Banks learn that paying little in savings interest comes with a cost

Casa ratio of the banking system stood at 31.6% at the end of 2014, and surged to 37.8% in 2016 as cash flooded into savings accounts after demonetization. It continued to rise and peaked at 42.9% in December 2021, but has fallen since then, touching 39.3% at the end of December 2023, data from rating agency Icra and Mint calculations showed.

“Casa ratio shot up after demonetization and reached its peak during covid-19, prior to which it used to be in early to mid-thirties levels," said Anil Gupta, senior vice-president and co group head of financial sector ratings, Icra Ltd. Casa levels should remain “comfortably above mid-thirties", Gupta said.

He said digital payments have increased significantly, which means people do not need to carry much cash for daily requirements; so, it will lead to higher balance in savings accounts.

Gupta said Casa ratio might go down further if banks continue to increase term deposit rates. However, he does not foresee any material increase in saving deposit rates for larger banks, as their savings deposit base is driven by balances that customers maintain on a day-to-day basis and the relationship with the bank is more transactional, not just driven by interest rates.

In FY24, savings deposits earned 2.7–3%, while term deposits of one to three years earned 6–7.1%, showed the Reserve Bank of India data of five major banks up to 1 September.

A decade ago, savings deposit rates were at 4% and one to three year fixed deposits at 8.75–9.25%, meaning the gap between savings and term deposits has narrowed over the years. In fact, the share of term deposits in total deposits increased to about 60% in September 2023 from 57% in March 2023 and 55% in March 2022.

According to Ajit Velonie, senior director, Crisil Ratings Ltd, since May 2022, RBI has increased the repo rate by 250 basis points (bps) and term deposit rates offered by banks also rose about 230 bps for fresh deposits till December, as the transmission of rate hikes played out.

“On the other hand, there has been hardly any increase in rates offered on savings deposits," said Velonie, who believes a few banks could offer higher savings rates for larger quantum of savings account balances.

Bankers said they are looking at alternative ways of shoring up low-cost deposits. India’s largest lender State Bank of India (SBI) has reached out to the wealthier customer segments to raise savings account deposits.

“When it comes to Casa, invariably in the increasing interest rate environment, there is a tendency of customers to try and earn as much interest as possible. That is why many customers are moving from pure savings to multi-option deposits," State Bank of India chairman Dinesh Khara told the media on 3 February.