In the past year, private sector banks have experienced a more pronounced decline in their Current Account Savings Account (CASA) deposit ratio compared to public sector banks (PSBs), primarily driven by an increased demand for credit and a growing preference for term deposits.
As of December 31, 2023, the share of CASA deposits to total deposits for private sector banks contracted to 39.9%, down from 44.5% on December 31, 2022. Concurrently, PSBs witnessed a slip in their CASA ratio to 40.5% from 42% during the same period. The overall CASA ratio for the Indian banking system registered a decline from 42.8% to 40.1% over the specified timeframe.
Term deposits grow
The growth in aggregate deposits was primarily fuelled by an increase in term deposits, which transitioned to higher rates. However, CASA growth remained sluggish across the industry, with private banks experiencing a sharper contraction in their CASA ratio compared to PSBs. Analysts anticipate that the pursuit of deposits is likely to persist, given the ongoing drag on credit growth and banks’ efforts to bolster their deposit base.
The latest Reserve Bank of India (RBI) data indicates a year-on-year (Y-o-Y) credit growth of 20.3% to Rs 159.7 lakh crore for the fortnight ending January 12, 2024, while deposits grew by 13.1% Y-o-Y to Rs 199.8 trillion.
The CASA ratio for Indian lenders has been under pressure since the first quarter of 2022-23 due to increased customer preference for term deposits offering better rates.
A higher CASA ratio is crucial for banks to maintain a lower cost of funds, supporting net interest margins. The banking sector responded to increased demand for loans by offering higher interest rates on term deposits amid liquidity tightness, a result of monetary policy tightening by the RBI.
Despite policy rates reaching their peak, analysts anticipate that the CASA deposits of banks will remain under pressure throughout 2024. A reversal is expected only when the RBI begins to loosen liquidity through monetary policy easing, including potential rate cuts. The trajectory of CASA deposits may be influenced by factors such as credit growth, term deposit rates, and overall market conditions.
