Rising funding costs weigh on private banks

Mumbai: Private sector banks reported a strong March quarter in earnings and loans growth, but what's coming under strain is their cost of funding. As the fight for funds gets intense, the traditional strength of banks, CASA (low-cost current account savings account) deposits are slipping. Customers are moving their funds to higher-yielding fixed deposits. This is likely to squeeze the profitability of banks in quarters ahead.

"CASA ratio has two parts to it, the term deposit and the CASA part and you can see a healthy growth in our term deposits which is reflecting the overall market sentiment," said KVS Manian, whole-time director, Kotak Mahindra Bank. "In higher interest rate periods, people tend to move their money to term deposits; so some of the deterioration in CASA is arising out of that. Movement of CASA into higher interest-bearing products has happened."

For Kotak Mahindra Bank, the proportion of CASA deposits in total deposits fell to 52.8% from over 60% a year ago. Savings account deposits also declined 4% to ₹1.09 lakh crore from ₹1.14 lakh crore a year ago.

For HDFC Bank, while time deposits expanded to ₹10.47 lakh crore of the overall deposits, the proportion of CASA deposits fell to 44.4% of the total deposits as on March 2023 versus 48.2% same period last year. For ICICI Bank, average CASA ratio fell to 43.6% in the March quarter against 45.2% a year ago. Its total CASA grew by a tepid 4.4%.

"At this point in time, we are very comfortable with our deposit growth," Sandeep Batra, executive director, ICICI Bank said. "I do not think deposit growth will be a constraint to our ability to grow our assets in a risk-calibrated manner." According to RBI data, while credit offtake rose by 15.7% on year for the fortnight ended April 7, deposits witnessed a slower growth at 10.2%. Data showed that bank deposits increased by ₹17.1 lakh crore between April 2023 and 2022.

A wide gap in credit and deposit growth, lower liquidity and strong credit demand has been driving higher issuance of certificate of deposits (CD).

Banks are keeping their CD issuance elevated to meet short-term requirements amid lower liquidity and focusing on shoring up the deposits to meet robust credit demand.

According to CARE Ratings, fund mobilisation through CDs issuances was strong at ₹6.7 lakh crore during FY23, higher than ₹2.3 lakh crore in the previous year. The outstanding CDs stood at ₹3 lakh crore as of April 7, 2023, compared to ₹2 lakh crore a year ago.