Banks are looking to increase the share of low-cost current account savings account deposits (CASA) within the overall deposit franchise at a time when net interest margins (NIMs) are likely to see a compression in the medium term, according to experts.
“Growing low cost and stable deposits is the primary goal of the bank. In the rising interest rate scenario, term deposits, liquid funds and other debt instruments are always going to be more attractive for customers,” said Virat Diwanji, president and consumer banking head, Kotak Mahindra Bank Group.
“We will significantly enhance focus on the relatively less interest rate-sensitive customer segment. Salaried customer is one such segment, which has shown low volatility in their savings account balances. We will also try and bundle add-on products for business customers opening current accounts, who would see our product offering as a composite solution provider,” he said.
With the Reserve Bank of India (RBI) looking to remove excess liquidity from the financial system, banks have been scurrying for deposits to cater to the strong demand for loans.
Many banks have hiked the interest rate on term deposits to attract customers. Typically, term deposits are pricier than CASA deposits. But unlike CASA deposits, they can only be liquidated after a specific period of time, usually between a month and five years.
“Our strategy is to grow CASA (current account savings account) as much as possible. It is a very competitive environment out there. With interest rates already high, customers are looking to see what benefit they can get when they lock in deposits,” said Ittira Davis, managing director and chief executive officer, Ujjivan Small Finance Bank.
With RBI easing the quantum of repo rate hikes, banks’ margins are likely to be compressed in the medium term as deposit rates get re-priced at a slower pace than loans. In such a scenario, banks are expected to scurry for low-cost deposits to cushion their margins, according to experts.
“On savings accounts, minor interest rate adjustments could happen. Some banks are already offering higher rates. A few others could also hike it. But every time you hike the savings account rate, the whole deposit stock gets re-priced and not just incremental deposits. So, the hike in savings account rate will happen very selectively,” Karan Gupta, director – financial institutions, India Ratings and Research, said.
India’s largest lender State Bank of India’s CASA ratio fell to 44.48% as on December 31 from 45.74% a year ago. Similarly, HDFC Bank’s CASA ratio fell to 44% as on December 31 from 47.1% a year ago.
“Today, the gap between savings account rate and term deposit rates has reduced. Obviously, it will increase over a period of time. So the only way you can further get more funds is through current account deposits. You can only do that if you become a part of the entire customer transaction journey. If your company is operating with me, it means that I am a part of your daily transaction journey. That gives good balances to the bank,” Rajan Pental, executive director, YES Bank, said.