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A senior executive who recently moved on from a private sector bank had to meet with a Reserve Bank of India official as part of his exit interview with the regulator. One of the points on which the executive was repeatedly drilled by the RBI official was why the bank’s CASA (current account and savings account) deposit as a proportion of total deposits was abysmally low.
When asked if this was a bank-specific or industry-wide issue, the responses from various banks were an eye-opener. “It’s a dog’s fight to grow our deposit book, and on top of that we are expected to maintain 30–40 per cent CASA ratio. How is that doable in this environment?” the CEO of a bank vented.
So, how relevant is CASA today and is it a good measure of a bank’s ability to keep deposit costs under control?
Basics of CASA
CASA is reckoned as a low-cost source of deposits for a bank. A current account barely entails an interest payout, while savings account interest rates — at 300–400 basis points (bps) — are lower than term deposit (TD) rates.
In 2020, as an unexpected consequence of the Covid-19 pandemic, retail balances in bank accounts swelled, leading to surplus liquidity. The CASA ratios of banks surged to record highs. Some private banks posted 50–55 per cent CASA ratio. However, matters have since changed drastically. The CASA ratios of private banks fell by 393 bps year-on-year in Q3 FY24, while public sector banks saw a 187 bps decline year-on-year to 38.5 per cent, according to CARE Ratings.
Meanwhile, with the repo rate increasing by 250 bps since May 2022, the weighted average rates on outstanding term deposits increased to 6.1 per in FY23 and around 6.8 per cent as of January 2024. Rates on fresh TDs surged from 4 per cent during the pandemic to 6.2 per cent in FY23. They remain elevated at 6.4-6.5 per cent. According to RBI data, the TDs maintained by private banks grew 18 per cent from March to September 2023 at ₹39.5 lakh crore, while at PSU banks it rose 7 per cent to ₹68.3 lakh crore.
Are depositors moving money from SA to TD? The answer isn’t straightforward.
Alternative plans
One of the important changes has been the finacialisation of savings, perhaps as a consequence of the prolonged equity market exuberance. Households are looking beyond real estate and gold to park their savings in higher yielding avenues such as mutual funds, direct equities and alternatives such as real estate investment trusts (ReITs) and infrastructure investment trusts (InvITs).
While elevated interest rates continue to keep fixed deposits in favour, the newer alternatives are proving more popular than they were a decade ago, thanks to improved financial awareness and literacy. In short, idling money in CASA is becoming a thing of the past.
Lending pattern
Demand for deposits is a function of credit and the avenues for deposit deployment. Retail or consumer loans, especially with a shorter duration of 1–3 years, have driven a significant portion of banks’ credit over the past two years. Similar tenure TDs, compared to CASA, offer liquidity to support such retail products.
Currently, about 65 per cent of total TDs are of 1-3 years’ tenure.
The popular ‘Need for discipline’ circular issued in August 2020 has also restricted the growth of current account deposits. The circular had mandated that the CAs held by banks should be commensurate with the lending exposure of the corporate borrower.
Consequently, lenders are resorting to more commercial relationships with borrowers, including merchant and transaction banking, which are margin accretive and don’t bulk up CA.
Is CASA low-cost?
To increase SA balances, some banks are offering one-time attractive rates of up to 7 per cent on high-value savings accounts and even 7.5 per cent for balances above ₹2 lakh. Several mid-sized private banks and small finance banks are forced to offer such steep rates, at the cost of profitability, in order to grow their deposit books in a competitive environment.
For customers, high-value SA with better liquidity is more attractive than TD. But for banks, such SA rates are akin to TDs, which brings us to the question of whether CASA is ‘low-cost’.
If deposit growth continues to lag credit growth, then banks will have to tread a fine balance between growing CASA deposits and TD to ensure sufficient liquidity. But if CASA also proves costly, then it may not be fair to expect lenders to prioritise a healthy CASA ratio over their profitability in the medium term.
New thought process
India has one of the highest shares of retail deposits globally due to the perceived safety and lack of reliable alternatives until recently. While PSU banks have historically outpaced private peers in deposits, this is changing. Share of private banks in TDs increased to 35 per cent in Q2 FY24 from 32 per cent in Q4 FY23, while the share of PSU banks fell 200 bps to 60 per cent.
With the economy entering the next phase of growth, dependence on deposits may increase, unless banks prioritise institutional liability products such as bonds. While that option isn’t being used as much as it was a decade ago, can banks innovate retail friendly products to compete with mutual funds and equity products?
More importantly, will the regulator agree? Stakeholders, including investors of banks, must be willing to shed the obsession over 35-45 per cent CASA ratios. Will they?
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