The CASA courtship

When Samir Sethi moved to a new job in Bengaluru in March, he had to take whichever workstation  was readily available. But when it came to opening a corporate salary account, Sethi was spoiled for choice — his organisation asked him to choose between Axis Bank, HDFC, Citibank, State Bank of India and Yes Bank. Sethi opted for Yes Bank, the smallest and newest of the bunch, just for one reason: it offered a higher rate of interest on savings accounts compared with the others.

In Mumbai, one of the first decisions Priyadarshika and Samit Srivastava took as a married couple was to open a joint savings account to manage home expenses. After much deliberation, they zeroed in on Kotak Mahindra, IndusInd and Yes Bank. “We plan to maintain a balance of Rs.1-2 lakh in the account for all expenses such as rent, groceries, entertainment and for emergencies,” explains Priyadarshika. “These banks offer the same interest rate on savings accounts that bigger banks are offering for term deposits of 45 to 60 days.” The Srivastavas add that their final choice will depend on which of the three banks is most easily approachable from their house and opens an account in the fastest and most convenient way.

The Reserve Bank of India deregulated interest rates on savings accounts in October 2011. Since then, small private banks have been quick to take advantage of the opportunity to reach out to low-cost savings account customers. Until the RBI order, all banks offered a uniform 4% rate on these basic accounts. Under the new rule, while interest on all savings account deposits under Rs.1 lakh has to be the same, banks can offer differential rates for deposits over that amount.

Within hours of the circular being issued on October 25, Yes Bank hiked its interest rate to 6%. Other private banks such as Kotak, IndusInd, Karnataka and Ratnakar followed suit shortly after (See: Cashing in). However, bigger banks have stuck to the rate prevailing  before the deregulation. 

So why are the new banks raising their rates? In the simplest sense, they want more customers like the Srivastavas and Sethis to bank with them and they don’t mind paying a little extra for the privilege. Indeed, they hope this ‘privilege’ will give them a way to shore up their profits eventually.

According to the RBI, savings deposits accounted for nearly Rs.14 lakh crore or 25% of the entire Rs.56 lakh crore deposits with commercial Indian banks as of FY11. About Rs.11.76 lakh crore, or 84%, of this lies with public sector banks and new private sector banks such as ICICI and HDFC Bank. An erosion of even 3% in favour of newer banks from such accounts means a transfer of Rs.35,000 crore.

“We plan to concentrate on increasing our share of the accounts that move from bigger banks based on our service and interest rate difference,” says Rana Kapoor, MD and CEO of Yes Bank. Going rural is a costly affair and most of the smaller banks already have high urban penetration, so their growth has to come mainly by wooing away existing customers from bigger banks. 

For their part, large banks are in a sweet spot — at least, for the time being. Current accounts and savings accounts (Casa) as a percentage of total deposits are a healthy 40%-plus in older private banks such as ICICI and HDFC Bank and above 46% and 36.2% in government-owned State Bank of India and Punjab National Bank, respectively.

In comparison, Casa at IndusInd is 27.3%, while that of Yes Bank is just 15% (See: Catching up). For new banks, the rates deregulation has been a shot in the arm: in May, South Africa-based FirstRand kicked off its India operations by announcing 7.25% interest on savings accounts with a Rs.1 lakh minimum balance. “The attractive rate will enable us to acquire new customers. We are focusing on professionals with annual income levels of  Rs. 7.7 lakh upwards,” says Bobby Madhav, CEO, commercial and retail banking division, FirstRand Bank India. 

Why Casa is king

You don’t need to look far for reasons why Casa is so important to banks. This is low-cost (current accounts usually pay no interest at all) sticky money that brings down banks’ total cost of funds. It directly impacts a bank’s profit by increasing its net interest margin (NIM), the spread between the rate at which a bank collects funds from the market and the rate at which it lends to customers. 

For banks such as ICICI, HDFC Bank, SBI, Axis and Bank of Baroda, which have maintained the interest rate at 4%, savings account deposits are among the lowest-cost funds; but even at higher rates, these deposits are still among the cheapest funds available. Romesh Sobti, MD and CEO of IndusInd Bank, points out that even at 6%, the savings deposit rate is 3.5 percentage points cheaper than other 90-day instruments in the market (short-term money banks borrow from the market for lending to others). He says, “One can expect new private banks to continue offering these rates till the time the high differences between savings and fixed deposits remain.”

