NEWS & ADVICE : FIXED DEPOSITS

Falling CASA deposits obstruct reducing lending rates

By Neelima Shankar
Dec 19, 2008

Banks are not able to resort to a sharp cut in their lending rates because their
share of current and savings account (CASA) deposits has come down by a signifi
cant amount for the half fiscal year ending on September 30th. These deposits ar
e important for banks as they are considered to the cheapest source of liquid mo
ney.
With a fall in CASA, banks face a shortage in their cash supply and therefore it
becomes difficult for them to reduce the lending rates. According to the financ
e ministry, CASA deposits for most banks have come down by 2% to 4% during this
period.
These CASA deposit are the cheapest source of funds for the banks because they p
ay around of 3.5% interest on savings accounts and zero interest on current acco
unts. Banks consistently try to increase this share because a fall in this front
hit their margin in the long run. "Lower ratio of CASA reflects in higher cost
of funds for a bank. It may also affect the yield (profitability) of the bank (f
rom its advances or loans)," said V K Dhingra, Executive Director of UCO Bank.
Most public sector banks witnessed a fall in their CASA deposits between March a
nd September 2008. It fell by 3% for the largest lender, State Bank of India (SB
I) and even for Bank of Baroda, Bank of India, Canara Bank, and Oriental Bank of
Commerce, these CASA deposit came down by a sizeable amount.
The main reason for a fall in CASA deposits was the rising interest rate of fixe
d deposits. Banks have been offering high interest rates on fixed deposit to att
ract more funds. Interest rates increased to 10.5% for deposits that were parked
for more than a year. Besides the rates for bulk deposits [link] were even high
er and this attracted customers who shifted their funds from savings and current
accounts to fixed deposits that earned high returns.
"There has been a fall in the ratio of CASA deposits because of high interest ra
te on fixed deposits. The facility of flexi-deposits also attract customers towa
rds term and fixed deposits" said an official with Oriental Bank of Commerce.
Flexi-deposits are fixed deposits whereby the investor can earn fixed interest r
ate along with a facility to partially withdraw money before the tenure of the d
eposit is complete. On the other hand, an investor has to pay a penalty if he ch
ooses to withdraw money from his fixed deposit before the maturity period.
Earlier also it was noticed that the CASA deposits of public sector banks have d
eclined and now these banks are adopting new methods to increase their CASA depo
sits. A rise in bank's CASA deposits means that its cost of funds is reducing th
at will allow it lend at a cheaper rate.