Even in the digital age, banks need brick and mortar presence, especially in Hindi heartland

• Most private banks have re-initiated the addition of bank branches which can help establish a ‘connect with customers’.
• Emkay expects a war for retail deposits and says that bank branches can help with mobilization in the long term.
• Hindi heartland has the most unbanked districts which could be a sweet spot for branch addition, says the brokerage firm.

In the age of digital banking, there are very few reasons to step into the bank. Even if one decides to walk down to their closest branch (often for some human connection!), most officials advise customers to use phone banking or an app-based transaction to avail the services. So, in urban centres, many such bank branches on every major street may seem a bit redundant.

Yet, the importance of having well-staffed brick-and-mortar banks has not gone away, according to a report by a brokerage.

“Although digital has now become imperative, we believe beyond a point – even a digitally savvy customer needs a ‘branch connect’, while millennials and Gen Z prefer banks offering nearby branch services,” opines Emkay Global Financial Services.

Importance of physical presence

While servicing customers is one key factor of a bank, there are other key aspects of a branch in terms of garnering retail loans as well as deposit intake.

“Branches build trust and interact with customers day in and day out. They are also important from a KYC perspective and they know their depositors,” says Anand Dama, senior analyst – BFSI at Emkay.

Most banks have realized their importance too. While branch addition had slowed down in the last few years due to consolidation amongst public sector banks (PSBs), and private banks choosing to go aggressive on digital and reducing the opening of branches — the tide is turning.

“Most private banks have re-initiated branch expansion, with a focus on white spaces and even grey spaces with PSB presence,” the report says.

The physical branches — will become a key arsenal in the great deposit war that’s going to hit the markets and will help in the long term.

What’s the deposit war?

India has been busy borrowing. Thanks to rising consumerism, the credit growth is currently around 16.5% in the last two fiscal years. Even as it’s expected to moderate, it will retain its double-digit run at around 12-14%. Ideally, it’s very good for Indian banks which are in the business of lending. But, like always, there is a catch!

The growth in bank deposits has been slipping even as love for credit is growing. The deposit rate has been growing at 13.3% in the last two years. The slowdown in bank deposits also presents a structural worry.

Apart from slow household savings growth, financialization of savings — the preference of people to put money in equities as well as mutual funds — has become a hindrance to fixed deposits. Also, small savings schemes are causing deposit leakage.

Rising interbank competition with new banks in the fray is also causing a scramble for deposits. If they do not grow faster, banks won’t be able to put up with credit demand – leading them to lose business.

“This could lead to an all-out war for retail deposits over the next decade, with private banks leading from the front,” opines Emkay.

Heartlands offer an opportunity for deposit growth

While many factors, including higher deposit rates, will play a role in convincing Indians to go for long-term deposits — having a good branch network will also help in deposit mobilization. An RBI’s research paper also noted a positive relationship between the bank’s branches and deposits.

“It makes the case for bank branch expansion in unbanked areas for increasing deposit mobilisation in the long run. Higher interest rates helped a few banks garner deposits, but the stickiness as well as the economic value of such a customer or the deposit remains questionable,” says Emkay.

Banks must also go beyond metros to heartlands to build a channel to increase loan growth as well as deposit growth.

“Some of these solutions could include concentrating on the expanding branch network (metro + semi-urban and rural (SURU) with a focus on the Hindi Heartland, given its strong growth potential,” says Emkay.

Uttar Pradesh, Bihar, Madhya Pradesh, Chhattisgarh and Uttarakhand have the highest share of unbanked and underbanked districts. A good way to enter the hearts of the heartland customers could be via brick-and-mortar branches — which can catch walk-ins in a way that few apps can.