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Downfall in Casa ratio of banks to Pre-Covid level
Context:
SBI Chairman CS Setty stated that the share of low-cost deposits in the banking system, already declining, could drop further to pre-COVID-19 levels.
About the falling Current and Savings account (Casa) deposits of banks:
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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:
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- The pre-Covid level Casa ratios are 40 per cent, which went up to 45 per cent post-Covid. Now, it is going back to 40 per cent.
- Most large banks have seen their Casa ratio falling over the past year as customers are increasingly gravitating towards fixed deposits, which are offering attractive rates.
- SBI can maintain its share of low-cost deposits by targeting small businesses with improved services and innovative products as evident from deposits having grown 58% over five years, while credit grew by 56%.
Reasons for falling Current and Savings account (Casa) deposits of banks:
- Efficient Cash Management: Corporates and the Government of India are using funds more effectively for growth and debt repayment, reducing excess cash in CASA accounts through just-in-time cash management.
- This means that the float funds will not be available.
- Shift to Higher-Yield Investments: Rising interest rates are prompting depositors to move funds from low-return CASA accounts to term deposits like Fixed Deposit and other higher-yield investments.
- Post-Pandemic Recovery: Economic recovery has led to increased spending and investment, reducing the amount of idle funds held in CASA accounts.
- Monetary Tightening by RBI: Higher interest rates from the RBI make term deposits more attractive, drawing funds away from CASA accounts.
- Inflation and Spending: Rising inflation has increased daily expenses, causing individuals and businesses to withdraw more from CASA accounts for operational needs.
- Investment in Capital Markets: Favourable market conditions are driving retail and corporate investors to move funds into stocks, mutual funds, and other instruments instead of leaving them in low-yield CASA accounts.
- Changing Consumer Preferences: With access to advanced financial tools and digital platforms, consumers and businesses are opting for better savings and investment opportunities, like digital wallets and higher-interest products, over CASA accounts.
Key implications of a potential decline in the CASA ratio:
- Increased Cost of Funds for Banks: Banks may face higher funding costs as they rely more on term deposits, potentially reducing profit margins.
- Higher Lending Rates: To maintain profitability, banks might pass increased costs to borrowers, making credit more expensive and potentially slowing economic growth.
- Pressure on Net Interest Margins (NIM): A lower CASA ratio could compress NIM, impacting bank profitability if higher costs cannot be fully passed on to customers.
- Net Interest Margin (NIM) is the difference between the interest income generated by banks and the interest paid to depositors.
- Impact on Liquidity and Lending Capacity: Reduced low-cost deposits could limit banks’ ability to lend and manage liquidity, affecting credit availability.
- Shift Toward Non-Interest Income: Banks may focus more on generating non-interest income through fees and services to offset declining CASA ratios and rising costs.
- Greater Competition for Deposits: As banks work to replace low-cost CASA deposits, competition for term deposits may intensify, leading to higher deposit interest rates. While this benefits savers, it raises funding costs for banks.