Indeed, Kapoor believes Yes Bank has been able to protect its NIM at 2.8% despite the higher rates for savings accounts. “In FY12, the cost of funds increased for the entire banking system as the RBI, too, increased bank rates. With the new deposit rates, we were able to increase Casa by 4.5% on a y-o-y basis and this, in fact, helped us offset some of the higher fund-raising cost,” he adds. Not surprisingly, Yes Bank doesn’t plan to cut rates any time soon — certainly not before 2013, when the RBI may take steps to ease liquidity and rates may head down from the elevated levels prevailing now. 

ICICI Bank is a classic case in point. The bank has been working actively since the 2008 crisis on increasing its Casa ratio. In its FY10 investor presentation, ICICI Bank noted that it will “increase the proportion of low-cost Casa deposits (and) reduce the proportion of wholesale deposits” as a strategy to position its balance sheet better. From 22% in FY07, ICICI’s Casa ratio rose to 42% in FY10 and stood at around 44% in FY12. That has helped the bank maintain an NIM of 2.3-2.7% during this period. Despite rising interest rates and a worsening economic scenario. 

Wooing customers

Merely hiking rates wasn’t enough, though. Banks also needed to ensure that the word got out and that customers saw it as a compelling proposition. By early December, Kotak Mahindra had launched a high-decibel print and outdoor campaign and followed it up with a TV and radio ad blitz. The communication, with actor Vinay Pathak, centered on how the bank’s 6% rate wasn’t just 2 percentage points more than other banks, but was “50% zyaada”. The result: savings account deposits grew by 24% in Q3FY12 to Rs.4,426 crore and 14% in Q4FY12 to Rs.5,024 crore. “We saw a one-and-a-half time increase in our rate of account opening after deregulation,” says KVS Manian, Kotak Bank president of consumer banking. He adds that while it’s early days yet, Kotak customers tend to consolidate their accounts above the Rs.1 lakh slab for which the bank offers a 6% interest rate. 

On its part, Yes Bank furiously pursued salary accounts offering higher interest rates. Rajat Monga, CFO and president for financial markets, points out that Yes Bank has added 30,000-40,000 new customers a month since November 2011 compared with 4,000-5,000 earlier. “Most of these are through salary accounts,” he adds. Not surprisingly, there’s been a whopping 206% rise in savings account deposits between FY11 and FY12 to nearly Rs.2,500 crore and most of this has been in the second half of FY12. “The bank witnessed strong uptick in Casa balance post deregulation of savings rate. Casa balance grew 2%, from 12% in Q3FY12 to 15% in the current quarter [Q4FY12],” says Sumit Jatia an analyst with Aditya Birla Money in a report. 

Other banks were more muted in their communication but they, too, saw a jump in new account openings after raising rates. IndusInd’s savings account deposits grew 21% to Rs.3,977 crore in Q3FY12 and by 18% to Rs.4,964 crore in Q4FY12. In comparison, bigger banks such as HDFC and ICICI saw their accounts growing by only 3.5-5%. According to brokerage firm Motilal Oswal, post deregulation, savings account deposits as a percentage of overall deposits at IndusInd Bank increased from 9% in H1FY12 to 11% in H2FY12. “Since November 2011, post deregulation, we have been able to add 50,000 customers per month, just double of what we used to do before it,” says Sumant Kathpalia, head, consumer banking, IndusInd Bank. At Kolhapur-based Ratnakar Bank, Nitin Chopra, head of consumer and retail banking, says there’s been an increase in queries from retired, semi-urban and rural customers since the bank announced a rate hike in November. Being an unlisted entity, the bank doesn’t share details on number of accounts, deposits and other such figures.

The cost of Casa

Of course, there’s a cost involved in hiking Casa. With Rs.14 lakh crore parked in saving accounts across the country, every 0.5% increase in interest rates means an additional cost of Rs.7,000 crore for banks. That’s one reason bigger banks aren’t part of the rate-hike race. Since they are already in the high Casa bracket, hiking the rate will mean a much larger outgo compared with smaller banks. “For bigger banks such as SBI, ICICI and HDFC Bank, savings account deposits already make up nearly 20% of their total deposits,” points at Krishnan AV, analyst with Ambit Capital.

