Traditionally, current and savings bank deposits or CASA is considered to be low-cost deposits in Indian banks. So these deposits—in absolute as well as percentage terms—continue to receive overriding emphasis in policy for the sake of operational efficiency. But recent liquidity concerns in the face of loan growth outpacing deposit growth have added another dimension to the ‘Chase CASA’ strategy. Regulators and the government also have rightly pressed for higher augmentation of overall deposits, specifically the CASA component.
Here we try to present a kind of antithesis on whether CASA truly represents lowest-cost deposits or there is more to it than commonly perceived. True, a current account offers zero interest to depositors while savings deposits offer somewhere in the range of 2.7 to 3.2 percent, at least in public sector banks. In terms of the mathematics of interest outgo, CASA apparently represents lowest-cost deposits, since fixed deposits or FDs offer much higher rates of interest on various tenors and special schemes.
But deposit cost may not be all about interest outgo alone. While terming CASA as the lowest cost option, one missed a few links, as a result of which their cost is probably often understated. There are other associated costs as well that are probably not explicitly factored in. As a result, the impact of operating cost of CASA is often found missing. To add a substantive dimension over and above the normative one, it is essential to illustrate a few important cost drivers in CASA economics.
Transaction cost
One can probably attach the metaphor of ‘fill it, shut it and forget it’—an old advertising tagline—with fixed deposits, as a large portion of such deposits hardly involve recurring transactions except in events such as frequent shifting through pre-closure or granting loans on them. As such, with the exception of some stationary and machine cost, there are no major costs for banks involved in FDs other than the interest cost.
In contrast, CASA deposits involve a multitude of transactions day in and day out in terms of withdrawal, remittance, statements of accounts, mandates, linkage to gateways and so on. All these transactions entail significant costs that are not accounted for while banks calculate CASA cost. If added, the actual outgo on CASA could be much higher. In Reserve Bank parlance, intermediation cost is calculated by deflating operating expenses with assets, and this cost ranges between 1.5 to 2 percent. Empirical studies probably could throw up a much bigger number.
Opportunity cost of frills
Large segments of CASA clients, especially in the HNI and corporate segments, are offered frills like free remittance facilities, full/partial waiver of service charges and discount on interest rates on loans like women clients, education loans, doctor loans, etc. These frills entail certain sacrifice and opportunity loss, which need to be factored into CASA costs. Only then can the real cost of CASA be arrived at. The idea here is not to dissuade CASA, but to have a realistic evaluation of its cost.
Client relationship cost
Conventionally, customer complaints are largely confined to those having operative accounts. Resolving and addressing such complaints also involve a cost in terms of manpower deployment, portal management, legal expenses and likely punitive aspects, along with moral hazards and reputational costs. Hence, this calls for an indicative cost component in the overall costing matrix.
The ABC method
Going by the above, it is probably time CASA’s true cost is evaluated in a more realistic manner to dispel some historical notions. First and foremost, this calls for a quick revisit of the activity-based costing or ABC principle and appropriate pricing of liabilities and assets. ABC is a lesser known concept and pricing these days seems to be more a function of industry trend and peer bank offerings.
Second, disintermediation forces can be dealt with by a new approach from banks, regulators and the government. It merits a quick revisit of the taxation aspects under interest income, among others, for retail depositors and pensioners. Pension accounts are said to be accounting for more than 50 percent of overall CASA.
Tax on tax seems to have hit hard segments in the middle income and salaried class. Tenets of the Laffer curve—which depicts the relationship between tax rates and revenues—can be best leveraged through broad-based tax compliance by rationalising the rates on depositors’ hard-earned money.
Lastly, in order to align credit and deposit growth, public sector banks deserve a better deal, especially in mopping up government deposits. It is well known that PSBs have played a pioneering role in various flagship programmes of the government, including game-changing schemes such as SVAnidhi, Vishwakarma, Pradhan Mantri Awas Yojana and so on. It’s time an index is designed to rank the lead banks in such programmes and allot them central and state government funds as deposits according to their ranks.
While striving hard to pace up overall deposits, banks would also need to take on board a demystified CASA concept and go for appropriate policy reorientation.
(Views are personal)
Atanu K Das | Director, Institute of Insurance and Risk Management, Hyderabad