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Feature

MAGAZINE | JUN 23, 2012

CORPORATE

The Casa Courtship

Small private banks are wooing customers by hiking low cost savings rates. The strategy is working for now
TANEESHA KULSHRESTHA

hen 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
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Bigger banks have

a high CASA share
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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.

in total deposits
and hence enjoy
higher NIMs. Small
banks, too, want
the same

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

We will increase
our share of
accounts that move
from bigger banks
based on our
service and interest
rate difference"

. 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 dont
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

Bigger banks are

opting to keep Casa
interest rates low
as hiking them
would mean a
much higher cost
of funds

. 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
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. 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
New private sector
announcing 7.25% interest on savings accounts with a Rs 1 lakh
banks will offer
higher deposit rates
minimum balance. The attractive rate will enable us to acquire new
till the difference
customers. We are focusing on professionals with annual income levels
between fixed and
of Rs 7.7 lakh upwards, says Bobby Madhav, CEO, commercial and
savings deposits
retail banking division, FirstRand Bank India.
remain high"

Why Casa is king

You dont 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 banks 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

Theres been an
increase in queries
from semi-urban
and rural
customers since
the bank
announced the rate
hike"

Cross-selling
products to savings
account holders
may help banks
minimise the
impact of increased
costs

. 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 doesnt 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,
ICICIs 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.

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Wooing customers
Merely hiking rates wasnt 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 banks 6% rate wasnt 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 its 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, theres 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. IndusInds 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 theres 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 doesnt share
details on number of accounts, deposits and other such figures.
The cost of Casa
Of course, theres 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. Thats one reason bigger
banks arent 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 7,50010,000 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. Theres already been some effect on incomes. IndusInds 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.
Thats a trick bigger banks have already mastered pretty effectively. PricewaterhouseCoopers 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
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in-built stickiness of savings accounts customers dont 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 dont 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 havent 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 largescale migration from lower interest to higher interest accounts. Thats also because the consumer is still not
informed enough, says PWCs 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 Banks Kapoor puts it, we are witnessing the end of lazy banking.
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