Some news items are like icebergs; there is more to them than meets the eye. The recent short-lived controversy around ICICI Bank jacking up the minimum balance requirements for new savings accounts is one such news.
Even though the decision was subsequently reversed (someone gently leaned on them, I guess), the fact that the Bank did try to make such a move is a news in itself. The signalling was unmissable: this was not a calibrated tweak to factor in the improved economic situation and saving capacity of the target customers but a blunt statement of intent to move away from the so-called mass segment, the largest retail segment by volumes if we exclude the Jan Dhan beneficiaries.
ICICI is a well-run bank, arguably with the most grounded and non-hubristic management set-ups among banks in recent times. So, when they took the big call, it is safe to assume that they did so based on sound business considerations and after extensive internal deliberations. But why would one of the largest banks with more than 5900 branches want to shoo away the largest section of the market and put a scare on the others? That too, when the same customers collectively hold the keys to the CASA pot of gold, the objet de désir of every Bank CEO and Analyst! And at a time when the CASA pie of most banks has been shrinking? (A report in Economic Times dated 4th of August states that the CASA ratio of fourteen leading banks has shrunk by 150 bps in the last one year).
Was it a case of a rare strategic error on the part of ICICI management or is there something else hiding in plain sight? The answer may be close to the latter, I think. What if times have changed and CASA is no longer the pure bliss it used to be once? That leads us to the next question: how can a source of funds that costs a fraction of other sources suddenly lose its sheen?
Questions, questions! Here is a clue, it has something to do with the one of the smartest financial innovations of our times, UPI.
In the last few years UPI with NEFT and IMPS has made floats so fleeting that they can literally disappear before ones’ eyes. What is worse, even if the float stays, the fear that they may go away soon forces banks to keep higher liquidity reserves in their RBI account, diminishing the value of the float to that extent. Such dry-outs are more likely in accounts at the lower end of the spectrum which makes them least attractive to Banks.
This is not a stand-alone inference, there are other stories that corroborate the argument. The first one involves ICICI, again. On 1st of August ICICI started levying charges on UPI credits received by aggregators, a first for UPI payments. The other news is from HDFC Bank who had, a few days back, hiked the transaction fees for SB and Current Accounts. The increased charges apply even to segments like NRI and Payroll accounts that were once considered untouchable as far as bank charges were concerned.
There are indications that other banks may also soon follow suit. So, the writing on the wall seems to be getting clearer: In the speed-money era of UPI, transactional float alone cannot make an account viable for the bank. This is because, while transactional accounts like SB and CA have negligible or no interest costs, the cost of servicing these accounts is disproportionately high when compared to other banking services.
A large part of a Bank’s branch and core banking infra and the entire ATM infra are devoted to servicing SB and CA customers. Despite these overhead costs, CASA accounts were highly profitable because of the promise of a stable, low-cost float that can ramp up NIMs significantly. When ATMs were first introduced, there was an apprehension that it could deplete banks’ float funds since people could withdraw money 24x7. But the opposite thing happened. Since people knew they could access their money anytime, anywhere, they started leaving more money in the accounts and kept less money in their pockets and homes. The brisk pace of growth in CASA post the 1990s is at least in part attributable to the proliferation of ATMs and ‘Anywhere Banking’ Accounts.
Ironically, the next technology wave has reversed that advantage by helping the money zip-zap through the banking system at crazy speeds while the banks stand there, watching. No doubt, the money doesn’t leave the system, but no one is sure with whom the money is at any given point and how long it is going stay there. In short, the float has become too whimsical and lost some of its usefulness.
So let me call it now, the CASA era of Indian Banking is slowly drawing to an end. I think eventually current and savings accounts (except for the higher-end variants) would become something like VOICE for telecom service providers, something that is fundamental part of the service bouquet but hardly a money-spinner. Banks who have built their entire business strategy around CASA have to go back to the drawing boards and re-strategize to compete in the new era.
In a financial world dominated by SIPs and Fintechs, banks have to find new ways to build stable and sustainable deposits without chasing CASA mirage. Innovation is the key; bankers have become increasingly scared of innovations because they are worried about regulations or the lack of it. The fact is regulations can never precede innovation; innovation with constant dialogue with regulators is the only solution. The first bank to take that path may become the HDFC Bank of the new era.
