Context:
Banks have been aggressively selling mutual funds and insurance policies as substitutes for traditional deposits, primarily to boost fee income. These actions have led to the downfall of low cost deposits, which banks now feel sorry for as costs of borrowing rise.
Did bankers act as Frankenstein?
- Recently, a senior banker told that the financial industry has created many of these creatures.
- Drowning under constant for fee based income, banks persuaded heavily into mutual fund and insurance sales through their branches. By the time they realized their folly, it was all too late.
- Now that they want deposits to feed the loan book growth, they quarrel with their bad choice of these non banking financial products.
Banking Challenges Today
- Banks, even after lowering policy rates, cannot afford to do the same to deposit rates because the costs to the liabilities are high.
- Banks are having issues in attracting savings when competing with higher payoff avenues for investment.
- The CASA ratio has gone down among all major banks, resulting in them being pushed toward high rate Certificate of Deposits (CDs).
Strategies in Response
- Public Sector Banks (PSBs)
- Continue to maintain low interest rates on savings accounts and depend on government backing.
- Private Banks
- Offer higher interest rates (up to 8%) to lure depositors.
- Innovative Approaches
- Banks are exploring giving incentives like insurance covers, discounts for retail loans, and premium banking benefits.
Future Outlook
- Banks must build deposit strategies in segments such as students, professionals, and retirees.
- Just good interest rates will not suffice, with perks and extra service being equally important.
- The industry must balance income from fees with interest based income to avoid the same mistakes from the past.
Deposit strategy reconsideration is needed in banks instead of playing into the hands of fee income.
Otherwise, sooner or later, they could face financial instability as experienced by Frankenstein’s uncontrolled creation.
Current and savings accounts (CASA)
- Current and savings accounts (CASA)
- Term deposits
- NRI deposits
- Tapping into State and Central Governments
Current accounts do not accrue any interest, while savings yield meager returns largely in public sector banks (PSBs):
Importance of CASA Deposits
- The CASA Ratio of a bank determines its ability to keep its cost of funds low. A healthy CASA balance can ensure a bank gives a net interest margin (NIM) of around 4% without posing a threat to asset quality.
- The Decline in CASA Deposits
- Most of the banks have recorded a fall in CASA deposits over the last year:
Credit: BS
