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Faced with higher interest outgo on account of migration of deposits from savings bank to term deposits, public sector banks are looking at ways to improve the share of low-cost deposits.
They are opening salary accounts, expanding branches, especially in untapped smaller cities, and waiving charges for add-on facilities.
Margin protection
A higher share of low cost current and savings account (CASA) deposits helps to reduce the interest expenses, thereby protecting margins.
While the interest payable on savings bank is 4.5 per cent, the interest rate on one year and above fixed deposits is, on an average, above 8 per cent and going up to 10 per cent and above in case of longer-term deposits.
Besides, savings bank deposits are more long term in nature as they are replenished. Therefore, they offer a more reliable source of funds for banks than term deposits, which are by their very nature available for a fixed time period.
Bank of Baroda opened 45 branches in the first quarter and plans to add over 500 more this year. Of this, 269 will be in Tier-I and Tier-II cities and 253 in Tier-III to Tier VI cities.
The bank added 18 lakh new customers in the first quarter and will focus on adding more, said Mr M. D. Mallya, Chairman and Managing Director.
Share of the bank's CASA deposits fell to 33.92 per cent as on June 30, 2011, from 35.23 per cent last year.
At 24 per cent, Corporation Bank's CASA deposits to total deposits ratio is one of the lowest in the industry. “We are trying to replace high-cost deposits with CASA in order to protect our NIMs,” said Mr Ramnath Pradeep, CMD.
“Corp Mahila Power', a savings bank-cum-loan account for working women and similar other schemes are expected to bring in more low-cost deposits. This year the bank is targeting a CASA share of 30 per cent.
Indian Overseas Bank's CASA ratio came down to 27.56 per cent for the quarter ended June from 33.12 per cent in the previous year. “We are looking to open 400 branches during this year which will contribute to savings accounts,” said Mr M. Narendra, CMD.
“Our bank is on an account opening spree. We are targeting to open 75 lakh accounts to boost the CASA ratio to 30 per cent,” added Nupur Mitra, Executive Director, IOB.
Bank of India also plans to focus on customer acquisition for improving its CASA ratio, which as on end-June was at 30 per cent. During the first quarter the bank acquired over 12 lakh customers, said Mr Alok Misra, CMD, BoI.
It is quite natural that CASA share would drop when interest rates rise and interest rate differentials ( vis-à-vis term deposits) are wide. This would lead to additional pressure on the cost of deposits of banks, said Ms Vibha Batra, Co-head, Financial Sector Ratings, ICRA Ltd.
So far, after the latest interest rate hike by the Reserve Bank of India, most banks have only hiked lending rates as deposit mobilisation has remained far in excess of credit growth.
However, once the credit off-take picks up in the second half, banks may have to hike deposit rates to mobilise more deposits. Such an increase in deposit rates along with a decline in CASA ratio could put pressure on margins and profitability.
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