Low-cost deposits are back

Banks see funds flowing into current, savings accounts.

Bulk deposits are out and Casa (current account and savings account) is in.

Large Indian banks have managed to increase the share of low-cost Casa deposits in their portfolio largely due to a revival in stock markets, economic activity and a fall in term-deposit rates.

According to the latest data from banks, public sector banks have seen an increase of around 20 per cent in low-cost deposits during the current financial year (2009-10). In contrast, during the second half of 2008-09, lower Casa balances, partly due to high deposit rates, had meant that the share of these deposits fell for most banks. With deposit rates falling to 6.25-7.5 per cent from 8.75-10.5 per cent, individuals are looking for other investment opportunities instead of parking funds in fixed deposits.

Banks do not pay any interest on current account balances, while savings bank deposits earn 3.5 per cent a year.

In case of banks such ICICI Bank, the country’s largest private sector bank, a focus on Casa helped it increase the Casa base by Rs 9,000 crore during July-September alone. But what helped the bank increase the share of Casa in total deposits was a decline in the deposit base as the bank shunned high-cost deposit from companies. Despite turning down or retiring bulk deposits, the mix between retail and Casa deposits was still 50-50, the bank said.

But the focus on Casa, through steps such as higher minimum balance for savings bank accounts, was not the sole driver. With companies heading back to markets for initial public offers (IPO) and placement to institutional investors (QIPs), funds were passed on to the banking system for a few days. “This was one factor but not the only factor,” ICICI Bank told analysts.

In addition, banks which had seen flow of funds from sectors such as real estate and gems & jewellery dry up in the aftermath of the financial crisis, are seeing a revival of sorts. While the real estate sector was back to mopping up funds through the launch of new projects, the gems & jewellery sector was on way to recovery, an executive with a private sector bank said.

Government lenders such as Bank of India, Punjab National Bank and Bank of Baroda have witnessed 8-10 per cent Casa growth till September over March. Union Bank’s Casa growth in the first six months was one of the highest in the industry at 17.8 per cent with Casa accounting for 71 per cent of the incremental deposits since March.

Country’s largest lender State Bank of India’s (SBI’s) Casa share in total deposits was 40.96 per cent at the end of September, which is an increase of 126 basis points (bps) over the same period of the previous year.

For public sector banks, the push for Casa comes in the background of the government asking them to provide growth targets for low-cost deposits in their statement of intent for 2009-10. It was a first of its kind move, as in previous years the government used to seek overall deposit growth targets. The push was aimed at ensuring that banks managed to keep their cost of funds low which, in turn, would help the government push for lower lending rates.

In recent months, even the Reserve Bank of India (RBI) has commented on the falling level of Casa as banks over the last few years became highly dependent on high-cost bulk deposits contracted from companies, including public sector entities.

Over the years, for public sector banks, the share of Casa in total deposits has declined from 39.95 per cent at the end of March 2006 to 32.66 per cent at the end of March 2009.

“There was a cut in spending in this year and increase in the propensity to save. This was mainly because interest rate on fixed deposits came down drastically and the depositors did not want to lock in their funds in fixed deposits,” a senior executive of a public sector bank said.

Deposit rates of the banking system have fallen more than 300 bps in the last one year. SBI, for example, offers 6.25 per cent for one-year deposit presently, which was as high as 10.5 per cent a year ago.

The other factor which enabled banks to get low-cost deposits is the expansion of branches. Banks such as SBI and Union Bank of India which opened 500 and 160 branches, respectively, during the first six months, have been benefited from the expansion.

Bankers said that with public and private sector banks on a branch expansion spree, the share of Casa was going to rise further.