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ICICI is a well-run bank, arguably with the most grounded and non-hubristic management set-ups among banks in recent times. So, when they took the big call, it is safe to assume that they did so based on sound business considerations and after extensive internal deliberations. But why would one of the largest banks with more than 5900 branches want to shoo away the largest section of the market and put a scare on the others? That too, when the same customers collectively hold the keys to the CASA pot of gold, the objet de désir of every Bank CEO and Analyst! And at a time when the CASA pie of most banks has been shrinking? (A report in Economic Times dated 4th of August states that the CASA ratio of fourteen leading banks has shrunk by 150 bps in the last one year).
Was it a case of a rare strategic error on the part of ICICI management or is there something else hiding in plain sight? The answer may be close to the latter, I think. What if times have changed and CASA is no longer the pure bliss it used to be once? That leads us to the next question: how can a source of funds that costs a fraction of other sources suddenly lose its sheen?
Questions, questions! Here is a clue, it has something to do with the one of the smartest financial innovations of our times, UPI.
In the last few years UPI with NEFT and IMPS has made floats so fleeting that they can literally disappear before ones’ eyes. What is worse, even if the float stays, the fear that they may go away soon forces banks to keep higher liquidity reserves in their RBI account, diminishing the value of the float to that extent. Such dry-outs are more likely in accounts at the lower end of the spectrum which makes them least attractive to Banks.
This is not a stand-alone inference, there are other stories that corroborate the argument. The first one involves ICICI, again. On 1st of August ICICI started levying charges on UPI credits received by aggregators, a first for UPI payments. The other news is from HDFC Bank who had, a few days back, hiked the transaction fees for SB and Current Accounts. The increased charges apply even to segments like NRI and Payroll accounts that were once considered untouchable as far as bank charges were concerned.
There are indications that other banks may also soon follow suit. So, the writing on the wall seems to be getting clearer: In the speed-money era of UPI, transactional float alone cannot make an account viable for the bank. This is because, while transactional accounts like SB and CA have negligible or no interest costs, the cost of servicing these accounts is disproportionately high when compared to other banking services.
A large part of a Bank’s branch and core banking infra and the entire ATM infra are devoted to servicing SB and CA customers. Despite these overhead costs, CASA accounts were highly profitable because of the promise of a stable, low-cost float that can ramp up NIMs significantly. When ATMs were first introduced, there was an apprehension that it could deplete banks’ float funds since people could withdraw money 24x7. But the opposite thing happened. Since people knew they could access their money anytime, anywhere, they started leaving more money in the accounts and kept less money in their pockets and homes. The brisk pace of growth in CASA post the 1990s is at least in part attributable to the proliferation of ATMs and ‘Anywhere Banking’ Accounts.
Ironically, the next technology wave has reversed that advantage by helping the money zip-zap through the banking system at crazy speeds while the banks stand there, watching. No doubt, the money doesn’t leave the system, but no one is sure with whom the money is at any given point and how long it is going stay there. In short, the float has become too whimsical and lost some of its usefulness.
So let me call it now, the CASA era of Indian Banking is slowly drawing to an end. I think eventually current and savings accounts (except for the higher-end variants) would become something like VOICE for telecom service providers, something that is fundamental part of the service bouquet but hardly a money-spinner. Banks who have built their entire business strategy around CASA have to go back to the drawing boards and re-strategize to compete in the new era.
In a financial world dominated by SIPs and Fintechs, banks have to find new ways to build stable and sustainable deposits without chasing CASA mirage. Innovation is the key; bankers have become increasingly scared of innovations because they are worried about regulations or the lack of it. The fact is regulations can never precede innovation; innovation with constant dialogue with regulators is the only solution. The first bank to take that path may become the HDFC Bank of the new era.
(Disclaimer: The opinions expressed in this column are that of the writer. The facts and opinions expressed here do not reflect the views of www.economictimes.com.)
Prakash Balakrishnan
Prakash Balakrishnan is a seasoned banker with experience across International Trade and Remittances, NRI Banking, SME Banking and Branch Banking. Presently he is heading the International FI business for a leading private sector bank.