Standing Committee Recommends AI Adoption and Diversification in Banking
Context:
The Standing Committee on Finance, in its report, has recommended that banks diversify their funding sources, optimise operations, and leverage artificial intelligence (AI)-driven automation to enhance efficiency, reduce costs, and drive digital banking innovations.
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- These measures are suggested as a response to the decline in the current account savings account (CASA) deposit ratio.
- The recommendations were part of the committee’s review of the demands for grants of the Department of Financial Services for the financial year 2025 (FY25).
- The report further emphasised that fostering a secure banking ecosystem while prioritising technological advancements would enable banks to position themselves as forward-looking institutions that balance security with innovation.
CASA Deposit Ratio
The Current Account and Savings Account (CASA) deposit ratio is a critical financial metric used to assess a bank’s funding structure. It measures the proportion of a bank’s total deposits that are held in current and savings accounts, which are typically low-cost sources of funds.
Calculation of CASA Ratio: The CASA ratio is calculated using the following formula: CASA Ratio (%) = (CASA Deposits / Total Deposits) × 100
- Where:
- CASA Deposits = Total deposits in current accounts + Total deposits in savings accounts
- Total Deposits = All deposits held by the bank, including term deposits and other types.
- For example, if a bank has total deposits of ₹50,000 crore, with ₹15,000 crore in savings accounts and ₹8,000 crore in current accounts, the CASA ratio would be:
- CASA Ratio = (15,000 + 8,000 / 50,000) × 100 = 46%.
Importance of CASA Ratio:
- Cost of Funds: A higher CASA ratio indicates that a larger portion of a bank’s deposits comes from low-cost sources. Current accounts typically do not earn interest, while savings accounts offer minimal interest (around 3-4%). This results in lower overall costs for the bank compared to higher-interest term deposits.
- Profitability: Banks with higher CASA ratios tend to have better net interest margins (NIM), as they can lend out these low-cost funds at higher interest rates. This enhances their profitability and operational efficiency.
- Financial Stability: A robust CASA ratio can reflect customer loyalty and trust in the bank. It suggests that customers are willing to keep their funds in the bank for transactional purposes, which can provide stability during economic fluctuations.
- Competitive Advantage: Banks with high CASA ratios can offer more competitive loan rates while maintaining healthy profit margins. This can attract more customers and increase market share.
Strengthening Grievance Redressal Mechanisms
- In addition to addressing banking liquidity concerns, the Standing Committee on Finance highlighted the need for a comprehensive review and strengthening of grievance redressal mechanisms within the banking and insurance sectors.
- The report suggested that studying global best practices could provide valuable insights for improving the current system, ensuring better customer service and complaint resolution.
By adopting these recommendations, banks can not only improve their operational resilience but also maintain customer trust and competitiveness in a rapidly evolving financial landscape.
