Kotak’s next big challenge: Retaining savings customers

Kotak Mahindra Bank has the highest current and savings account (Casa) ratio—or low-cost funds—among Indian banks at 56.2%. Yet Uday Kotak, the managing director and chief executive officer, is concerned, considering that savings account growth has been declining steadily for the last seven quarters, after it slashed the interest rate from 6% to 3.5% in multiple tranches. Kotak Mahindra Bank reported a 0.8% drop in savings account deposits at the end of the September quarter to ₹1.22 trillion compared with ₹1.23 trillion a year ago. Kotak, in the earnings call, ascribed this drop to the higher interest rates being offered by other products.

“And, as interest rates have tightened, we have seen some bleed, particularly in the savings account book mainly on account of our high net worth and affluent customer base, many of whom have moved their money out of the savings deposit rate to liquid and fixed income instruments which are offering short-term higher rates. We believe this bleed was inevitable because of the nature of the high net worth customers who have now started getting much higher returns at the short end,” he said.

“But the granular SA growth up to 1 million continues to be pretty good,” he added.

From a 31% on-year growth at the end of March 2020, Kotak Mahindra saw its savings account deposits growth fall to 12% at the end of March 2021 and 6% at the end of March 2022. The current and savings accounts as a proportion of total deposits, which stood at 61% a year ago, fell to 56.2% at the end of September 2022.

To be sure, most banks have seen a slowdown in savings account growth over the last year after stock markets started doing well and retail bulk customers moved their money out of banks for better returns. HDFC bank, ICICI Bank and Axis Bank have maintained their saving deposit growth over the last financial year, although growth dropped in the first two quarters of this fiscal year. Kotak saw a sharper drop in its savings account growth as many of its customers who had parked money at a higher savings rate moved out when the bank dropped the rate sharply.

While some of these customers moved to higher yielding instruments such as mutual funds, some others shifted their money to other banks offering higher savings rates. Banks such as AU Small Finance Bank and IDFC First offered better rates on their savings deposits during this time.

That said, Kotak was one of three banks which introduced a higher, 6% interest rate on savings deposits in 2011. This helped the bank grow its Casa book from 28% at the end of December 2011 to 61% in FY21.

With its loan book now growing at 25% y-o-y and the bank looking to increase its share of unsecured lending from 8.5% to mid-teens, Kotak Mahindra Bank needs to raise more deposits to fund this growth. While it has marginally increased rates on savings deposits by 25 bps to 3.75% this year, the bank is looking at more ways to raise stable deposits.

“We have increased focus on salaried customer base. That’s where the growth has been better and money has been stable. We will focus on the salaried segment. We have introduced products to encourage customers to do more transactions. This will expedite the growth in savings deposits,” said Virat Diwanji, head of consumer banking, Kotak Mahindra Bank. “The bulk money has gone. Not much is now left to be done,” he added.

However, analysts are not convinced—they believe deposit growth will be a concern for the bank in the coming quarters.

“The bank is witnessing a substantial slowdown in saving bank deposit accretion primely due to the rationalization of the rate over the last four quarters. This trend gets further boosted in Q2FY23 as the bank witnessed a 3.5% q-o-q decline in the saving deposit rate, which coincided with a 3.6% q-o-q increase in term deposits. In our view, this can be primely attributable to the improving attractiveness of the term deposits post the sharp upward revision in the offering rate on term deposits, which makes them much more attractive for rate sensitive customer base,” said Asutosh Mishra, head of research, Ashika Stock Broking.