CASA Dynamics in Indian Banking!

Source: BS

Context:

• Indian banks are facing an asset-liability tug-of-war.
• Assets: Loans and investments.
• Liabilities: Deposits and capital.
• Current trend: Credit growth has outpaced deposit growth, pressuring banks’ net interest margin (NIM).

What is CASA?

CASA (Current Account Savings Account) deposits refer to low-cost funds that banks mobilize through customers’ current accounts and savings accounts.

• Current Accounts → No interest paid
• Savings Accounts → Low interest (usually 2.5–4%)
• Hence, CASA is the cheapest source of funds for banks.

Why CASA Matters in Banking

• Lower Cost of Funds
  • Higher CASA increases the share of cheap deposits, reducing overall Cost of Funds (CoF) and improving profitability.

• Supports Credit Growth
  • Low-cost deposits help banks lend more aggressively at competitive rates.

• Enhances Net Interest Margin (NIM)
  • Since funding cost is low, the gap between lending and deposit rates (NIM) widens → better earnings.

• Improves Liquidity & Stability
  • CASA balances are usually stable and sticky → ensure consistent liquidity.

CASA Ratio

CASA Ratio = (Current + Savings Deposits) ÷ Total Deposits × 100

• High CASA Ratio = Better margins, strong retail franchise
• Low CASA Ratio = Higher dependence on costly term deposits

Drivers Behind CASA Decline:

• Financialisation of Savings:
  • Shift from bank deposits to mutual funds and equities.
  • Mutual fund assets under management (AUM) rose from 12% to 32% of bank deposits over a decade.
  • Popularity of Systematic Investment Plans (SIPs) diverts money from CASA.
• Corporate Behavior:
  • Companies park surplus cash in liquid funds for higher returns and low risk.
  • Money returns to banks in bulk deposits or commercial papers, increasing deposit cost.
• Interest Rate Environment:
  • RBI cut policy rate by 100 bps to 5.5% since February 2025.
  • Lending rates fell faster than deposit rates → adverse margin environment.
  • Weighted average lending rate (September 2025): 8.50%
  • Weighted average term deposit rate: Up 4 bps month-on-month
• Digital Payments & UPI:
  • Instant transfers reduce average deposit retention in savings accounts.
  • CASA now serves as a transit point, not a parking place.
• Government Fund Management:
  • Introduction of Just-In-Time fund management via RBI’s e-Kuber platform reduces government funds parked in low-cost accounts.
  • Limits CASA contribution from government deposits (earlier ~10% of CASA).
• Emerging Technologies:
  • Central Bank Digital Currency (CBDC) may further reduce CASA as funds could be held directly with RBI.

Implications for Banks:

• Profitability: CASA drop increases deposit costs, squeezing NIM.
• Competition: Banks face pressure from mutual funds, digital platforms, and tech-enabled fund flows.
• Strategic Response:
  1. Strengthen digital payment systems to retain CASA.
  2. Target salary accounts and high-value customers for stable deposits.
  3. Introduce flexible recurring deposits and specialized deposit products.
  4. Use AI and analytics to track fund movements and prevent CASA migration.