The sub-branch banking model, designed to bring underserved people into the formal banking system, is increasingly showing a worrying imbalance: banks are collecting deposits from people who have traditionally remained outside the banking system but are failing to provide them with adequate financing.

The central bank disseminated the statistics of sub-branch banking on Wednesday.

Data for the April-June quarter showed that deposits collected through sub-branches from underserved customers rose 5.7 per cent to Tk 842.63 billion, up from Tk 797.17 billion in the January-March quarter.

Whereas total outstanding loans and advances disbursed through sub-branches decreased from Tk 223.09 billion to Tk 206.02 billion, representing a 7.7 per cent decline, the overall banking sector's outstanding loans and advances grew 1.4 per cent during the same period.

The figures show a growing gap between deposit mobilisation and lending through the sub-branch network. While deposits through sub-branches grew 5.7 per cent during the quarter, compared with 2.4 per cent growth in deposits across the banking sector, sub-branch lending contracted sharply.

The number of deposit accounts also increased by 5.9 per cent, from 8.47 million to 8.97 million, during the quarter. In contrast, the number of loan accounts declined by 5.3 per cent, from 253,512 to 240,010.

Sub-branch banking was introduced in 2018 as a “Banking Booth” to extend banking services to remote and underserved areas where establishing a full-fledged branch was not feasible. Bangladesh Bank first issued a policy regarding the operation of Banking Booths through BRPD Circular Letter No. 28 on December 27, 2018. The facilities were later considered “Sub-branches” through a circular issued on December 3, 2019.

The sub-branch banking system, designed to bring underserved people into the formal banking system, may instead be contributing to financial inequality. Scheduled banks are collecting deposits from low-income customers at nominal interest rates of around 3 per cent, while many of these customers are unable to access loans through sub-branches because of stringent eligibility criteria.

As a result, they are often forced to rely on microcredit organisations, which charge interest rates of more than 20 per cent per annum.

The development comes despite the continued expansion of the sub-branch network. The number of sub-branches increased to 5,033 at the end of June from 4,992 in March, with 30 rural and 19 urban sub-branches opened during the quarter.

The data also show that the rural share of sub-branch loans increased from 31.8 per cent to 35.8 per cent, while women's share of loan accounts rose slightly from 18.3 per cent to 18.9 per cent. However, the overall number of loan accounts declined during the quarter.

At the end of June, sub-branch deposits accounted for 3.8 per cent of total deposits in the banking sector, up from 3.7 per cent in March. In contrast, sub-branch loans accounted for only 1.1 per cent of total banking-sector loans, down from 1.3 per cent.

The widening disparity between deposits and lending raises questions about whether sub-branch banking is adequately fulfilling its original objective of bringing underserved people into the formal financial system—not only as depositors but also as borrowers.