Banks are once again in expansion mode and are opening more branches. With the world's second fastest growing economy on the rebound, this new spell of increasing footprint is set to translate into better returns for bank shareholders in two years from now.
The most visible examples of this expansion binge are the industry's top two players – State Bank of India and ICICI Bank. State Bank of India opened about 1,100 branches last year while ICICI followed with the addition of 580 branches during the last 13 months. Other top players such as HDFC Bank added 313 branches while Axis Bank added 200 branches. Relatively, the branch expansion of other top public sector banks seemed a trifle modest.
What makes ICICI Bank's expansion noteworthy is that it has practically doubled its branch network in the past two years. For a bank that was avowedly tech-friendly and consciously sought to direct more of its customer traffic to ‘alternate channels' such as ATMs, phone banking and the Internet, the massive branch expansion seems to reflect a back-to-the-basics kind of approach to running its business.
BUILDING BLOCKS
Although various studies have pointed to the lower transaction costs when these alternate channels are used, bankers say they need branches to bring the customer in.
Ms Chanda Kochhar, Managing Director, ICICI Bank, in a conversation with Business Line a month ago, called branches the building blocks for growth. She said branches were necessary to engage with the customers and build a long-term relationship with them. Once the customers come in, it is then easier to ‘migrate' them to other channels that are more cost-efficient from the bank's point of view.
Importantly, the basic bread and butter for banks - the low-cost deposits comprising current accounts and savings accounts (referred to as CASA deposits) - come in only if a bank has a large number of branches. For instance, ICICI Bank's CASA deposit base was at about 28 per cent a year ago. A combination of measures - retiring old high-cost deposits, picking up new accounts through existing as well as new branches - have seen the bank adding over Rs 21,000 crore of CASA deposits and increasing the CASA deposits ratio to about 42 per cent.
Little wonder then, that banks want to open more branches. And who would know the value of a branch network better than foreign banks that get only few branch licences every year? “To do anything meaningful, you need a physical presence through a branch network,” said Mr Jaspal Singh Bindra, Group Executive Director, Standard Chartered Bank, a trifle wistfully, when asked if its alternate channels would be enough to grow. Incidentally, Standard Chartered Bank, which has about 90 branches in India, made an operating profit of about a billion dollar from its operations here last year.
Is there an optimum size for a branch network? In an interview to Business Line last year, Mr Sanjiv Bhasin, CEO of DBS Bank, had said: “Nobody can tell you what the right size for a branch network is. In a country like India, a branch becomes productive pretty soon. Even if we have 200 branches, it is quite possible that each branch would become profitable within a very short period of time.”
BREAK-EVEN PERIOD
Banks spend between Rs 10 lakh and Rs 15 lakh a branch as capital expenditure when they open a branch. There are other costs such as rentals, salaries, and operational expenses that vary from location to location. But the investment is often recovered within two years. Ms Kochhar said ICICI's new branches break even in about 18 months on the average. Echoing that view, SBI said that about 80 per cent of the 1,800 branches it opened in the last two years, had turned around.
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