Between April 2012 and January end, the demand deposits in the banking system have shrunk 7%. RBI data suggest overall deposit growth has been weak at 6.78% in the same period, compared with 10.8% in the corresponding period last year. Time deposits have fared better than Casa deposits having grown by 9%, as compared with 10% in the corresponding period last year. Time deposits are those that are locked in with the bank for a certain fixed tenure and banks pay a higher interest on them than on demand deposits, which can be withdrawn anytime.
Bigger banks like Bank of Baroda saw domestic Casa growing just at 2% in the first nine months of FY13, and its domestic net interest margins (NIMs) have come down 36 basis points (bps) to 3.08% since January-March quarter in FY12. Punjab National Bank saw NIMs declining to 3.47% in the third quarter from 3.5% in the preceding quarter. HDFC Bank also witnessed a 10 bps sequential fall in margins to 4.1% because of the 50 bps sequential drop in its Casa ratio.
In the fortnight to January 25, 2013 overall banks deposits grew at 13.08% year-on-year (y-o-y) to R65,27,117 crore. In the second quarter review, RBI had projected deposit growth of 15% for FY13.
State Bank of India (SBI) chairman Pratip Chaudhuri said tax-saving instruments were proving to be a tough competition for bank deposit products. We are facing a flight of deposits, a lot of money is moving to mutual funds. Banks are loaded with handicaps, our interest is taxed at the highest rates, whereas mutual fund investments even in debt funds are taxed at a benign rate, he said.
The bigger problems for banks is the decline in Casa ratio, which is the proportion of current and savings account deposits in total deposits. Casa plays a key role in boosting margins as banks do not pay interest on current account and most of them pay 4% interest on savings accounts. Casa not growing is a serious concern, said SL Bansal, CMD, Oriental bank of Commerce.
A report published by Bank of America-Merrill Lynch said that deposits were not languishing because of investors shifting towards other investment products, as popularly believed. In reality, time deposit growth has outstripped demand deposit growth or cash demand, analysts at Bank of America-Merrill Lynch say. The shift towards a higher interest paying instrument like term deposits has meant that Casa deposits have fallen thus increasing the cost of funds for the banks.
There is certainly a migration of money to fixed deposits as interest rates currently are at its peaks, said Jairam Sridharan, head consumer lending and payments, Axis Bank. The problem has been steeper in current account as investment velocity has come down.