate director, financial services, PricewaterhouseCoopers, an audit and consulting firm said the use of ATMs by customers of public sector banks is at a nascent stage, but the situation is changing very quickly. “Public sector banks are gradually pushing their retail customers to use ATMs,” Roy added.
However, Axis Bank’s Kaul says that just putting up an ATM machine or issuing cards individually “is not enough” “One needs to monitor footfalls of customers in branches then spot the right locations for ATMs,” he said. Axis Bank has set up its ATMs at railway stations in Mumbai.
A private sector banker recalls how an internal research on footfalls in a western suburb in Mumbai revealed that a public sector bank saw its customers using the ATM of a private sector bank with which it had an ATM sharing agreement. This was because the location of the public sector bank was not convenient.
K.S. Bajwa, general manager, operations, payments and settlement decisions at Punjab National Bank, a Delhi-based lender, says a bank needs to spend money to maintain an ATM and “lesser the footfalls, higher the cost (for the bank).”
There is another offshoot of higher ATM usage by customers—the average balance kept with bank is high as people tend to frequently withdraw smaller amount of money from ATMs. A senior executive at a large Mumbai-based private bank says customers took time to migrate from “branch-banking” to other direct channels, but now it’s a win–win for both customers and banks.
Foreign banks with fewer branches have made the most of technology. “The customer should be able to bank at his convenience and not when the bank is open,” said a foreign banker who did not wish to be identified. D. Krishnamurthy, general manager, retail banking, Bank of India, says, “We don’t want our customers to go to the ATM only. We tell them please don’t stop coming to the bank.”