Casa, a four-letter word that bankers love

Casa is also changing its profile as it is no longer low-cost money but it balances the asset-liability gaps and lowers banks' capital requirement

The earnings season is in full swing and the analysts are keeping a close watch on a few metrics in banks’ balance sheets. Indeed, for most banks, the net interest income has been rising, backed by credit growth; and bad loans, as a percentage of the loan book, are coming down. That’s a good story. The not-so-good story is the drop in current and savings account (Casa) and, consequently, net interest margin (NIM).

The raw material for a banking business is the money savers keep with a bank in the form of deposits. The challenge before all banks is to keep the cost of deposits low and NIM high.

NIM and spread are the two key parameters that give an indication of a bank’s operational efficiency. As a concept, NIM and spread are similar — and often NIM is loosely used for spread — but there is a subtle difference between the two. While NIM is arrived at by dividing a bank’s net interest income by its average interest-earning assets, spread is the margin between the yield on assets and the cost of liabilities, or the difference between interest income and interest expense as a percentage of assets. NIM can be higher or lower than the net interest spread.

Normally, in a rising interest rate cycle, banks are in a hurry to raise their loan rates but they go slow in offering higher interest to depositors. Conversely, when the rates fall, banks are quick to cut their deposit rates but take time in passing on the benefit to the borrowers.

The impact of any hike or cut in loan rates is felt immediately as a bank’s entire loan book is re-priced, but that’s not the case with deposits as the new rates are applicable only when the existing deposits mature or new deposits flow in.

Every banker loves the four-letter word Casa as it plays an important role in lowering the cost of deposits. The “Ca” of Casa stands for current account, primarily meant for companies, public enterprises and entrepreneurs who typically do several banking transactions daily. Such customers can deposit or withdraw any amount of money any number of times.

Banks generally insist on a higher minimum balance to be maintained in a current account. As the balances maintained in the account are often volatile, banks levy a certain service charge for operating a current account. The money kept in such accounts comes free to a bank as no interest is paid on current accounts.

A savings account, or the “sa” of Casa, is the most common operating account for individuals and others for non-commercial transactions. Banks generally limit the number of withdrawals an account holder can make, and also specify a minimum average balance. Of course, there is a segment of zero-balance accounts, too.

Until 2011, the interest on savings accounts was regulated. Even after deregulation, most banks were offering 4 per cent when the free regime started — the last level of rate in the regulated era. Every bank wants to increase its Casa, as a higher portion of Casa in the overall deposit liability brings down its cost of money.

Of course, a high NIM alone cannot make a bank profitable as operating expenses and credit costs, including provisions for bad assets and write-offs, erode a substantial portion of NIM. Banks need to cut their operating costs and increase efficiency. They can remain profitable even when NIM shrinks, provided they start generating more fee income.

These are all theories. Let’s look at the ground realities of the Indian banking system. The Reserve Bank of India raised the policy rate from 4 per cent to 6.5 per cent (between May 2022 and February 2023) and the banks followed it up by raising their lending rates. They were initially slow in raising deposit rates but, to keep pace with the loan growth, they needed money; and a fierce rate war broke out on the deposit turf.

While most public sector banks and a few large private banks have stuck to the 4 per cent savings rate, others have substantially raised their savings bank rate. And, all have raised the interest rates on fixed deposits or FDs. As most of the old deposits have got repriced over the last 18 months and new deposits offer higher rates, the cost of money for the banks has been rising.

A portion of the savers has also shifted a part of their savings bank accounts to create FDs. As a result of this, most banks’ Casa ratio — as a percentage of total deposits — has been coming down.

If we look at the figures of some of the banks for the September quarter earnings, there has been a dramatic drop in Casa. HDFC Bank Ltd’s Casa has gone down following the merger of HDFC Ltd with itself but, for others, the customers have either shifted from savings bank deposits to FDs or left for greener pastures. Unlike water, money flows to a higher level.

One small finance bank’s Casa ratio has slipped from 52 per cent in the June quarter of 2022 to 34 per cent in the September quarter of 2023! During the same period, a new private bank’s Casa ratio dropped from 43 per cent to 39 per cent and that of an old private bank from 37 per cent to 31 per cent.

Incidentally, the profile of Casa is also changing as it is no longer low-cost money. A few banks are offering as much as 7.25-7.5 per cent for “sa”. On “Ca”, banks cannot offer interest rates but many of them have put in place switching facilities — after a certain amount, the money from “Ca” flows out to create an FD on which the customer earns interest.

Still Casa is important for every bank. Why? The banks need to manage their assets and liabilities of the asset-liability management buckets. The deposits, capital and reserves and certain other borrowings are liabilities of a bank while loans and advances and investments in government and corporate bonds are assets.

There are several such buckets — from the very short-term to 15 years and more. There could be gaps in some of the buckets and each bank follows a board-driven policy to manage the so-called IRRBB or the interest rate risk in the banking book.

Typically, based on behavioural analysis, about 30 per cent of Casa is considered stable and adjusted in the longer end asset-liability bucket. That’s how Casa balances the asset-liability gaps and reduces the IRRBB in a bank’s balance sheet and lowers the capital requirement. Since capital is far more expensive than Casa, banks would not mind paying higher rates for “sa”.

The writer is an author and senior advisor to Jana Small Finance Bank Ltd. His latest book is 'Roller Coaster: An Affair with Banking'

To read his previous columns, log on to https://bankerstrust.in

Twitter: @TamalBandyo