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A RESEARCH STUDY ON HOW TO IMPROVE CASA RATIO

By: Saurabh Kumar, Research Officer

Introduction
CASA is an integral part of every Indian banker's vocabulary these days and analysts are busy working on it to gauge bank's profitability. CASA ratio shows how much deposit a bank has in the form of current and savings bank deposit in the total deposit. Higher CASA ratio means less cost of deposits, which results in a better net interest margin and better operating efficiency of the bank. In this competitive environment in the banking sector, it is very difficult to keep the net interest margin high. The depositors are demanding for the higher rate of interest and the borrowers are asking for more and more competitive pricing. At present nearly 22% of the deposits are savings bank accounts and 12% are current accounts, according to the report of the RBI on the Trends and Progress of banking in India 2008-2009. This is approximately 12 lac crores of deposits in the Indian banking system in the form of Savings bank or Current account deposits. The major portion in savings bank deposit balance is constituted by Individual customers. With term deposits rates losing attractiveness for people to park money for longer durations, most banks have reported a significant surge in their current account savings account (Casa) ratio for the quarter ended December 31, 2009. Leading the pack is State Bank of India (SBI), countrys largest commercial bank. The Casa of the bank has surged to 42.94 per cent as on December 31, 2009, against 36.58 per cent in the corresponding period a year ago, thereby registered a growth of 29.94 per cent. In the same period, SBI has registered 11.26 per cent growth in overall deposits. In case of HDFC Bank, the Casa ratio stands at close to 49 per cent as on December 31, 2009, against 40 per cent as on December 31, 2008. ICICI Bank, the largest private sector bank in the country, also reported a similar trend. The Casa ratio in case of ICICI Bank stood at 39.6 per cent at the end of third quarter of the present financial year, compared with 27.4 per cent on December 31, 2008 and 36.9 per cent on September 30, 2009.

We can better understand the effect of CASA deposits on the net interest margin by this trend that when a bank cuts its loan rate, its interest income declines, and if its not able to cut its deposit rates by an identical margin, its NIM gets affected. Normally, in a rising interest rate scenario, banks are in a hurry to raise their loan rates, but slow in offering higher interest to depositors. Conversely, when the rates move southwards, banks are quick to cut their deposit rates, but they take time when it comes to passing on the benefit to borrowers. There is a reason behind this. The impact of any hike or cut in loan rates is felt immediately as a banks entire loan book is repriced, but thats not the case with deposits as the new rates are applicable only when the existing deposits mature or new deposits flow in. Here comes the role of CASA deposits. Higher the CASA ratio, the negative effect of interest rate fluctuation is minimized. There are many factors which affect these low cost deposits in the Banks. A retail customer keeps usually balance equivalent to one to two months expenses in the savings bank account. Similarly an individual, firm, institution or company keeps balance equivalent to usually one month expenses in the current account. The amount is thus decided out of the total funds which will become the part of savings bank or current account balance. The next comes selection of the bank based various criteria and perception of the customer depending on the reputation of different banks in the market. Strategic goals are required to be set for improving CASA deposits on all the areas like marketing, technological improvement, customer service, cross selling etc.

Methodology For deciding strategies and tools for improvement of CASA deposits, it is required to study the trends amongst the Banks and as our Bank is itself a large institution, within the Bank trends study is also required for SBI. The following methodology is followed for conducting this study: (i) Collection of data Data is collected of five banks including State Bank of India for last 4 years and for December, 09. The other banks selected for comparison are Punjab National Bank, Bank of Baroda, HDFC Bank and ICICI bank, for a representative sample from both public sector and private leading banks. The trends are also compared with the trend in stock market, gold prices and average term deposit rates for 1-2 year period. The data of CASA deposits of the fourteen Circles are also collected and analysed to understand the trend within the bank in different part of the country. The trend is compared with the growth in average number of new accounts opened monthly in both savings bank and current account. (ii) Feed back is collected form officers working in different segments and different geographical areas in relation to the various factors affecting the CASA deposits and suggestions are obtained regarding measures to be taken for improving CASA deposits. The total sample size is 95, which includes officers posted as Branch Manager in P intensive branches in different Circles, trainers posted in various State Bank Learning Centres, Branch Managers from different parts of the country and young Trainee Officers. Their feed back is analysed to understand how strong are the factors affecting the CASA deposits. (iii) On the basis of the trends during the past years and the effect of the external and internal factors and the suggestions given by the officers from the cross section of the Bank, few strategies are designes which may be helpful in improving the CASA deposits.

Trends in CASA ratio (Major Banks in India) The trend of CASA deposit is studied for five banks including State Bank of India. The data is collected for March 06, March 07, March 08, March 09 and Dec 09. (i) Trends in CASA deposits of major banks 350000

300000

250000

200000

State Bank Of India Bank of Baroda

150000

Punjab National Bank ICICI Bank

100000

HDFC Bank

50000

0 Mar, 06 Mar, 07 Mar, 08 Mar, 09 Dec, 09

Fig.1 It is clear from the fig.1 that the CASA deposit of all the major banks is improving over the year. This is mainly due to economic development in the country, as more funds become available and with inflation average monthly expenditure also increases.

