Pvt banks lead in the banking network growth

HDFC Bank has said it plans to double its network in the next five years (Photo: Mint)
HDFC Bank has said it plans to double its network in the next five years (Photo: Mint)


In the last five years, Indian banks have added only about one-fourth of the bank branches than they did in the preceding five years. As government-owned banks pull back, it’s private banks who are driving expansion, but rural is not a focus area for them.

The quarter ended March 2022 saw banks in India open the highest number of bank branches in the past nine quarters, since the beginning of the covid-19 pandemic. Even as the pandemic fed the growth of online banking services, brick-and-mortar branches remain crucial for financial inclusion in India, especially in rural areas. However, the experience of the past five years shows that nationalized banks, which dominate India’s banking sector and have historically led the rural drive, are going slow on branch expansion. And while private banks are taking the lead in branch expansion, rural via this route is not a priority for them.

In the five-year period to March 2022, the number of functioning bank branches increased 8% to 158,793. Notably, branches of nationalized banks decreased 6.6% during this period as they rationalized their network following a spate of directed mergers. By comparison, the branch network of private banks increased about 40%. As a result, they continued their gradual ascent in branch network share, increasing from about 19% in March 2017 to about 25% in March 2022.

Private Banks have a distinctly urban focus. Only about 20% of their branches are in rural areas—the least among the four geographical categories of bank branches defined by India’s central bank. As a result, private banks account for only 15% of rural bank branches in India. This is significantly lower than their 28% share in semi-urban branches, 27% in urban branches and 36% in metropolitan branches. For rural coverage to expand, government-owned banks have to step on the pedal again or private banks have to farm out in a bigger way.

Slower expansion

Around one-third of total bank branches in India are located in rural areas, which comprise nearly two-thirds of India’s population by most estimates. Therefore, these areas are largely underserved by the existing network of branches. Notably, 83% of branches situated in rural areas are operated by public sector banks (including regional rural banks), which emphasizes their importance to the rural economy.

In the last five years, the pace of branch addition has decelerated in all four geographical categories. Between 2017 and 2022, India added 12,049 new branches, against 43,232 branches between 2012 and 2017, and 28,584 branches between 2007 and 2012. The deceleration is especially sharp in rural and semi-urban areas, where lower financial inclusion, lack of access to online services and low digital literacy serve as handicaps to remote banking. The number of new rural and semi-urban branches added during 2017-22 amounted to only about a quarter of the 2012-17 period.

Private-public contrast

While overall growth in bank branches in the latest five-year period has been anemic, select banks have grown well. The top five in growth are all private banks, led by IndusInd Bank, Axis Bank and HDFC Bank. In fact, HDFC Bank has said it plans to double its network in the next five years. By comparison, government-owned banks in this list have either posted marginal gains in branch network or have reduced branches during this five-year period.

Several realignments are underway in the space of government-owned banks. As many as six of the top 20 banks by branches have had to absorb other government-owned banks following directives from the government. This has caused their branch network to increase, but this is more in the nature of an existing branch being reassigned. They are now rationalizing their networks. Even private banks have embarked on acquisitions (for example, IndusInd taking over Bharat Financial), some of which has led to new branches being created.

Geographical disparity

Wide, easy and equitable access in the Indian banking system remains a work in progress. At present, there exists wide disparity among states in terms of access to bank branches. This, in turn, reflects a stark inequality in access to financial services. Smaller states and union territories, and southern states, lead in terms of bank branches per capita. On the other hand, north-eastern states, Uttar Pradesh, Bihar and Jharkhand are the worst off in terms of access to banking services.

Generally, the more economically-developed and urbanized states have better access to the banking network, while states with large rural populations are lagging behind. Even as large regions and populations remain underserved by the banking network, India’s dominant public sector banks seem to be pausing on expansion, either because of internal compulsions or because they have reached their expansion threshold. Thus, the role of the aggressively- expanding private banks and small finance banks becomes crucial. But will they expand their network in the regions that really need them?

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