Banks are likely to grapple with the ongoing challenge of a declining Current Account-Savings Account (CASA) ratio in the first half of the current calendar year. The expectation is that there won’t be an immediate turnaround in the CASA ratio as high interest rates on fixed deposits continue to attract funds away from current and savings accounts.
The widening gap between interest rates on term deposits and savings accounts has led customers to shift some funds from savings accounts to term deposits. This trend is expected to keep exerting pressure on the CASA ratio, especially when customers prioritize term deposits over immediate fund access.
Maintaining a high level of current and savings accounts remains favourable for banks, serving as a stable and cost-effective source of funds. Investors closely watch banks’ CASA ratios, as a higher ratio implies lower fund costs, contributing to enhanced earnings.
The challenge
Banks in India have faced a challenge of inadequate deposits amid surging loan growth over the past year. The average credit growth has been around 15-16%, primarily driven by personal loans and loans to shadow lenders, while deposits have grown at a comparatively slower rate of about 12-13%. To address this imbalance, banks have been raising interest rates on deposits to attract savers, but credit-deposit ratios (CDR) have reached new highs.
In the December 2023 quarter, HDFC Bank reported a substantial year-on-year increase of 62% in advances, while deposits saw a more modest growth of 28% year-on-year. This disparity has prompted banks to explore various strategies to bolster their deposit base.
Higher rates
Current tight liquidity conditions in the banking system, coupled with robust loan demand, have prompted lenders to offer elevated rates on Fixed Deposits (FDs). Fierce competition among banks, with smaller ones competing against mid-size and large banks, has driven FD interest rates beyond the 9% mark.
Despite the pressure on banks to mobilise deposits for funding high credit demand, FD rates are not expected to decline anytime soon. The Reserve Bank of India’s cautious approach to maintaining tight liquidity is likely to persist unless there is a sustained decline in inflation. The upcoming quarters are anticipated to witness high credit demand, putting additional pressure on banks to raise deposits to support their loan growth.
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