(ii) Growth in CASA deposit over the years 45%

40%

35%

30%

State Bank Of India

25%

Bank of Baroda

20%

Punjab National Bank ICICI Bank

15%

10%

HDFC Bank

5%

0% 2007 -5% 2008 2009 Dec, 09

Fig.2 All the major banks have shown positive growth during last four years with the only exception being ICICI bank in 2008-09. The decline in the CASA deposit of ICICI bank is mainly due to mass withdrawal of deposits from the bank, the reason being the loss of reputation of the bank in the domestic market in a particular period during the year.

(ii) Trend of CASA ratio 70.00

60.00

50.00 State Bank Of India

40.00

Bank of Baroda

Punjab National Bank 30.00 ICICI Bank

20.00

HDFC Bank

10.00

0.00 Mar, 06 Mar, 07 Mar, 08 Mar, 09 Dec, 09

Fig.3 It is evident that HDFC bank is the leader in the CASA deposits during last 4 years. SBI has maintained a level around 40% in the last four years. The other major banks also show almost similar trend through the sample period. The decline is due to the effect of global recession on the Indian Markets during 2007-08 and 2008-09 period. (iii) Trend of growth in CASA deposit compared with SENSEX We can positively relate growth in sensex to the availability of liquid funds. It is quite visible that CASA deposit showing better growth when sensex is improving.

45% 40% 35% 30% 25% 20% 15% 10% 5% 0%


10% 40% 39%

20000 18000 16000 14000


26%

17464
34%

15644

13072

27% 25%

27%

12000
20%

State Bank Of India Bank of Baroda


Punjab National Bank

9709 10000
17% 15% 14% 11% 14%

18% 15% 11%

20%

8000 6000 4000 2000

ICICI Bank HDFC Bank SENSEX

2% -2%

Mar, 07
-5%

Mar, 08

Mar, 09

Dec, 09
0

Fig.4 (iv)Growth of CASA deposit compared with avg. term dep. rates The CASA deposit of the banks are adversely related to the average term deposit ratesduring a period. Higher term deposit rates will adversely affect the growth in CASA deposit. The relationship is shown in Fig.5.

45% 40% 35% 30% 25% 20% 15% 10% 5% 0%


10% 40% 39%

10 9 9 8 7.5
27% 25% 27%

8.5 7.5
34%

7
26%

6
20% 20% 17% 15% 11% 15% 14% 11% 14%

State Bank Of India Bank of Baroda


Punjab National Bank

18%

5 4 3 2 1

ICICI Bank HDFC Bank Avg Term Dep Rate

2% -2%

Mar, 07
-5%

Mar, 08

Mar, 09

Dec, 09
0

Fig.5 (v) Growth in CASA deposit compared with gold price changes
45% 40% 35% 30% 25% 20% 15% 10% 5% 0%
10% 40%

28.8%
39%

0
34%

19.3% 16.5% 27%


25% 27% 26%

0
20% 18% 15% 11% 15% 14% 11% 14% 20% 17%

State Bank Of India Bank of Baroda

Punjab National Bank

ICICI Bank

HDFC Bank Gold Price change

2% -2%

-0.1%

Mar, 07
-5%

Mar, 08

Mar, 09

Dec, 09
0

Fig.6

The change of gold price is showing no relationship with the sample data. The price of gold has continuously increased during the past four year period, but the CASA deposit of the banks are not showing positive or negative trend with this. The great recession in the global markets which squeezed the liquidity from the market may be one of the reasons and the loss of confidence in the currencies during the recession affected economies led to the surge in the gold prices.

Trends and Comparison (within SBI) (i) Trend of CASA ratio of selected Circles of the Bank 70.00

60.00

NEW DELHI MUMBAI PATNA

50.00

LUCKNOW KOLKATA

40.00

BHOPAL CHENNAI HYDERABAD

30.00

BHUBANESWA R BANGALORE

20.00

Mar'05

Mar'06

Mar'07

Mar'08

Mar'09

Dec'09

Fig.7

Barring a few exception most of the Circles showed the same trend of growth and decline in the CASA ratio during last five years. The CASA deposit of the Circles is increasing throughout the period. The decline in the CASA ratio is due to comparatively more growth in the term deposits. During the period March 08 to March 09 the average interest rate in the term deposits was in range of 9.5% to 10.5% .

(ii) Trend of CASA deposit of the selected circles of the Bank45000

40000 NE W DE L HI MUMB AI 30000 P AT NA L UC K NO W K O L K AT A 20000 B HO P AL 15000 C HE NNAI HY DE R AB AD 10000 B HUB ANE S W AR B ANG AL O R E

35000

25000

5000

0 Mar'05 Mar'06 Mar'07 Mar'08 Mar'09 Dec '09

Fig.8 The CASA deposits in almost all the Circles have an increasing trend. The growth is quite significant during March 07 to March 09. But this was not sufficient to improve the ratio due to even higher growth in term deposits during the period.

