Mint Explainer: Why private banks cannot ignore their CASA growth challenges

All scheduled commercial banks, including private sector players, have witnessed a decline in funds held in savings and current accounts, while fixed deposits have surged in recent quarters. Specifically, the current account and savings account (CASA) ratio in private banks fell by five percentage points in the second quarter of fiscal year 2023-24 (FY24) from 45% in the April-June period. The slippage was less severe across all scheduled commercial banks, about 3%, indicating a broader banking trend with term deposits making up for about 60% of deposits by the end of September 2023. 

This shift has continued into the third quarter, as revealed by latest bank earnings, with major private banks showing more rapid growth in term deposits compared to modest increases in current and savings accounts.

This has implications for the earnings of banks as well as their ability to grow their loan books. Mint explains.

CASA on a slippery path

A robust CASA ratio is beneficial for banks as it signifies access to funds at lower costs—vital for offering competitive loan rates while maintaining healthy interest margins. Most large banks pay 3-4% on savings account deposits and nothing on current account deposits. Small finance banks, of recent vintage, which together have about 6,500 branches across India, offer interest rates as high as 7% as they need to build a depositor base.

However, as money migrates to term deposits, banks' CASA ratios have declined, affecting their capacity to grow their lending portfolios.

The overall CASA ratio for scheduled commercial banks stood at about 43.5% in March 2023, dipping to 40.5% by September 2023 as deposits flowed into term deposits. 

Individual banks have seen varied impacts; for instance, HDFC Bank's CASA ratio remained stable at 37.7% in the October-December 2023 quarter, despite significant growth in term deposits. The bank saw term deposits grow a whopping 42.1%, from a year ago, after a 48.3% growth in the preceding quarter, while its CASA deposits rose 9.5%.

In contrast, ICICI Bank reported a 31.2% rise in term deposits by December 2023 while CASA deposits only rose 3.8%. The bank saw its CASA ratio slip to 39.4% at the end of December 2023 from 40.8% at the end of September. Unlike its bigger competitors, Kotak Mahindra Bank managed a better CASA ratio of 47.7%, though it was marginally lower than the 48.3% at the end of September 2023. This was aided by a 6.2% year-on-year rise in CASA deposits as of 31 December. 

Axis Bank also managed to keep its CASA ratio for the third quarter of 2023-24 above 42%, as accretions in saving account deposits rose 16%. However, the growth of its term deposits was slower than its competitors at 24% from a year ago.

Consumers chase better returns

The attractive returns on term deposits have naturally drawn consumers away from savings accounts. The Reserve Bank of India (RBI) noted a significant shift towards higher-yielding deposits, with a decrease in the share of term deposits bearing less than 6% interest from 85.7% in March 2022 to 16.7% in September 2023. Correspondingly, the share of term deposits bearing 6-8% interest rate went up from 12.5% in March 2022 to 78.6% in September 2023.

This trend reflects broader economic factors, including inflation and investment shifts, impacting households' saving capacities and preferences. 

The RBI is unlikely to start cutting policy rates any time soon as inflation continues to be a risk. Commercial banks may tweak the rates on term deposits of some tenor but a substantial reduction is not on the cards given that the market for deposits is very competitive currently.

Implications for credit growth

The banking sector faces challenges in credit growth due to these shifts in deposit behaviour. With banks earning from the difference between the interest paid on deposits and the interest received from loans, the current environment complicates their ability to offer competitive loan rates. 

With industrial growth picking up due to public spending, and households investing in new homes, vehicles and various durable goods, the demand for credit has been strong. For that matter, the growth in loans has been faster than the rise in deposits. The slow growth of deposits as the RBI intervened to keep liquidity tight in an effort to tamp down inflation has been a cause for concern for banks' management. They do not expect much improvement in the situation in the immediate future – at least, not till inflation is firmly within the RBI’s comfort zone.

Since banks are expected to maintain comfortable credit-to-deposit ratios, they are expected to prioritise their lending to give more credit to segments where returns will be higher.