Branch Economics~BW~Mar 09

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Branch Economics Banks need to rethink their branch business model

RAGHU MOHAN 19 Feb 2009

Problem Of Plenty: Although banks are opening many branches, only a few are doingit in the places needed (Pic By Bivash Banerjee)

Banks have been on a branch-opening spree of late. Between June 2007 and June

2008 — the last month for which data is available —3,829 branches were set up.

That translates to over 10 branches a day.

This should have been a cause for some cheer. A hugely under-banked country,

India has one branch per 15,000 people compared to the US’s2,720 people per branch. The ratio in Germany is 1,945:1, in

Japan it is 3,968:1, Hong Kong 4,545:1, France 1,587:1,Canada 6,410:1 and in Sweden it is 4,672:1.

For some time now, the Reserve Bank of India (RBI) has beenexhorting banks to set up branches in rural areas and other

places such as the Northeast, where there are relatively fewbank branches.

The trouble is that the current spurt in bank branches is

unlikely to solve the core under-banking problem. While the

RBI would like 25-30 per cent of all new branches to come upin rural areas, the bulk of the new branches are actually

coming up in urban areas, which already have more thantheir fair share of branches. Indeed, apart from the

government-run banks, no one seems particularly keen insetting up branches in rural areas.

The current burst in branch-building has actually worsenedthe rural–urban ratio. The share of rural branches dipped to



40.7 per cent at end-June 2008 from the 42.1 per cent in the same month a yearago. Worse, in November 2007, then RBI deputy governor, V. Leeladhar, pointed out

that nearly 30 per cent of new branch approvals were not implemented.

The share of the Northeast in total branches is the lowest at 2.7 per cent at end-June2008 (see ‘Regional Pie’). During July 2007 to June 2008, most of the new branches

were opened in the southern region (1,147, or 29.9 per cent of new branches) andcentral India (854, or 22.3 per cent). Yet the average population served by a singlebank branch declined only a tad to about 15,000 at end-March 2008 from about

16,000 at end-March 2007.

Meanwhile, all new private sector banks as well as the international banks operating

in the country are focusing on the cities. And it is the sheer economics of bankbranches that is really responsible for this.

The Economics Of Bank BranchesIn the old days, bank branches were the primary points of contact for customers

looking for transactions such as cheque clearances and deposits, but it is a costly

way of doing business for banks. With automation setting in, these transactions caneasily be handled by automated teller machines (ATMs), call centres, mobile andinternet banking, which are far more cost-efficient routes for banks.

A global study on bank branches in 2003 by Booze Allen Hamilton was categoricalthat it is not enough for banks to simply open up more branches that run like

existing ones or to redesign them to resemble hip retail stores. The existing modelfor bank branches is veering towards using them as financial supermarkets for selling

a range of money-related products from credit cards to insurance and loans. In fact,that is a model most private banks in India are following. And this model works best

in urban areas, not in rural — the one reason why most branches are coming up incities instead of villages. A more recent study on India (March 2008) says that

branch banking is still relevant. The difference lies in how a bank goes about it.

Take Yes Bank, for instance. It currently has 117 branches, but wants to ramp it up

to 250 within a couple of years. But these are not designed as cheque transactionoutlets. Rana Kapoor, managing director and CEO of Yes Bank, says, “Branch

banking is undergoing a paradigm shift with branches becoming service and wealthdistribution centres.”

And that explains the exponential increase in ATMs. Installation of ATMs grew by

28.4 per cent to 34,789 at March end 2008.

While the ATMs installed by foreign banks and new private banks were nearly fourand three times of their branches, respectively, the same was much lower for state-

run banks (41.2 per cent) and old private sector banks (47.2 per cent).



A Booby Trap?

Of course, not everyone is convinced that even this model will actually help in takingcare of the sheer costs of running a branch. Shyam Srinivasan, country head for

consumer banking at Standard Chartered Bank in India, admits that real estate costsare a factor. “Property prices may have come down, but it is not always possible to

renegotiate them. Typically, 30 per cent of a branch’s costs are accounted for bypremises.”

In urban areas, this is particularly critical. For state-run banks, the operating profitper branch is at about Rs 1-2 crore a year; it is Rs 4 crore for new private banks,

while for foreign banks it ranges between Rs 30 crore and Rs 100 crore. Clearly,state-run banks need to rethink their branch business model.

So, a bank has to be smart as it rolls out new branches. Though technology hashelped mitigate the disadvantage of a vast branch banking network, a physical

branch still follows a ‘hub-and-spokes’ model. The physical branch acts like a hub,and serves an area within a certain radius. As a bank gets more hubs going, its

sphere of influence increases.

Some banks are following a slow-down strategy. K.V.S. Manian, group head, retail

liabilities and branch banking at Kotak Mahindra Bank, says that the bank plans toscale down the branch target to 210 in the year ahead. Given the fact that it had

plans to open 76 new branches in 2008-09 taking the total number of branches to250, that is some tapering off.

Looks like it cannot be business as usual for banks: it’s reflection time.

raghu dot mohan at abp dot in

(Businessworld Issue Dated 24 February-02 March 2009)

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Branch Economics~BW~Mar 09