In the late 90s, Laxman Das Motwani, a mid-level manager at a nationalized bank, retired without any liabilities. When questioned about repaying his home loan and financing his daughters’ weddings, he revealed that he avoided bank loans. Instead, he prioritized earning interest by opening recurring deposits soon after joining the bank, using their earnings for more than 35 years to cover expenses.
But over the last three decades, there has been a shift in financial habits. Nowadays, individuals tend to avoid recurring deposit accounts and keep lower balances in their savings accounts. The business community, as well as government departments, public sector enterprises and corporations, have become adept at utilizing current accounts for smarter financial management.
Savers to Investors
Recent data from the Reserve Bank of India indicates that domestic financial savings fell to a near five-decade low, standing at 5.1% of GDP in FY2023, down from 7.2% in FY2022. India, traditionally a nation of savers, is gradually transitioning to a nation of investors and spenders. The booming capital market and mutual fund industry, along with record spending on things like cars and smartphones, are contributing to this shift. The challenges in the slow growth of CASA (Current Account Savings Account) and deposits are evident amidst this evolving financial landscape.
As on March 31, 2023 (Amount in Trillion INR)
Modern Indian banking has a history of around 250 years, with 140 players in the Indian business space as of March 2023. This includes 12 PSBs, 21 PVBs, and an extensive network of 1,52,000 bank branches across the country. During this duration, it took 250 years to accumulate total deposits of Rs 191 trillion and total CASA of about Rs 80 trillion. In contrast, the mutual fund industry has reached an impressive 51 trillion rupees in assets under management (AUM) in less than 60 years, without the formal arrangement that traditional scheduled commercial banks have.
Remarkably, the mutual fund industry has witnessed exponential growth, taking just over a year to jump from Rs 40 trillion to Rs 50 trillion in assets under management (AUM), while it initially took 50 years to reach Rs 10 trillion. The total number of systematic investment plan (SIP) accounts at the end of December 2023 reached 76.36 million, with an impressive addition of 30–40 lakh accounts every month in the fiscal year 2023–24. The SIP AUM now stands at approximately 9.96 trillion rupees, constituting about 20 percent of the total mutual AUM.
Dwindling CASA, Banks Struggling
Current and savings accounts, or CASAs, act as low-cost deposits for banks. While current accounts earn no interest, savings accounts yield lower interest than fixed deposits. Higher volumes of low-cost deposits translate into improved margins for banks. The report “Trends and Progress of Banking in India 2022-23” by the Reserve Bank of India (RBI), published at the end of December 2023, reveals that the cost of deposits for all scheduled commercial banks (SCBs) rose from 3.6 percent to 3 .8 percent.
The consolidated balance sheet of scheduled commercial banks (excluding regional rural banks, or RRBs) saw a growth of 12.2 percent, the highest in the last nine years. However, this falls short of the robust growth observed in the mutual fund (MF) industry. The main driver of this banking growth was on the assets, with total deposits growing only 10.98 percent and CASA by 5.6 percent. Consequently, banks resorted to borrowing with cost implications. While public sector banks (PSBs) saw deposit growth of 9.26 percent, private sector banks (PVBs) experienced a greater growth of 15.28 percent. Notably, the CASA of PSBs grew by only 4.14 percent, while PVBs witnessed a negative growth in CASA during the period.
Banks should accelerate deposit mobilization for lending, aiming to minimize borrowing costs and maintain a healthy net interest margin (NIM). Although Scheduled Commercial Banks (SCBs) have stepped up deposit mobilization from April 2023 to December 2023, the focus on term deposits, influenced by rates, is highlighted in the latest RBI Financial Stability Report. However, CASA growth remains lackluster, hovering around 5.0 percent.
Turnaround Time
CASA growth has been slow, attributed in part to evolving investment habits. The remarkable expansion of the Mutual Fund (MF) industry and increased capital market activities, with nearly 140 million damat accounts, suggest a possible inverse relationship between the growth of SIP portfolios and MF AUM and the growth of bank deposits, especially in CASA. As people increasingly diversify their investments, traditional bank deposits face increased competition from alternative financial instruments.
To reverse the trend, banks need to go deeper by expanding their reach to include more individuals in the formal banking sector. Emphasizing prudent savings habits and educating clients about the financial risks associated with market-linked products is crucial. Many retail investors enter the market uninformed, risking their hard-earned savings. Raising awareness and education is crucial to ensure depositors make prudent allocations in their financial portfolios.
Banks should prioritize building strong verticals in cities and towns, addressing staff shortages in rural and semi-urban (RUSU) branches exacerbated by attrition. Despite large investments in IT systems, there is a need for a greater focus on training employees to improve their competence and equip them with innovative ideas and strategies to effectively deal with new-age challenges.
This article is written by Bikash Narayan Mishra, Senior Advisor, Indian Banking Association. All opinions expressed are personal.
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