“A 1% increase in interest rate could mean a 22 basis points rise in the cost of funds.” For banks such as Axis Bank and Yes Bank, the cost of funds in FY12 stood at 6.45%  and 9%, respectively. For others like Allahabad Bank, the cost of funds for FY12 stood at 6.98% for the year but had increased to 7.23% in the fourth quarter. IndusInd, too, reported a marginal increase in the cost of funds in Q4FY12 to 7.27% from 7.24% in the previous quarter.

The average balance is also an issue. With a low 3% interest rate, banks need an average balance of Rs.7,500-10,000 in savings accounts to manage technology and human resources costs associated with the account. At 6% and higher, this figure goes up to as much as Rs.12,500, which may be that much more difficult to achieve. Crisil Ratings head Suman Chowdhury expects a 5 basis points drop in the return on assets of new banks that have announced rate hikes.

There’s already been some effect on incomes. IndusInd’s NIM dropped to 3.25% from 3.61% in December as the cost of funds increased. Manian of Kotak concedes that a 10-12 basis points increase in cost of funds is more than likely and points out that Kotak plans to save by increasing operational efficiencies. But that may not be enough to make up for the increase on the expenditure front. 

Seeking new opportunities

What can banks do to minimise the impact of increased costs? Hiking transaction fees may backfire since savings account customers are notoriously price-sensitive, and it may dissuade potential customers. Instead, both Kapoor and Sobti are banking on the opportunity to cross-sell products to savings account holders. Indeed, for Sobti, the opportunity to cross-sell products to a new customer is worth despite the higher interest cost.

“A savings account is the quickest way of forming a relationship with a new customer,” he says. “Typically, they are long-term relationships and we have a greater chance of achieving better revenues from the same account by selling more products to the customer.” 

That’s a trick bigger banks have already mastered pretty effectively. PricewaterhouseCooper’s associate director Robin Roy points out that almost all bigger banks have a product-to-account ratio of 2-2.5 or more. “If you have a demat account linked to your savings account, a credit card, a payment for home loan and purchase mutual funds through it, or pay your electricity bills, the bank already has a 5:1 ratio for you,” he explains, adding that ICICI and HDFC Bank have  aggressively pursued these kind of relationships.

What will work to the advantage of banks is the in-built stickiness of savings accounts — customers don’t like changing banks nor do they like the hassle of too much paperwork. So using more products from the same bank may seem the convenient option. “We can use this relationship to sell retail products, insurance, mutual funds and so on,” says Kapoor. “Fixed deposits, in contrast, are a one-time transaction.”

Big changes afoot

So far, the large, established suitors don’t seem worried by newer banks’ determined courtship of savings account holders. SBI chairman Pratip Chaudhuri points out that the banks which are offering higher rates are those with small networks, so they need to resort to pricing tools. “For savings deposit customers, factors like convenience, service and offers are equally, if not more, important,” he says. Heads of other nationalised banks agree. Indian Bank chairman SMD TM Bhasin says, “We haven’t seen any migration from our savings accounts, so we are not considering raising rates anytime soon.”

But signs of trouble are already visible for the biggies. A recent report by Espirito Santo Investment Bank says that the smaller private banks are seeing much higher savings account momentum than bigger private and state-owned banks. It adds that PSU banks are already seeing a deterioration in their savings bank deposit accruals, while large private sector banks have begun to see early weaknesses.

It further expects smaller private banks to gain market share at the cost of PSU banks in the initial phase. According to the report, Yes Bank, IndusInd and Kotak Bank together increased their market share of savings account deposits to 4% in Q4FY12 compared with 1% in Q1. The top five PSU banks’ market share of savings accounts decreased to 25% in Q4 from 27% in Q1, although large private banks such as ICICI, HDFC Bank and Axis managed to retain their 28% share.

Market experts point out that it is natural for customers to veer towards higher interest rates. “Long-term structural change has started and will certainly reflect in three to four years,” says Ambit Krishnan. “It could be even earlier if a bigger bank decides to disrupt the market and hike its rates earlier.” Customer stickiness has so far prevented large-scale migration from lower interest to higher interest accounts. “That’s also because the consumer is still not informed enough,” says PWC’s Roy, adding, “Generation Y consumers are beginning to show a much greater understanding, so a change is in the making.”

As newer banks expand their branch networks, work on their technology and customer offerings, their higher rates could become a worry for bigger banks. As Yes Bank’s Kapoor puts it, we are witnessing the end of lazy banking.