The ongoing interest rate adjustment cycle has brought to fore a very peculiar thing in the banking sector, especially among smaller banks. Almost every day we see advertisements for savings account, with banks offering rates as attractive as 6.5 per cent and 6.75 per cent. Although conditions apply, these are very similar to the interest rates on fixed deposits; this brings us to the question – what’s low cost about CASA, an abbreviation for current account–savings account deposits, perceived to be a cheaper source of funds for banks?

Prior to May 2022, or even till December 2022, rates offered on savings account, irrespective of the size of the bank, was 3.5-4.5 per cent. The peak rates for term deposits were 6.75-7.50 per cent. Therefore, it made a lot sense to call savings account as low cost, because it helped save at least 200 basis points on cost of funds. But today the saving is barely 75 basis points, and the direction in which the war for deposit is headed to, there could a further narrowing of differential.

Take banks such as IndusInd, IDFC First, RBL, and YES Bank, which in recent times, have rolled out savings account products with interest rates as competitive as 6.75-7.5 per cent. At these rates, even if a bank posts CASA at 50 per cent, it defies logic and is barely a representation of its ability to raise low-cost deposits, because these savings products are almost akin to a fixed deposit. For small finance banks, the struggle is worse. Most of them are at sub-30 per cent CASA, and may continue to operate at these levels given their business model.

The ones for whom CASA still holds some significance are, by and large, the public sector banks and the top four private banks, namely HDFC Bank, ICICI Bank, Axis Bank, and Kotak Mahindra Bank to an extent. They haven’t had the need to go all out to woo customers for deposits because of the pedigree they have earned over the years. For them, the cost of deposits hasn’t shot up unduly; its at best 60-80 bps increase in the last nine months. For private banks below Kotak Mahindra Bank’s layer and the universe of small finance banks, it’s a totally different story.

Therefore, in the current scenario, CASA shouldn’t mean much. Especially while dealing with smaller banks, and more so while dealing with small finance banks. Until rates stabilse and start easing, even if banks can post healthy deposit growth amid the ongoing war for deposits, it’s a decent show. Maybe we shouldn’t judge them on CASA for a while!

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