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.

Branches are the principal interface between banks and public and as such play an important role in financial intermediation to support the economic activities of the state. The distribution of branches within and across districts in a state defines markets for financial services, because branches are where deposits are mobilized and credit facilities arranged. If banking markets were to become more concentrated through the process of branch expansion, small firms and marginalized people who live in unbanked areas may suffer. If more branches were increasingly sited in affluent districts, the distribution of income and wealth could become more unequal.

Banks’ decision to open a new branch at a particular location is driven by many factors. From the banks’ perspective, to be able to deliver those important services to firms and individuals, banks must be profitable over time; their choice of location of new branches is surely based on the expected returns and business potential. However, in India, banks are constrained to open certain percentage of branches in unbanked and under-banked areas to ensure equitable distribution of branches and facilitate financial inclusion. Subject to those constrains, banks still have the freedom to choose the location and hence it can be reasonably expected that the choice of location of new branches would be influenced by a mix of factors such as the level of economic activities, level of existing banking facilities, business potential, level of financial inclusion, and presence of unbanked areas.

In view of the above, this paper empirically investigates the level of concentration of branches in Kerala and how it has changed over time. Further, the paper investigates how various socioeconomic factors influence a bank’s choice of location for opening new branches at district level.