PSBs rework branch strategy to cut costs amid changing customer behaviour

PSU banks are reviewing low-traffic locations, shrinking branch sizes and using AI-driven site analytics as digital adoption rises, leading to more mergers and micro branches in rural areas

In order to optimise branch efficiency, public sector banks (PSBs) are reworking their strategies to streamline operations and reduce cost amid changing customer behaviour.

 

The strategies include closing or merging low traffic branches and reducing their size in smaller centres.

 

According to banking industry sources, multiple state-owned lenders have initiated internal reviews to identify underperforming branches, particularly in rural and semi-urban regions where footfall has thinned significantly in recent years.

 

For rural areas, the focus is on establishing more micro branches and business correspondents’ outlets.

 

Some of these banks have informed regional and zonal offices to begin evaluating branch viability based on traffic, transaction volumes and cost metrics.

 

Bankers said that running a branch costs around ~50-80 lakh per year, depending on regions.

 

“Earlier, we used to lease a 1,600 sq ft land to set up a new branch. Currently, it has reduced to 1,200 sq ft in Tier-2 and Tier-3 cities,” said an official from Indian Bank.

 

He added, “In rural areas, the distance between two branches should be significant and branches should be set up in a populated area.”

 

The official further said that the current strategy is to merge nearby branches or merge low traffic branches with a busy branch.

 

The trend reflects a structural shift with digital channels witnessing increasing traction among customers — driven by mobile banking, UPI transactions and online service platforms.

 

“Customer behaviour has changed substantially. A growing share of transactions is now happening online. Maintaining a large brick-and-mortar presence in low-demand locations no longer makes economic sense,” said an official from another PSB.

 

At the same time, banks are investing in technology and data-driven tools to decide on locations. Officials noted that artificial intelligence (AI) and analytics-based models are being used to assess branch performance and predict future demand.

 

These tools evaluate factors such as customer density, demographic shifts, digital adoption rates, transaction patterns and operational overheads. They help banks to make decisions about where to maintain, upgrade or shut a branch, said officials.

 

A senior official at Canara Bank said, “Although we are expanding our branch network, the change is how we select the location? Earlier we used to take only viability reports from the field and used to give licenses. Currently, we are using data analytics and AI tools to locate a potential branch that is helping us get early positive results.” 

 

The person added that some branches were closed in the hinterland of the North-East.

 

The rationalisation drive is also being tied to cost restructuring plans across several state-owned banks. Branch operations represent a major portion of operating expenses, including staffing, rental, maintenance and security. By consolidating branches and reducing overlaps in certain regions, banks aim to improve their cost-to-income ratios, which remain under pressure despite an overall improvement in profitability in the last few years.