Banks Brace for Challenge as Current Account-Savings Account Ratio Faces Decline in Early 2024

In the initial half of this calendar year, banks are anticipated to grapple with the persistent issue of a diminishing Current Account-Savings Account (CASA) ratio. Forecasts indicate that a quick reversal in the CASA ratio is unlikely, mainly due to the allure of high interest rates on fixed deposits diverting funds away from current and savings accounts.

The widening gap between interest rates on term deposits and savings accounts has prompted customers to shift funds from savings accounts to term deposits. This ongoing trend is expected to continue exerting pressure on the CASA ratio, especially as customers prioritize term deposits over immediate fund access.

Maintaining a robust level of current and savings accounts remains beneficial for banks, serving as a steady and cost-effective source of funds. Investors closely monitor banks’ CASA ratios, as a higher ratio implies lower fund costs, contributing to enhanced earnings.
Banks in India have grappled with the challenge of insufficient deposits amid a surge in loan growth over the past year. Credit growth has averaged around 15-16%, driven mainly by personal loans and loans to shadow lenders, while deposits have seen a comparatively slower growth rate of about 12-13%. To counter this, banks have increased interest rates on deposits to attract savers, but credit-deposit ratios have reached new highs.

In the December 2023 quarter, HDFC Bank reported a significant year-on-year increase of 62% in advances, while deposits experienced a more modest growth of 28% year-on-year. This discrepancy has led banks to explore various strategies to strengthen their deposit base.
The current tight liquidity conditions in the banking system, coupled with robust loan demand, have led lenders to offer elevated rates on Fixed Deposits (FDs). Intense competition among banks, with smaller ones vying against mid-size and large banks, has pushed FD interest rates beyond the 9% mark.

Despite the pressure on banks to mobilize deposits for funding high credit demand, FD rates are not expected to decline 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 expected to witness high credit demand, putting additional pressure on banks to raise deposits to support their loan growth.