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WITH BANK rates turning attractive and one-year real returns being positive, customers have started shifting their funds from savings bank accounts and current accounts to fixed deposits (FDs). Since May, the Reserve Bank of India’s 250 basis point hike in its key policy rate has slowly translated into better interest rates on deposits for savers.
The real rate of return on deposits is positive only when the interest rate on FDs offered by banks is higher than the retail inflation. After remaining over 6 per cent for 10 months in a row till October 2022, retail or consumer price index based inflation dropped to below 6 per cent (5.88 per cent in November). Banks too have increased one-year FD rates to over 6.5 per cent now.
Most of the public and private sector lenders have seen a moderation in the share of current account and savings account (CASA) in their total deposits in the second and third quarter of FY2023. The weighted average domestic fixed deposit rate on fresh deposits and outstanding deposits increased by 213 bps and 75 bps, respectively, since May 2022, according to the RBI.
On the other hand, the country’s largest lender State Bank of India offers just 2.70 per cent interest rate on savings bank deposits whereas on one-year FD deposits, it gives 6.5 per cent rate (7 per cent for senior citizens). HDFC Bank pays just 3 per cent on SB deposits, but 6.60 per cent on one-year FDs. There’s no interest on funds lying in the current account. Depositors can freely withdraw funds from SB accounts any time while premature withdrawal from FDs attract a penalty of 0.50 per cent to one per cent.
SBI’s CASA ratio dipped from 45.33 per cent in the quarter ended June 2022 to 44.63 per cent in September 2022 and to 44.48 in December 2022. Private lender HDFC Bank’s CASA stood at 45.8 per cent, 45.4 per cent and 44 per cent, in the quarter ended June, September and December, respectively. ICICI Bank witnessed its Casa declining from 45.8 per cent in June 2022 quarter to 45 per cent in September 2022, and to 44.6 per cent in end-December 2022.
Easing of inflation and a hike in deposit rates by banks has meant savers will get better real returns on their money in FDs (fixed deposits). While banks are quick to hike lending rates as RBI raises its key policy rate, they are slow in increasing deposit rates. With a 250 bps hike in repo rate over 10 months, savers are finally getting to see higher deposit rates.
This decline seen over the last two quarters comes after a sharp rise in the CASA deposits during the Covid-19 pandemic when households preferred having liquidity amidst uncertainties
“The fact that now term deposit rates are substantially higher as compared to the savings bank rates, there is a movement which is happening from the savings banks to the term deposits. When the (interest rate) differential now is 3 per cent (on savings bank deposits) and 7.5 per cent (on term deposits), it makes a lot of sense to do that (shift from savings bank deposits to term deposits),” Bank of Baroda MD & CEO Sanjiv Chadha said.
The share of CASA deposits in total deposits of all banks stood at 44.8 per cent in March 2022 compared with 41.7 per cent three years ago. These low-cost deposits accounted for 60.9 per cent and 55.6 per cent of incremental deposits during 2020-21 and 2021-22, respectively.
As banks started raising deposit rates following the hike in repo rate, the growth in CASA ratio has seen a dip. CASA is the main source of low-cost funds for banks. It indicates the amount of current and savings deposits a bank has in its total deposits. Higher CASA ratio results into better net interest margin for a bank as interest rates on such deposits are low.
“With economy opening up, credit off take improving and discretionary spending going up, the banking system liquidity had an impact, leading to rise in term deposit rates and growing preference for capital market investments. This led to industry wide squeeze in CASA deposits,” said Suresh Khatanhar, Deputy Managing Director, IDBI Bank.
Bankers said although there is a growth in CASA in absolute terms, the fall in the CASA ratio is a cause for concern. “For us and other banks maintaining CASA balances has become a challenge. Last year it was easy as people were keeping money in their savings account. Now, the reverse is happening. The anxiety which the households were showing that there can be problems, income will come down (during Covid), that has all subsided now and so, people are spending lavishly,” said a private sector lender.
According to IDBI Bank’s Khatanhar, banks are likely to see their CASA ratio stabilising in the fourth quarter on account of improvement in inflows from big companies and government sectors.
