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Indian Banking: Digital Paradox

Digital has been the biggest game changer in Indian banking especially in last 5-7 years. The proliferation of smart phones, transformation of connectivity with 3G/4G and spectacular growth of ecommerce has further catapulted digital banking.

There are enormous statistics that will stand to prove the above. Let us look at a few:

  1. UPI/ IMPS: The growth in UPI is astounding. In FY1819, it grew by 485% by volume and 698% by value. IMPS also registered more than 70% both by value and volume during the same period.
  2. Mobile Transactions: In April-2017, there were 10.5 million transactions. By April-2019, it has grown nearly 6.5X to 67.4 Million
  3. Debit card usage at POS: Transactions grew nearly 1.5X, from 27.2 million in April-17 to 40.7 million in April-19
  4. Credit card usage at POS:  Here, transactions grew during same period by 1.57X, from 10.6 million to 16.7 million

The icing on the cake for the digital story is again hidden in the above data. Debit card usage at POS was nearly 2.5X of mobile transactions in April-17. Come April-19, mobile transactions had taken a healthy lead on debit cards! A similar story is told by credit card usage. This is an indication of how banking shifted from physical cards to the ubiquitous mobile in just 2 years, a tall tale driven by the three levers which we mentioned at the starting.

In such a digital age, branch lose relevance and I, for one, visit a branch only for accessing my lockers! Nearly, everything else can be done over alternate channels. Also, with proliferation of digital, physical cash and hence ATMs are expected to lose their preeminence position which it has been enjoying for more than a decade. Here, however, the story gets a little confusing…or does it really? Let’s see.

Bank Branches

Commercial bank branch growth is muted as expected but it is off the lows

The branch growth surprisingly is led by private sector banks. SBI and PSU banks seems to be consolidating their bank branches while private sector banks have found reasons to open new ones.

More surprisingly, two of the most digital savvy and large private sector banks have been leading the branch growth

ATM

Even when it comes to ATM, while SBI and most PSU banks have been consolidating their ATM presence to cut down costs, large private sector banks have added ATM’s in FY19. This despite the growth of digital and an ever-increasing push towards lower cash society. Also, there has been 14% growth in overall value transacted at ATMs using Debit cards in FY1819

POS

There has been a fervent run among banks to take the pole position in POS. With pie in the payments being the hot KRA to go after, this rush is well understood. Surprisingly, a mid size private sector bank, RBL, has now taken a significant lead in POS. Though with exponential rise in mobile transactions, we may see POS seeing a shift from primarily physical cards to more QR code/ similar off-cards payments.

What we see looks apparently little confusing. While growth in POS goes well with the credit and debit card usage, the apparent focus on branch addition by a few private sector banks looks contradictory.

The paradox is that private sector banks which are much more aggressive on digital are adding more on the physical infrastructure (aka branches and ATM), the public sector ones which are either catching up and or even worse off are consolidating their physical presence.

Then next question is where are they adding branches? For that, we will investigate the population category wise distribution of branch strength.

The key observation is that %age of Metro and Urban branches for private sector banks increased from 46.5% to 47.1% between Mar-2017 and Mar-2019, coming at the expense of rural and semi-urban branches (drop from 53.5% to 52.9%). The situation is reverse for SBI and the PSU banks. Pls. note that we had excluded Small Finance Banks, Payments Banks, RRBs, LAB and Foreign bank branches from the below.

The consolidation of branches for SBI is no brainer because of the merger. For the rest, let us look at another important data point, annual business (advances and deposits) per branch.

HDFC and Axis have much higher average business per branch, which perhaps explains why they have been investing in branches as well.

We can then safely conclude:

  1. Private sector banks like HDFC and Axis have a more profitable branch model
  2. They are opening branches at metros/ urban where they can drive more business
  3. The banks still do believe that despite digital push, physical is going to remain very important either in form of cash (aka ATM) or branches, in near future
  4. Despite all the talk of value at “bottom of pyramid” or economic upliftment, there is still not much attractiveness for banks in the rural/ semi-urban market
  5. Public sector banks have some social targets, prodded by the government, which explains their greater presence in the rural/ semi-urban areas

Source:

RBI for raw data.

Disclaimer: The representations made in the article are the personal views of the author. The article and the views are made in his personal capacity.

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