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Banks’ CASA deposits fall as customers shift to FDs
Context:
The banking sector in India is witnessing a behavioural shift among depositors, with a notable movement of funds from low-cost Current Account and Savings Account (CASA) deposits to high-yield Fixed Deposits (FDs).
Decline in CASA Deposits
- CASA deposits declined by ₹5,900 crore during the first nine months of FY 2024-25.
- This is in stark contrast to the ₹42,000 crore increase in the same period last year.
- According to RBI data:
- CASA deposits stood at ₹83.50 lakh crore in March 2024 but declined to ₹83.44 lakh crore by December 2024.
- In comparison, CASA deposits had increased from ₹78.27 lakh crore to ₹78.69 lakh crore between March 2023 and December 2023.
CASA Ratio: The CASA ratio measures the proportion of current and savings account deposits relative to a bank’s total deposits. It indicates the bank’s cost of funds, liquidity, and profitability:
- Cost of Funds: Higher CASA ratios imply lower funding costs, benefiting bank profitability.
- Liquidity: A high CASA ratio reflects strong liquidity and deposit stability.
- Profitability: Banks with a higher CASA ratio generally have better profit margins on lending.
Growth in Fixed Deposit
- Fixed Deposits (FDs) grew by nearly 10% in the first nine months of FY 2024-25.
- As per RBI data:
- Fixed Deposits increased from ₹122.61 lakh crore in December 2023 to ₹134.21 lakh crore in December 2024.
- In FY 2023-24, FD growth was recorded at 14%, reaching ₹117.6 lakh crore in December 2023.
- The shift is primarily driven by higher interest rates offered by banks to attract deposits in response to the liquidity crunch.
Key Factors Behind the Shift
- Higher Interest Rate on FDs
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- The widening gap between savings account interest rates (typically 3-4%) and FD rates (which have surged to 7-8%) has encouraged depositors to switch.
- According to Vinay Tonse, MD (Retail Business and Operations), SBI, whenever the difference between savings bank interest rates and FD rates increases, a natural shift occurs.
- Liquidity Crunch in the Banking Sector
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- Banks are facing tight liquidity conditions due to increased credit demand and withdrawal of surplus liquidity.
- To counteract this, banks are offering competitive FD rates to attract long-term funds.
- Economic Uncertainty and Risk Aversion
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- In times of economic volatility, risk-averse individuals prefer safe and assured returns offered by FDs over uncertain returns from market-based investments.
- Unlike CASA accounts, FDs provide predictable and stable income.
Implications for the Banking Sector
- Impact on Banks’ Cost of Funds
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- CASA deposits provide banks with low-cost capital, whereas FDs increase the cost of funds due to higher interest payments.
- A decline in CASA deposits affects banks’ profit margins and lending rates.
- Changes in Credit Availability and Lending Rates
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- A shift towards FDs may lead to higher lending rates, making credit more expensive.
- The banking sector may tighten lending norms, impacting sectors reliant on bank loans.
- Monetary Policy Implications
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- A surge in FD deposits indicates tightening liquidity, which could influence the RBI’s monetary policy stance.
- The RBI may need to adjust repo rates or infuse liquidity to balance credit demand and supply.
Way Forward
- Balanced Deposit Mobilisation Strategies
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- Banks need to introduce innovative savings products to retain CASA deposits.
- Offering higher interest rates on savings accounts or hybrid deposit schemes can help balance deposit inflows.
- Strengthening Digital Banking and Customer Engagement
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- Enhancing digital banking experiences and value-added services can encourage customers to maintain CASA balances.
- Implementing financial literacy programs can help depositors make informed choices.
- Policy Support from RBI
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- The RBI can monitor liquidity conditions and take necessary steps to prevent excessive tightening.
- Policy adjustments, such as Open Market Operations (OMOs) or repo rate tweaks, may be required to stabilise deposit trends.
