Banks witness increase in low-cost deposits

Banks are experiencing increase in flow of funds in low-cost deposits rather than in bulk deposits.

The reason for increase in the share of low –cost Casa deposits is mainly because of revival in stock markets, economic activity and a fall in term-deposit rates.

As per the latest reports from banks, in most of the public sector banks there has been increase of 20 per cent in the low-cost deposits during the current financial year (2009-10). Whereas during the second half of 2008-09, in Casa deposits flow of funds was low to some extent because of high deposit rates, thus for most of the banks the share of these deposits got reduced. The banks started reducing deposit rates which fell to 6.25-7.5 per cent from 8.75-10.5 per cent, therefore individuals started looking for other investment options rather than investing funds in fixed deposits.

However on current account balances banks do not give any interest, while on savings accounts banks give 3.5 per cent a year.

The increased flow of funds in Casa has helped some of the banks such as ICICI Bank, the country’s largest private sector bank, to increase their Casa base. During July-September alone, ICICI Bank Casa base had increased by Rs 9,000 crore. The reason for increase in the share of Casa in total deposits was mainly due to decline in the deposit base as the bank avoided high-cost deposit from companies. The bank said in spite of rejecting or retiring bulk deposits, the mix between retail and Casa deposits still stand to 50-50.

The sources said focus to increase Casa, by taking certain measures such as higher minimum balance for savings bank accounts, was not completely responsible, it was due to companies moving towards markets for initial public offers (IPO) and assigning to institutional investors (QIPs), funds were transferred to the banking system for a few days. “This was one factor but not the only factor,” ICICI Bank told analysts.

Moreover the banks which saw fall in the flow of funds from sectors such as real estate and gems & jewellery as a result of financial crisis, are witnessing revival of sorts. In the real sector the funds have started flowing due to launch of new projects, gems & jewellery sector is on the path of recovery, an executive with a private sector bank said.

In the public sector banks such as Bank of India, Punjab National Bank and Bank of Baroda there has been 8-10 per cent growth in Casa till September over March. While Union Bank saw the highest growth in Casa in the first six months at 17.8 per cent with Casa accounting for 71 per cent of the incremental deposits since March.

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

The increase in Casa funds in public sector banks was possible because the government had asked PSBs to provide growth targets for low-cost deposits in their statement of intent for 2009-10. This is the first time such a step was taken, as in previous years the government used to look for overall deposit growth targets. The increase in Casa was mainly done to ensure that banks can keep their cost of funds low, which help the government to bring down the lending rates.

In the recent months, the Reserve Bank of India (RBI) has also shown its concern on the falling level of Casa as banks over the last few years mainly depended on high-cost bulk deposits the funds coming in from companies, including public sector entities.

Over the years, there has been decline in the public sector banks share of Casa in total deposits, which has reduced 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.

In the last one year banks have reduced deposit rates more than 300bps. For instance SBI is offering 6.25 per cent for one-year deposit; a year ago it was as high as 10.5 per cent.

The extension of branches has also helped banks in increasing the low-cost deposits. For instance during the first six months, SBI and Union Bank of Indian have opened 500 and 160 branches, respectively, have been benefited from the expansion.

According to bankers as the public and private sector banks are expanding their branches the share of Casa is likely to rise further.