Private banks in India have seen a decline in the share of low-cost deposits in the first quarter of this year, according to updates provided by individual banks. This trend was observed across both large and smaller lenders, including HDFC Bank, IndusInd Bank, IDFC First Bank, Federal Bank, and Yes Bank. IDFC First Bank and Bandhan Bank experienced the sharpest sequential drop in their current and savings account (Casa) ratio, with a decline of 330 basis points (bps) in the first quarter. At IDFC First Bank, 46.5% of deposits were in Casa, while at Bandhan Bank, it stood at 36%. HDFC Bank, the largest private lender in India, saw its Casa ratio drop by 190 bps to 42.5%.
The decline in low-cost deposits can be attributed to stagnation in savings account rates while fixed deposit rates increase. As a result, customers are choosing to park their funds in term deposits, which offer higher interest rates. The higher the percentage of Casa in a bank’s deposit base, the more cost-effective it is for the bank. Therefore, a lower Casa ratio can increase the cost of deposits for lenders.
Despite the decrease in low-cost deposits, the overall deposit growth in the June quarter remains strong. Data from seven private banks compiled by Mint reveals that aggregate deposits of all banks, except one, have increased by more than 10% on a year-on-year (y-o-y) basis in the June quarter. However, RBL Bank’s deposit growth of 8% in Q1 was slower than that of the others.
On the credit front, five out of seven banks reported a loan growth of over 15% y-o-y in the first quarter of FY24. IDFC First Bank demonstrated the highest growth at 24.5%, followed by Federal Bank at 20.9% and RBL Bank at 20%. HDFC Bank, with a significantly larger base, experienced a loan growth of 15.8% in the three months through June.
The drop in the Casa ratio can be attributed to banks aggressively looking to raise deposits at a higher cost to fund increased loan growth. The transition of the balance sheet following the HDFC merger has also resulted in higher demand for deposits from HDFC Bank, which has put pressure on other banks to raise deposits aggressively as well.
Analysts suggest that deposit growth has been supported by the Reserve Bank of India’s decision to withdraw ₹2,000 banknotes from circulation. This move has encouraged customers to deposit their cash, with 87% of the withdrawn notes going into deposits.
However, the increase in the cost of deposits may lead to a moderation in margins for several banks. While some banks may report stable margins in Q1 FY24, overall, the rise in deposit costs is expected to impact profitability.
In conclusion, private banks in India have seen a decline in the share of low-cost deposits in the first quarter of this year. This can be attributed to various factors such as stagnation in savings account rates and the need for banks to aggressively raise deposits to fund increased loan growth. Despite this decline, overall deposit growth remains strong, and most banks have reported significant loan growth in the same period. However, the increase in deposit costs may impact margins and profitability for several banks.
