Innovative Deposits: A Strategic Blueprint for Public Sector Banks to Harness Low-Cost Funds and Drive Successful Investments

Introduction:

The banking landscape in India is undergoing a paradigm shift, and one of the primary challenges faced by public sector banks is the constant struggle to enhance their Current Account and Savings Account (CASA) base. CASA plays a pivotal role in determining the cost of funds for banks, as it represents the proportion of low-cost deposits in relation to total deposits. If a substantial portion of bank deposits comes from these funds, this means that the bank will receive these funds at a relatively lower price. It is generally accepted that a higher CASA indicates an excellent net interest margin. In India, it is used as one of the measures to assess the profitability of the bank.

A higher CASA ratio indicates that a greater portion of the bank’s deposits come from current and savings accounts, which is a cost-effective source of funding. Savings bank deposits only incur an interest rate of 3.5%, whereas many banks do not pay any interest on current account deposits. Therefore, a larger CASA ratio improves the net interest margin, a measure of the bank’s improved operating efficiency. This results in higher profitability.Net interest margin is the difference between the total interest income earned on assets or advances and the interest expense paid on term deposits and demand deposits and is expressed as a percentage of the average value of income. The increase in CASA’s revenues will improve the net interest margin as fund costs are relatively cheaper. The amount of current and savings bank deposits at banks has increased since the demonetization. Money from unaccounted for and accounted for taxes, in the form of demonetized cash, was coming into the banks, and CASA deposits have increased significantly. In particular, it helped the banks’ current, and savings accounts grow in an indirect manner.

Understanding the CASA Challenge:

CASA is the lifeline for any bank, as it comprises the deposits in current and savings accounts, which typically carry lower interest rates compared to fixed deposits. Public sector banks in India often find themselves grappling with a lower CASA ratio, leading to a higher cost of funds. The CASA challenge is multifaceted and can be attributed to factors such as fierce competition, changing customer preferences, and technological disruptions in the banking sector. SCBs term account deposits rose 17.4% y-o-y in Q1FY24 vs. 8.2% in the year-ago period due to a rise in interest rates on deposits driven by elevated inflation. (This is the highest growth seen in the last 5 years) Term deposits outperformed other segments by a wide margin, impacted due to a rise in interest rates. In absolute terms, it increased by Rs.20.6 lakh crore from June 2022 and reached Rs.185.3 as of June 30, 2023. Saving account deposits witnessed a moderate growth of 4.9 % y-o-y in Q1FY24 vs 10.5% over a year ago period. In absolute terms, it increased by Rs.2.8 lakh crore in Q1FY24 over Q1FY23 and reached Rs.59.6 lakh crore as of June 30, 2023. The segment lost market share by 240 bps y-o-y in Q1FY24 and held a share of 32.2% of the total deposits as of June 30, 2023. Current and savings accounts reported lower growth compared to the previous year in the same period. PVBs deposits saw a healthy growth of 16.8% in Q1FY24 due to aggressively increasing deposits from the market to meet the credit demand. In addition, offering higher interest rates on saving accounts helped them to outperform PSBs (10.6%). Compared to Q4FY20, PVBs saw a huge outperformance due to attractive Interest rates offered specially on CASA deposits. In terms of deposits market share, PVBs accounted for a 33.6% share gaining 122 bps y-o-y in Q1FY24, whereas PSBs held a 60.6% share, losing 107 bps y-o-y. PVBs have been continuously gaining market share due to aggressive acquisition of clients and offering better services. In absolute terms, CASA rose by Rs.4.6 lakh crore in Q1FY24 reaching Rs.77.2 lakh crore as of June 30, 2023. PVBs and PSBs expanded their CASA by Rs.2.4 lakh crore and Rs.2.2 lakh crore, respectively during the quarter. SCBs CASA rose by 6.4% y-o-y primarily driven by PVBs. PVBs reported a CASA growth at 9.9% y-o-y in Q1FY24, whereas PSBs reported a slower growth at 5.0%, Current account saw a robust growth of 11.9%, however an uptick of 4.9% in savings account slowed the overall CASA uptick to 6.4%.

