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Cut-rate Deposits Back in Fashion

People are preferring to keep their money as liquid as possible

The push for growth by Indian banks has seen them turn away from the corporate sector, despite its huge potential, and move towards low-cost deposits.

The change in strategy is government-powered and has little to do with the likes and dislikes of banks - they had shown what they preferred in earlier years, when they pursued corporates’ money rather than that of the humble depositor.

With the government insisting that providing total growth rate numbers would not be enough, banks now have to show separately the growth they were able to log in the CASA area (current account and savings account). Savings deposits generate just 3.5 per cent returns while current account does not give off any gains.

The effect has been electrifying. The big Indian banks have increased the portion of CASA deposits in their portfolio. There has been a 20 per cent rise in low-cost deposits in public sector banks (PSBs) in the current fiscal. In the same period last fiscal the opposite ruled. At that time, while the interest rates offered under CASA deposits was less, term deposits rates were quite attractive for depositors. Also, falling markets were forcing people towards the safety of bank fixed deposits as they promised both safety and gains at the same time, Business Standard reports.

However, in the current fiscal, term interest rates have fallen from the heights of over 10 per cent to a low of 6 per cent and thereabouts, forcing people not to keep money in them and instead go for the CASA deposits as these are extremely liquid. A stock market boom has also led to a flight from term deposits as people check out the fast-reviving economy for other investment options.

ICICI Bank has been a prime mover in the area having logged a rise in the CASA base by Rs 9,000 crore in the quarter (July to September). PSBs like Bank of India, Punjab National Bank and Bank of Baroda logged an 8-10 per cent CASA growth starting March and going on till September. The highest jump was made by the Union Bank of India at 17.8 per cent in the first six months.

However, PSBs’ CASA share in total deposits has fallen from 39.95 per cent in March 2006 to 32.66 per cent at the end of fiscal 2009.

Another CASA enabler has been the expansion exercise that banks have been launching into the hinterland. It has seen the State Bank of India setting up 500 new branches, while Union Bank has set up 160 branches.