Kotak’s next big challenge: retaining savvy customers

Bombay : Kotak Mahindra Bank has the highest current and savings account (CASA) ratio – or low-cost funds – among Indian banks at 56.2%. Still, Uday Kotak, the managing director and chief executive, is concerned, considering that growth in the savings account has declined steadily over the past seven quarters, after cutting the interest rate from 6% to 3, 5% in several installments. Kotak Mahindra Bank reported a 0.8% decline in savings account deposits at the end of the September quarter at 1.22 trillion compared to 1.23 trillion a year ago. Kotak, on the earnings call, attributed the decline to higher interest rates offered by other products.

“And, as interest rates have tightened, we have seen some bleeding, particularly in the passbook savings account, mainly due to our wealthy and affluent clientele, many of whom have moved their money from the deposit rate savings into cash and fixed income instruments that offer higher short-term rates.We believe this drain was inevitable due to the nature of wealthy clients who have now begun to earn much higher short-term yields “, did he declare.

“But SA granular growth up to 1 million continues to be quite good,” he added.

From 31% year-on-year growth at the end of March 2020, Kotak Mahindra saw the growth of its savings account deposits drop to 12% at the end of March 2021 and 6% at the end of March 2022. Current accounts and savings as a share of total deposits, which was 61% a year ago, fell to 56.2% at the end of September 2022.

Granted, most banks have seen a slowdown in savings account growth over the past year after stock markets started to do well and bulk retail customers withdrew their money from banks to better yields. HDFC Bank, ICICI Bank and Axis Bank maintained savings deposit growth over the past fiscal year, although growth fell in the first two quarters of this fiscal year. Kotak saw a steeper decline in its savings account growth, as many of its customers who had parked money at a higher savings rate moved when the bank lowered the rate sharply.

While some of these customers have moved to higher yielding instruments such as mutual funds, others have moved their money to other banks offering higher savings rates. Banks such as AU Small Finance Bank and IDFC First offered better rates on their savings deposits during this period.

That said, Kotak was one of three banks to introduce a higher interest rate of 6% on savings deposits in 2011. This helped the bank boost its Casa book to 28% in late December 2011. 61% in FY21.

With its loan portfolio growing 25% year-on-year and the bank looking to increase its share of unsecured loans from 8.5% in mid-teens, Kotak Mahindra Bank needs to raise more deposits to fund this growth. Although it has slightly raised rates on savings deposits by 25 basis points to 3.75% this year, the bank is looking for other ways to raise stable deposits.

“We have placed more emphasis on salaried customers. This is where growth has been better and silver has been stable. We will focus on the employee segment. We introduced products to encourage customers to make more transactions. This will accelerate the growth of savings deposits,” said Virat Diwanji, Head of Retail Banking, Kotak Mahindra Bank. “Bulk money is gone. There is not much left to do,” he added.

However, analysts are not convinced – they think deposit growth will be a concern for the bank in the coming quarters.

“The bank is seeing a substantial slowdown in the accumulation of savings bank deposits, primarily due to rate rationalization over the past four quarters. 3.5% qoq in the savings deposit rate, which coincided with a 3.6% qoq increase in term deposits. ‘attractiveness of fixed-term deposits after the sharp upward revision in the fixed-term deposit offer rate, which makes them much more attractive to rate-sensitive clients,’ said Asutosh Mishra, head of research. Ashika Stock Brokerage.

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