Focus on Innovative Deposits for Low-Cost Funds:

Finance Minister Nirmala Sitharaman has instructed state-run bank executives to concentrate on creative deposit mechanisms in order to raise lower-cost resources to meet their financing needs, since public sector banks are losing market share in current and savings accounts.What has compounded the problem for public sector banks is their decision to lower the interest rate on savings bank deposits at a time when some of the private banks have opted to offer higher rates to corner a bigger share of this business. Public sector banks have recently lost out to their private sector competitors on salary accounts belonging to major corporations. The government’s shift to “just in time” cash release has contributed to the decline in the proportion of CASA, and state-run players are attempting to offset this by pursuing current account balances of medium-sized firms. Partnerships with exchanges and other sources have aided private sector lenders like HDFC Bank in mobilizing a solid base of CASA deposits.

Strategies to tackle CASA Challenge:
Customer- Centric Approach:

Public sector banks need to adopt a more customer-centric approach to attract and retain account holders. Offering personalized services, user-friendly digital banking platforms, and value-added products can enhance the overall banking experience, encouraging customers to maintain their primary accounts with the bank.

Technological Integration:

Embracing cutting-edge technologies is essential for public sector banks to stay competitive. Implementing advanced digital banking solutions, artificial intelligence-driven customer service, and seamless online account management can attract tech-savvy customers, thereby boosting the CASA ratio.

• Develop user-friendly mobile and internet banking apps to encourage customers to manage their accounts digitally.
• Introduce features such as easy fund transfers, bill payments, and real-time account monitoring to make digital banking more attractive.

Financial Inclusion Initiatives:

Public sector banks can actively engage in financial inclusion initiatives to expand their customer base. By reaching out to unbanked or underbanked populations through mobile banking and other innovative channels, banks can tap into new demographics and increase CASA deposits.

Strategic Marketing Campaigns:

Effective marketing campaigns highlighting the benefits of CASA accounts, such as lower transaction costs, higher liquidity, and personalized services, can attract a broader audience. Creating awareness about the advantages of maintaining a CASA account with a public sector bank can contribute to deposit mobilization.

Relationship Building:

Building strong relationships with corporate clients, small and medium enterprises (SMEs), and retail customers can lead to bulk deposits in current accounts. Public sector banks should focus on understanding the unique financial needs of different customer segments and tailor their services accordingly.
(i) Create tailored packages for corporate clients with special perks, incentives, and discounted fees for maintaining higher current account balances.

(ii) Provide additional services like bulk payment facilities and payroll management to attract business clients

Cash Management Services:

(i) Offer efficient cash management services for businesses, including cash pickup and drop facilities, to streamline their cash handling processes.

(ii) Implement solutions for faster clearance of checks and other payment instruments

Cashback and Rewards Programs:

(i) Introduce cashback or rewards programs for businesses and individuals who maintain a certain minimum balance in their current accounts.

(ii) Collaborate with merchants to provide discounts or exclusive offers to account holders.

Collaboration with FinTech’s:

(i) Partner with fintech companies to integrate innovative solutions that simplify financial transactions for customers

(ii) Explore partnerships for offering digital invoicing, supply chain financing, and other value-added services to businesses

Educational Initiatives:

(i) Conduct financial literacy campaigns to educate businesses and individuals about the benefits of maintaining higher current account balances

(ii) Highlight the advantages of digital banking and showcase success stories of businesses that have benefited from efficient cash management.

Green Banking Initiatives:

(i) Introduce environmentally friendly banking initiatives that reward customers for opting for paperless statements and transactions.

(ii) Promote sustainability and corporate social responsibility, attracting environmentally conscious businesses

Blockchain for Payments:

(i)Explore blockchain technology for faster and more secure cross-border transactions, attracting businesses involved in international trade.

(ii) Implement blockchain-based solutions to reduce transaction costs and enhance the efficiency of payment processes.

 

Cross-Selling Financial Products:

(i) Cross-sell other financial products, such as insurance, mutual funds, and term deposits, to CASA account holders so that product per customer increases.

(ii) Offer bundled packages with discounts for customers who utilize multiple banking products

Participation in Government Initiatives:

(i) Leverage government initiatives promoting digital transactions and cashless economies.

(ii) Align the bank’s services with programs like Digital India and promote them to customers.

Conclusion:

The CASA challenge for Indian public sector banks necessitates a proactive and multifaceted approach. By aligning their strategies with customer expectations, leveraging technology, and fostering financial inclusion, these banks can transform the CASA challenge into an opportunity for sustainable growth. Embracing innovation, being agile in adapting to market changes, and prioritizing customer satisfaction will be key in navigating the evolving banking landscape and securing a stronger CASA position for the future.