In our post in the wee hours of the morning after the Yes Bank crisis, we had pointed out what this would mean for the lower runk private banks. In line with the thesis, aggravated by a few other factors, these banks have now dropped precipitously.
In today's post we look at how a bank makes money, and how the CASA(current & savings account) ratio plays an important part in that, dive into the reasons behind a falling CASA, and try to understand the implications of this for the sector and the country.
Understanding the Fundamentals
Before delving into the interpretation of a falling current and savings account ratio (CASA ratio) for a bank, let us understand the business model of a bank. Banks operate by collecting money from the public, through savings and current accounts and fixed deposits. They do not give any interest on current account deposits, the interest on saving accounts is usually 3-4% while money locked for a stipulated time in fixed deposits earns 7-8%. This money is then loaned out to companies, institutions, or individuals at higher rates. This difference in interest rate allows banks to profit from such transactions and the income that they generate is called the Net Interest Income (NII). NII, when calculated as a percentage of the average loan book of that bank is called the Net Interest Margin (NIM). Apart from NII, the other sources of income for any bank are overdraft fees, ATM charges, cheque handling fees, and other such ancillary sources of income. Since the growth trends of these sources are extremely unpredictable, the NIM is the primary metric that drives the performance of lending institutions.
Hence, any bank looking to increase its profits will try to increase its share of deposits from current and savings accounts to reduce its cost of funds. CASA ratio derives its importance from this hypothesis. A high ratio is seen as a positive indicator of a bank’s profitability.
The CASA Conundrum: Why is it falling?
According to RBI’s annual report 2019, the rate of growth in CASA deposits has come down from 25% in 2016-17 to 10% in 2018-19 while the growth in Term Deposits have picked up from 4% in 2016-17 to 10% in 2018-19. The share of CASA in major banks’ domestic deposits have slid on a year on year basis for Q2F20. Axis bank’s CASA ratio fell from 48% to 41%, ICICI’s ratio declined by 4.1% to 46.7% while HDFC slipped by 3% to 39%.
The frequent rate cuts by the RBI have led to the lowering of interest rates in savings accounts. This, along with increasing adoption of the auto-sweep features for saving accounts customers has led to an increasing number of customers moving their money from CASA deposits to term deposits. With more financial awareness, depositors with a higher risk appetite have also moved their savings into the equity market either directly or via mutual funds.
There has also been a reduction in current account balances driven by the increasing adoption of digital payments and UPI among businesses, a trend which is likely to pick up in the coming quarters. The uncertainty in the economy might also have caused lower demand consumption with people preferring to save rather than spend. All signs today point to this trend continuing.
So what does it all mean?
The Punjab & Maharashtra Cooperative Bank crisis has already shaken investor confidence. But the Yes Bank crisis might have been the last straw. A lot of WhatsApp messages in the aftermath used Marketcap to assets (a metric flawed in numerous ways, and explicitly pointed out by the RBI as a bad metric) were used to warn customers about banks.
Retail customers were not the only ones scared for their money. In spite of advice from the RBI to state governments not to withdraw deposits from private sector banks, institutional depositors and state governments have withdrawn 3% of RBL Bank’s deposits last week and 2% of IndusInd Bank’s deposits this week. Near run situations at Karur Vysya Bank and Lakshmi Vilas Bank have also led to them taking a huge beating in their market value. The street increasingly believes that the NPA number for these banks is potentially a lot larger than is reported, and seems to be pricing in a boatload of pain for these banks in the future. The added stress on the telecom space in the country, with whispers on pain in the real estate space, is only hurting their case.
Both RBL & Indus Ind have come out with public statements to quash rumours around their financial health and reassure the market of their strong capital positions, with the promoter of one hinting at increasing his stake in the company as well, but all their comments have fallen on the deaf ears of the depositors. The RBI has warned that even though the health of the banking sector is safe, pulling out funds from private sector banks may affect the stability of the financial system.
Trust is a central pillar in banking. And that seems to have been shaken. With the customer afraid of the safety of their hard-earned money, this seems like a trend destined to continue.
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About the Author: The post is writen by our EZPP Partner Abhirup Roy with relevant edits from our editorial team. Abhirup is a graduate from IIM Ahmedabad and works with Zolo Stays.