India’s banks face decline in CASA ratios impacting net interest margins

India’s top 14 private and public sector lenders have seen their CASA (current accounts-savings accounts) ratios drop 150 basis points over the past one year. The immediate impact of this is visible on the net interest margins (NIM) at these lenders — down 18 basis points (bps) year-on-year in the June quarter, 14 bps sequentially, and 43 bps over the past two years. One basis point is a hundredth of a percentage point.

Between Q1FY22 and Q1FY26, HDFC Bank, the country’s largest lender by market value, and IndusInd Bank each saw an 11-percentage point drop in CASA ratios, highlighting the growing reliance on costlier sources of funding.

Kotak Mahindra Bank reported the sharpest decline, with its CASA ratio falling by more than 19 percentage points during the same period.

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“A bank is judged by the quality and granularity of its deposit franchise,” said Suresh Ganapathy, head of financial services research at Macquarie Capital. “In the past four years, (Kotak Mahindra Bank’s) CASA and term deposits below `5 crore, considered to be granular deposits, are down from 90% to 78%, a sharp 12% decline.”

The bank has, therefore, relied on “high-value bulk deposits,” he said. Greater reliance on high-cost term and bulk deposits has put pressure on core profitability which is gauged by NIMs. Some large lenders, however, have managed to cushion this impact. HDFC Bank and ICICI Bank cut savings account interest rates during the June quarter, helping to slow the margin erosion.

Shift to alternative instruments
A 25 bps reduction in savings rates is estimated to improve NIMs by 5-8 bps.

“This decline (in CASA ratios) was primarily driven by a shift toward higher-yielding term deposits, along with increased deployment of funds into alternative instruments,” said Sanjay Agarwal, senior director, CareEdge Ratings.

“The fall in CASA ratio was also fuelled by deposit repricing and strong inflows into term deposits, while retail CASA inflows remained tepid. Banks’ access to low-cost funding weakened, despite ample liquidity in the system and raising CASA deposits continues to be challenging.”

The fall has been more pronounced over the four-year period, reversing gains made during the pandemic, when CASA ratios surged on the back of heavy deposit inflows. Access to low-cost funds is a key factor in helping enhance core profitability at lenders collectively struggling now to boost credit offtake amid a decline in policy rates.

To be sure, banks expect CASA ratios to improve once term deposit rates begin to ease.

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