Most govt banks lose the plot on Casa

RBI gives a wake-up call via liquidity coverage ratio norms

Banks will have to maintain 60 per cent liquidity coverage ratio (LCR) from January 1, 2015 and increase it gradually to 100 per cent by 2019, the Reserve Bank of India mandated last week.

LCR is defined as the proportion of high-quality liquid assets to the total net cash outflows in the next 30 calendar days. The move is aimed at making the banking sector more prepared for any liquidity disruptions in the short run.

Understandably, banks with lower exposure to high-cost bulk deposits and higher share of current and savings account deposits will find it easier to meet the norms. Lenders having excess government bonds over and above the mandated 22.5 per cent will also be at an advantage, as they can borrow from the daily liquidity adjustment facility (LAF) in lieu of securities and meet their obligations. However, with the Reserve Bank of India’s (RBI) decision to cap LAF borrowings, to discourage banks to go for overnight borrowings, will limit lenders’ ability to access funds from this window.

Hence, the key variable of the LCR norms is the share of low-cost current account and savings account (Casa) deposits. Here, the scenario is not very encouraging. According to data compiled by rating agency Icra, the proportion of Casa to total deposits for the banking system has fallen in the past financial year. Casa deposits constituted 30.5 per cent of the total deposits for public sector banks in 2013-14, compared to 32 per cent in the previous year. If these banks have to maintain the prescribed liquidity ratio, lower Casa deposits will limit their credit expansion. Till the end of March 2013, credit growth of banks outpaced deposit growth. With the LCR norms in place, banks cannot afford such a scenario.

The data further shows that at least 14 public sector banks’ share of low-cost deposit is less than 30 per cent. Among government banks, State Bank of India has the highest proportion (42 per cent), followed by Punjab National Bank (38 per cent).Going ahead, deposit accretion for banks could be a challenge as buoyant equity markets, coupled with a benign interest rate regime will make bank deposits unattractive. Following the savings account deposit interest rate deregulation in October 2011, only a handful of smaller private sector banks offered a higher rate at six-seven per cent, while all other banks decided to keep rates at four per cent.

RBI’s December 2013 quantitative impact study to assess banks’ preparedness for the Basel-III liquidity ratios revealed their average LCR varied between 54 per cent and 507 per cent, suggesting they are already broadly compliant with the January 1, 2015 minimum LCR requirement. It is to be seen if some, particularly public-sector ones which hitherto resisted a hike in savings bank rates, will finally bite the bullet.