What’s In A Bank Branch? 

Financial inclusion efforts may get a boost as India’s central bank has redefined what counts as a bank branch.

The bank branch has now made way for the “banking outlet”. What’s more, universal, small finance and payments banks now have the option of opening “part-time banking outlets”.

The Reserve Bank of India (RBI) on Thursday released its revised guidelines on authorisation of banking outlets. Bankers BloombergQuint spoke to were unanimous that this would reduce expansion costs and improve customer experience.

So what’s getting the bankers excited?

At the outset, the RBI has defined a banking outlet as a “fixed point service delivery unit” that is manned either by the bank’s staff or a business correspondent. These outlets must perform basic banking services, including accepting cash and cheque deposits, cash withdrawal, and lending, for at least four hours a day, five days a week.

What this means is that several outlets that are manned by banks’ business correspondents can now be classified as banking outlets.

The second key change is the creation of part-time outlets, which are open for less than the requisite four hours a day. For example, a banking outlet that is open for three days in a week for a total of 10 hours would be considered part-time. However, this part-time outlet would also count towards the bank’s overall network.

In this case, the outlet is open for half the requisite time of 20 hours and is therefore counted as half an outlet. So, if a bank has 95 full-fledged banking outlets and 10 such part-time outlets, the total network adds up to 100 outlets.

Cost-Effective Expansion

Banks have already begun employing an asset-light approach to network expansion. Some, like IndusInd Bank, intend to expand the number of branches, but at the same time reduce the size of those that will be added from here on.

Redefining branches will help banks better plan expansion of physical presence. For areas with lower populations that are currently unbanked or underbanked, banks will now be able to have smaller outlets, which will still be counted towards the targets stipulated by the central bank.

The RBI requires a quarter of new banking outlets opened in a financial year to be in unbanked rural centres.

RBL Bank has as many as 572 business correspondent outlets that previously did not count as branches.

For new-age banks, conscious of the costs involved in expanding their physical footprint, the change in regulations comes as good news.

“For small finance banks, it will be a substantially positive change,” said Baskar Babu, chief executive officer at newly launched Suryoday Small Finance Bank. “We don’t have to create our own physical infrastructure. It will have a simplified bank branch model. There will, therefore, be an extension of distribution without having to pay for it.”

According to Babu, creating brick-and-mortar outlets in several locations might not have been viable, and the creation of “micro banking outlets” through a light-touch approach will help increase services revenue.

The key here, he believes, is ensuring that the bank’s business correspondents find it viable enough to exclusively conduct banking operations. For Suryoday, Babu expects the perfect model will emerge over the next couple of years.

Chandra Shekhar Ghosh, chairman and managing director of Bandhan Bank, one of the latest entities to get a universal bank licence, said the recognition of the work done by business correspondents is a huge positive.

Traditionally a microfinance lender, Bandhan has over the years employed a large number of feet on the street to provide doorstep services to customers. Now, many outlets that have been providing banking services without being recognised as branches will be called banking outlets or, at the very least, part-time banking outlets, said Ghosh.

Bank Branches Aren’t Passé

This doesn’t, however, spell the end of the road for the traditional brick-and-mortar branch.

With the recent spurt in digitisation of banking services, the new generation of customers is finding that physical branches are not relevant to them, said Ahuja. However, he believes that small-and-medium enterprises will continue to find the physical banking outlet relevant.

And while some believe there might be a case for replicating the successful model employed by some fast moving consumer goods companies like Hindustan Unilever Ltd., others are not as convinced.

The small banking outlets are a good idea for routine banking transactions and to increase banking access, but it may not be ideal for value-added services, said Ekambaram. “The use of BCs (business correspondents) in fixed outlets is an interesting idea. But, money is different from selling soap,” she said.