Hike in short-term rates could spur Casa flight

The aggressive rate hikes effected by banks for short-term retail deposits are expected to hurt their low-cost deposits, and thereby impact net interest margins (NIMs).

On Tuesday, the State Bank of India (SBI), the country’s largest lender, raised the deposit rates in short tenure term deposits by 100-225 basis points (bps) with term deposits in 91-180 days now yielding 7% per annum and deposits for less than 90 days fetching 6.25% per annum.

This follows a similar move by lenders like IDBI Bank, which had raised its deposit rates for 46-90 days tenure by 50 bps to 6.50% and for 91-180 days by 25 bps to 7.75%. Similarly, Lakshmi Vilas Bank has raised its deposit rates for 46-90 days term by 175 bps to 6% and 91-180 term deposits to 9%, one of the highest in the industry.

Experts believe this trend may lead to a decline in low-cost current and savings account deposits (Casa) ratio for the entire banking system.

“The seven-day 6.25% deposit, when rolled over continuously for a year, yields an annualised yield of 6.45%, nearly 250 bps more than what the savings deposit now offers, resulting in potential Casa erosion across the banking system. When there is such a visible arbitrage opportunity as a depositor, we find it hard to imagine why Casa balances will remain sticky,” Krishnan ASV and Pankaj Agarwal, analysts at Ambit Capital, wrote in a sector update.

Many banks have already seen moderation in their Casa ratios over the last quarter due to higher growth in term deposits.

Among others, Bank of India, Axis Bank, Indian Bank, Canara Bank and Bank of Baroda have reported sequential decline in Casa ratio by 331 bps, 120 bps, 116 bps, 80 bps and 60 bps, respectively during the fourth quarter.

“We would see Casa ratio coming down if the term deposit rates continue to remain high for longer period of time. This is likely to impact the net interest margins further for some of the banks,” said Rajat Rajgarhia, director - research at Motilal Securities.

So far, large private banks like HDFC Bank, ICICI Bank and Kotak Mahindra Bank have not seen any impact on their Casa proportion and have shown marked improvement in low-cost deposits ratio on a sequential basis. But with the SBI move, analysts feel they too may get affected.

“Other banks will feel the need to narrow the spread between the rates they offer on such short-term maturity buckets and the rates now being offered by SBI. We expect medium-term margin pressures to accentuate as a result of this development,” said the analysts at Ambit Capital.

For all that, however, analysts do not see the hike in shorter-end deposits resulting in deposit rates going up across maturities.

“The SBI’s move seems to be driven by its need to mange liquidity in the short term, while IDBI Bank being a wholesale driven bank also requires liquidity. The drop in Casa ratio is inevitable, but it is less likely that we will see increase in deposit rates for tenures above one year,” said Vaibhav Agrawal, vice-president (research) at Angel Broking.