Large public sector banks have seen an erosion in the share of low-cost deposits due to a fall in the proportion of balances in the savings bank and current accounts to their total deposits during the financial year 2008-09.
The decrease is attributed to depositors shifting a part of their balances from current and savings bank accounts (Casa) to term deposits as banks paid higher interest rates on these funds for a major part of the year.
In case of private players, especially ICICI Bank, the increase in the share of Casa in the total deposit base was due to account holders’ aversion to high-cost bulk deposits, something that the bank avoided last year. For HDFC Bank, the fall was attributable to a large build-up in the fourth quarter of 2007-08 as a large amount of funds mopped up through initial public offers (IPOs) by companies, such as Reliance Power, was parked with it.
| DECREASING DEPOSITS The trends in share of CASA* deposits for select banks (in per cent) | ||
| Bank | 2007-08 end March | 2008-09 end March |
| State Bank of India | 43.00 | 39.00 |
| Bank of India | 36.00 | 31.00 |
| Bank of Baroda | 36.00 | 34.87 |
| Union Bank of India | 34.00 | 30.00 |
| Central Bank of India | 36.14 | 33.36 |
| ICICI Bank | 26.40 | 28.70 |
| Axis Bank | 46.00 | 43.00 |
| HDFC Bank | 54.50 | 44.00 |
| * CASA = current account and savings account | ||
The fall in the share of Casa also put pressure on the net interest margins. For State Bank of India, the country’s largest lender, Casa deposits grew by 22.3 per cent to Rs 2,73,396 crore at the end of March 2009. But their share in total domestic deposits, which were estimated at Rs 6,96,340 crore at the end of March this year, slipped by 400 basis points to 39 per cent as the build-up in term deposits was higher.
During the third quarter of 2008-09, SBI was mopping up over Rs 1,000 crore a day by way of term deposits. An analyst said this was on account of banks rushing into the market to raise retail deposits to finance high growth in loans.
As a result, in October, SBI launched a 1,000-day deposit scheme offering 10.5 per cent annually. Now, it pays 8 per cent interest on these deposits and the total term deposit mobilisation has dropped to less than Rs 500 crore a day.
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A senior Axis Bank executive said that, along with the cost of funds, the industry-wide slowdown in growth of Casa deposits also impacted the net interest income, especially in the third quarter of the last financial year.
A slew of senior executives with public sector banks said that, while assessing the deposit mobilisation pattern, they have to bear in mind that the government-owned banks were raising resources along with lending.
In contrast, the private and foreign players had either slowed down or stopped lending activity in the face of sharp economic downturn, especially after collapse of Lehman brothers in September 2008.
Bank of Baroda chief economist Rupa Nitsure-Rege said that during the nine months ending December 2008, deposits with public sector banks were growing at 29 per cent as against the industry average of 20-21 per cent.
For most part of the last financial year, there was a hardening in the interest rates, but global financial crisis and moderation in the economy turned the cycle. Thus, the current financial year is marked by a softening interest rate cycle.
Since December 2008, banks – especially public sector ones – began cutting interest rates on deposit and on advances. Now, the rates on term deposits across various maturities are down by 150-250 basis points.
A senior public sector bank official said that the change in the economic and business climate to some extent impacts savings and investment behaviour.
The lower economic growth and slump in job opportunities has made households cautious, especially in urban areas. Now, the safety of funds is top priority, instead of just attractive returns. This could mean a rise in the outstanding balance in the savings deposits, one component of low cost deposits.
Also, the flow into current accounts is expected to grow as fund-based business expansion takes and there is upturn economic cycle. There is also a positive correlation between technology penetration and opening of current accounts.
A banker said that with real estate players launching new project, there would be greater inflows into their current accounts. Similarly, the gems and jewellery and the automobiles sector was showing signs of improvement, which would result in higher inflows and help banks improve Casa. Further, the rural sector remained unaffected by the downturn, which will help banks to raise the a large share of low-cost deposits.
There could be some dampening due to the upswing in the stock markets as this might entice people to shift funds to mutual funds and other capital market-linked investment products, Rege said.