Is Bank Branch Expansion Driven by Demand? – Some Evidence from Kerala

Branches are the principal interface between banks and public and as such play an important role in financial intermediation to support the economic activities. If banking markets were to become more concentrated through the process of branch expansion, small firms and marginalized people who live in unbanked and under-banked areas could suffer. This paper examines the level of concentration of branches of commercial banks in Kerala using Herfindahl Hershman Index (HHI) and the Four Firm Concentration Ratio (C4) and how it has changed over a period of time. Further, the paper studies whether the level of concentration of branches is justifiable in terms of banking requirements of districts and whether the branch expansion has taken those factors into account. The study reveals that more new branches are opened in districts where the existing branches have more business instead of exploring untapped business potential of districts that have relatively better economic activities but not able to transform those into banking business due to lack of sufficient number of branches. The results also reveal that financial inclusion initiatives have influenced branch expansion and they have marginally reduced disparity among districts in terms of reach and availability of banking service.