The determinants of bank branch location in India: an empirical investigation

Abstract

PurposeBank branching plays a significant role in a wide range of economic activities. Existing studies on determinants of bank branching activities largely focus on developed countries; studies devoted to developing countries are scant. The purpose of this paper is to examine the determinants of bank branching activities in one of the largest developing country India.Design/methodology/approachThe authors employ a unique longitudinal data to study the determinants of bank branch location in India. These data are collected at the state level covering 25 Indian states for the period 2006–2017. The authors employ Poisson regression that are better suited for modeling counted dependent variable.FindingsFirst, region and bank specific factors such as size of population and bank deposits influence location of bank branches. Second, the relationship between these factors and branch locations is heterogeneous across different types of banks and across states with different business environments.Practical implicationsFirst, from the view of banks, considering the factors of branch location are crucial in order to set out branching strategy. Irrespective of policy measures aimed at promoting financial inclusion in India, the authors show that banks consider economic activities in the region in locating their branches. Second, from the view of policy makers and regulators, such branching strategy could potentially contribute to financial exclusion. As a result, population in the less developed regions may be excluded from accessing financial services. Hence, policy makers and regulators should take into this account when formulating policies aimed at promoting financial inclusion.Originality/valueFirst, while existing studies largely focus on developed countries, studies devoted to developing countries are scant. To the best of our knowledge, the authors have not come across any study that investigates the determinants of bank branch location in India, so the authors reasonably believe that this study is a first-of-its-kind. Second, the study provides a new perspective concerning how regional and bank specific factors influence banks of different ownership in locating branches. Third, while traditional regression used to be a method of choice among early studies, the authors employ Poisson regression that is better suited for modeling counted dependent variable.

Regional financial disparity in India: can it be measured?

“…Other studies have also shown that, unlike common perception, public banks like private banks prefer locating their branches in high-income developed areas (Zhang et al, 2021). failure in financial sector and finance socially valuable projects in less developed regions and rural areas (Yeyati et al, 2005).…”

“…Zhang et al . (2021) too found that region specific factors influence the location of bank branches in India.…”

“…Third, just like other bank groups, the presence of public banks is much higher in the leading states. In another study, our research too showed that contrary to general perception, public banks consider regional and economic activity of region in locating their bank branches (Zhang et al ., 2021). Finally, an interesting finding is improvement in index scores in the recent years for some states including those in the north-east reflecting some early impact of recent drive on financial inclusion.…”

“…The study also showed that 'one percentage point increase in the average prior period judge occupancy decreases outstanding loan by 0.5%'. Zhang et al (2021) too found that region specific factors influence the location of bank branches in India.…”

“… 9 Other studies have also shown that, unlike common perception, public banks like private banks prefer locating their branches in high-income developed areas (Zhang et al ., 2021). …”