(iii) CASA ratio in respect of new accounts opened For savings bank account deposit the relationship is positive with the number of new accounts opened. Higher growth is observed when more numbers of new account are opened. For current account the relationship is not linear. (iv) Feedback from officers on factors affecting CASA ratio Feedback was collected from officers representing various business groups and geographical areas. The feedback focused on four aspects which may influence CASA deposit. a. What affects CASA deposits To achieve the goal of mobilizing more CASA deposits, it is required to understand the factors which can motivate or de-motivate the potential CASA depositor. The Majority responded that the rate of interest in term deposits is the strongest factor that affects the CASA deposits. The other strong factors are returns from market investments and banks new hybrid liability products. There is a strong negative correlation between rate of interest term deposits and growth in CASA deposits. This view is also supported by the data of CASA deposits of the five major banks compared with the average rate of interest in term deposit. b. Factor affecting selection of Bank for CASA deposits When a potential depositor decides to keep the money in current or savings bank account, the next he decides is Bank. More than 60% of the respondent recommended customer service. Customer service is the first and most important factor which comes in the mind of the depositors. The other factors are technological superiority, availability of good hybrid liability products and availability of other non-banking investment products under one roof. (v)Feedback on strategies for improving CASA ratio Keeping in view the above factors feedback was taken on what should be the strategy for improving CASA deposits a. Strategies for improving Savings account deposits When asked about the strategy for sustainable growth in savings bank deposit,

more than 45% agreed that opening maximum number of individual accounts is the best option. High preference to opening of HNI accounts is also viewed as a strong factor for growth. b. Strategies for improving current account deposits Opening maximum number of current account of retail traders and small industries should be the strategy for better growth in current account deposits is the response of more than 50% respondents.

Strategies for improvement CASA deposits Based on the trends of CASA deposits of major Banks, trends in Circles of SBI and feedback collected from officers of SBI from across the country, following strategies are suggested, which may be helpful for improving CASA deposits (i) Improvement in services and technologies- As we understand that the potential is decided by the liquidity available in the country, in retail and other segments, the competition starts with selection of the bank where these deposits will go. In the current financial environment, the level of customer service and availability of advance technologies are the most important factors which attract a potential deposit to any bank. On customer service front, our level has increased a lot from the position 4-5 years back. But the standard is still not satisfactory, and we have to walk a long way to achieve this, that too in a very short time. For developing the employee into a knowledgeable, customer friendly asset, training process and training system are required to be developed and strengthened. We may plan to have a dedicated helpline for CASA accounts Circle wise. Technology is the aspect where we are far behind the private sector banks. The products and tools are available in most of the cases, but due to knowledge gap, our staff is not able to use them properly. Training is required for the employees to provide them proper knowledge of the products and for customers, awareness programme may be conducted through different media and through branches regarding new generation products like internet banking, mobile banking etc. On the banks website the facility may be provided to the customers for putting up the technical problems or queries related with Internet banking, Mobile banking and ATM. Presently all kind of requests can be generated through Internet banking facility, in addition to that facility may be provided that the customer can refer the pending requests to the vertically higher office in case of abnormal delay.

(ii) Marketing and development of new hybrid products and proper marketing of the existing products Nowadays, customer does not want to come to the branch for every transaction and he expects from the banker his deposits will be kept in such a manner to give him maximum returns. Our bank has very good hybrid products like Savings plus, which is one of the best such products in the market. These kinds of products should be marketed vigourously. All the private banks are capitalizing on the different variants of the same products, only due to better marketing and better technical support. (iii) Drives for opening more new accounts For savings bank deposits, opening of more and more new accounts is the best alternative. Our bank is planning to double its savings account base in rural area as on March 09 within two years. The campaigns should be designed and launched with suitable strategies matching to the different conditions prevailing during the period based on the factors discussed earlier in the report. (iv) Providing all financial services under one roof Presently we are providing other facilities to our customers only for the companies associated with the State Bank of India, viz. SBI life, SBI MF etc. This restricts the opportunity for the customers and the chances of migration of an urban customer start if he plans to invest in other companies. Providing investment opportunity to the customer by offering products of all the major companies may be a good option. This is one of successful strategies applied by private banks like HDFC bank. If the complete financial planning will be provided for the urban customers with excellent customer service and supported by better technology, it would certainly help in improving the savings bank deposits. (v) Targets for each officer and reward for best performances Monthly targets may be set for the officers and staff of each branch for the number of accounts and amount mobilized both. Higher

reward and recognition schemes may be launched for the best performers. (vi) Popularising demat services With the strong emergence of electronic media, interest of retail customers in the stock market has increased significantly. The young and tech savvy generation always want to do it themselves while sitting in their office/ home. It is required to market our product but simultaneously it is also required to reduce the processing time for the opening of new accounts . In urban centre this product alone is sufficient to attract a huge amount of low cost deposits.