Private banks are grappling with declining current account-savings account (CASA) ratios as customers shift to fixed deposits (FDs) in search of higher interest rates. Private lenders have witnessed a decline of up to 370 basis points (bps) quarter-on-quarter in the CASA ratio during the first quarter of the current financial year. The decline is even steeper on a year-on-year basis, with the ratio dropping by up to 600 bps.
As banks continue to raise interest rates on term deposits to attract customers, experts do not expect any relief for lenders in the next couple of quarters.
“We have seen the ongoing stress in low-cost deposits. And that is an industry-wide phenomenon, and we continue to try and build propositions to counter this,” Ashok Vaswani, CEO, Kotak Mahindra Bank, said in an analyst call.
On a quarter-on-quarter basis, Bandhan Bank’s CASA ratio dropped the most, falling by 370 basis points to 33.40%, followed by Kotak Mahindra Bank, which witnessed a decline of 210 bps to 43.40%. The CASA ratio of other private lenders fell by 10-260 bps during the quarter.
ICICI Bank and Karur Vysya Bank managed to buck the trend and improved their the CASA ratios sequentially by 70 and 30 bps, respectively, in the first quarter. Banks are under pressure to mobilise deposits to fund high credit demand, which means that fixed deposit rates are unlikely to decline anytime soon.
“We have made general criteria that we don’t want to grow credit too far ahead of deposits. So, fund before you lend is one. Two, we want to respect our LCR (liquidity coverage ratio) and CD (credit-deposit) ratio criteria. If that means we need to price some buckets more attractively to get deposits, we will do that,” said Shyam Srinivasan, managing director and CEO, Federal Bank, in an analyst call. “So, what we are trying is to stay away from going into large-category bulk deposits or purchase deposits, but go after client deposits.”
Banks prefer to keep high-level of CASA as these are sticky and a cheap source of funds for them. Investors also keep a close watch on banks’ CASA ratios as a higher ratio indicates that the cost of funds of a bank is lower, which helps boost its earnings.
“The CASA ratio of lenders has been under pressure since the first quarter of 2022-23 because of increased preference for term deposits by customers due to better rates. CASA deposits are expected to remain under pressure owing to an elevated share of term deposits for some more quarters. A reversal expected only after the RBI begins to loosen liquidity in the market through the easing of the monetary policy,” Rahul Malani, deputy vice president, fundamental research, Sharekhan by BNP Paribas, told FE. “However, despite a rate cut, in case the credit growth remains strong, term deposit rates may stay elevated,” he said.
A higher CASA ratio is important for banks to maintain lower cost of funds, which, in turn, helps net interest margins. Banks can either resort to higher rates in savings accounts, but NIMs would come under pressure.