Private banks continue to bet on physical branch expansion to garner deposits

Deposit growth has slowed down compared to credit growth.

Private sector lenders continue to bet on physical branch expansion to connect with a wider cross-section of depositors, although digital banking has been picking up in a big way in recent years.

Data from at least six private sector banks showed that the lenders are planning to open more physical branches this year than the previous year. The lenders on an expansion overdrive include HDFC Bank, Kotak Mahindra Bank, RBL Bank, Federal Bank, City Union Bank and AU Small Finance Bank.

HDFC Bank, the country’s largest private sector lender, for example, is planning to open around 1,000 branches in the financial year 2024-25. “Last year we opened 1,481 branches, this year somewhere close to 1,000. We had Rs 260-odd crore per branch last year. This year, it is about Rs 270 crore per branch adjusted for the merger, the deposits that came in from HDFC Limited as well. So which means that our branch strategy is actually working because India is a large country. We still believe the potential is there to expand,” Sashidhar Jagdishan, managing director and chief executive officer of HDFC Bank, said in an analyst call after the Q4FY24 results.

Similarly, Kotak Mahindra Bank looks to add around 200 branches this fiscal, up from 150 they added last fiscal. “About 95-96 percent of current savings account business happens digitally. We had a branch expansion approach first and then digital. And we have been adding roughly 150-odd branches for several years now. This year too, the momentum is going to continue. We are looking to add about 175–200 branches this financial year,” said Virat Diwanji, group president and head of consumer banking.

In line with the trend, Deepak Gaddhyan, head of branch banking and retail liabilities at RBL Bank, said that the bank has plans to open around 70-75 branches in FY25. “Our major focus will be on the metro and urban areas. This branch expansion will help us to grow our overall deposit base by around 18-20 percent in the current fiscal year. In the last fiscal, we have grown our deposit by around 22 percent," he told Moneycontrol.

State-run banks have a total branch strength of 84,404 as on March 2023, whereas private sector banks have 41,258 branches and foreign banks around 783, the RBI data showed.

Deposit growth slows down

In the past few months, credit growth of banks has been outpacing deposit growth. A CareEdge report on June 20 said that deposits grew at a slower pace compared to credit growth. “Deposits grew with an on-year increase of 13.6 percent, amounting to Rs 24.7 lakh crore, reaching a total of Rs 206.1 lakh crore by the end of March 2024. And credit growth is growing by 19.1 percent on a YoY basis,” the report said.

While experts said that banks are facing challenges to garner more deposits, they are also facing scrutiny from the regulator on high credit growth.

The Reserve Bank of India (RBI), in the past few months, has been highlighting a high credit-deposit (CD) ratio in the system. In January, some media reports said that the RBI expressed discomfort with the high CD ratio in the banking industry. Additionally, data and commentary from the central bank and experts show that the CD ratio of some banks has been high, leading to pressure on their net interest margin (NIM).

Here, Karthik Srinivasan, senior vice-president and group head at ICRA, said that banks would have to attract more deposits to match high credit growth. “If they do not mobilise more deposits, banks would have to cut their credit growth to get both in line,” he told Moneycontrol.

Digital push firms up 

Banks are expanding their physical presence despite an increased focus on digital bank channels in recent years.

HDFC Bank spends around 7 percent of its total spending in information technology (IT), said Parag Rao, country head for payments, liability products, consumer finance and marketing at HDFC Bank. The bank, in the past few months, launched digital credit cards, products on the unified payments interface (UPI) to expand its digital business.

Kotak Mahindra Bank, which has been under the RBI scrutiny for its credit card and certain segment of digital banking business, is in the works to launch a completely new digital payments application. “The app will have different payment options and services,” an executive had earlier told Moneycontrol.