Amid slowing CASA growth, banks turn to costly solutions

Credit growth has picked up over the past few months, but banks have struggled to grow their deposit base to match it.

Growth in current account and savings account (CASA) deposits has particularly slowed, with retail investors now having a range of avenues to put their savings in, such as stocks and mutual funds. These avenues provide much better returns than traditional CASA accounts and have become more accessible over time due to digitisation and regulatory bodies’ simplification of norms. CASA deposits are low-cost for banks and are used to fund loans, the major source of revenue.

They are considered a reliable and “sticky” source of funds for banks due to low churn, as such depositors aren’t likely to shift this money to other banks easily.

Due to this mismatch in growth, the gap between credit and deposit growth has widened from 1.8 percentage points in December to 5.4 percentage points as of June 15, according to data from the RBI.

This has led to the credit-to-deposit ratio of banks — which is the percentage of a bank’s deposits deployed as loans — widening to 82.5% as of June 15 from around 75% in mid-2025. The slowdown was also noted in the Reserve Bank of India’s Financial Stability Report released last week.

Banks shifting to other funding avenues

As CASA deposits have slowed, banks have shifted to other sources of funds such as term deposits and CDs.

Term deposits refer to financial instruments where one locks in their money for a particular tenure to earn interest in return. This includes retail options such as fixed and recurring deposits. A CD is a type of term deposit used by corporates and institutions to raise money through the money markets.

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“CASA is the low-cost liability available to banks. Additionally, on a behavioural pattern perspective, CASA can support creation of longer-tenure assets. CDs, on the other hand, have historically been used to manage shorter-duration liquidity by banks,” said Rohan Mandora, associate director at Equirus Securities.

As a result, the share of CASA in the total deposit base of the banking system has fallen to around 39% from a peak of around 44% in FY22 (during the post-Covid liquidity boom). Meanwhile, the share of term deposits has inched up to all-time highs of over 61% from around 56% in FY23.

Why is it a concern

CASA deposits have always been a reliable funding source for banks due to their low cost (around 3-4% interest rate) and “stickiness”. Term deposits and CDs, on the other hand, are much higher-cost (7-8% interest rate) options that ultimately squeeze the margins of banks.

“CDs are wholesale, price-sensitive money with typical tenors of 3-12 months, whereas CASA is granular, behaviourally sticky retail money. In a tight-liquidity phase, CD rollover costs can spike quickly,” said Yuvraj Choudhary, research analyst at Anand Rathi Institutional Equities. While banks have largely managed to maintain robust financial growth and protect their net-interest margins (NIM) so far, this increased reliance on higher-cost shorter-term funds has already started to seep in.  The impact has been limited due to the low interest rate environment. This rate influences the interest rates across the entire banking system.  During a low interest rate cycle, banks are able to offer lower rates to depositors, providing some breathing space.

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“On funding costs, the pressure is visible but contained. The current rate-cut cycle works in banks’ favour. CDs and bulk term deposits reprice downward the fastest, so short-term wholesale reliance is cheapest to carry precisely now. The risk flips when the rate cycle turns,” said Choudhary.  “Incrementally, some banks have marginally increased their term deposit rates in Q1. We expect the impact of higher share of bulk deposits to flow into cost of funds during 2HFY27,” according to Mandodra.  Experts also believe the sluggish CASA growth is cyclical in nature after the post-Covid boom in liquidity due to steps by the central bank.  “We believe this is more cyclical in nature and linked to overall liquidity in the system.

With most banks showing little difference in asset quality, liability franchise quality is becoming the key competitive moat in Indian banking,” an analyst at a domestic firm said.

Thus, while banks have found shorter-term funding solutions as CASA growth has dried up, the over-reliance on such temporary fixes is a double-edged sword.

While it helps manage liquidity and fund the booming credit growth for now, a hike in interest rates by the RBI or an external crisis may hit the sector hard if CASA growth is not rejuvenated.