Of CASA, NIM and Indian banks’ profitability - Columns - livemint.

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Banker’s Trust | Tamal Bandyopadhyay
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Public sector Dena Bank’s net interest margin, or NIM, for
CWG 2010
fiscal 2009 dropped to 2.45 percentage points from 2.75
Reviews percentage points in the previous year because of reduced
ADVERTISEMENT loan rates. Private sector lender ICICI Bank Ltd, on the
other hand, has been able to raise its NIM from 2.2
percentage points to 2.4 percentage points. It has done so
by raising its current and savings accounts, or CASA, from
26% of its overall deposits in 2008 to 28.7% in 2009. It
wants to raise its CASA to 33% in 2010.

NIM and CASA are an integral part of every Indian banker’s vocabulary these days
and analysts are busy dissecting these two parameters to gauge a bank’s
Mint 50 profitability. How is NIM measured and what’s the connection between NIM and
Environment CASA or, for that matter, NIM and a bank’s loan rates?

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NIM and “spread” are the two key parameters that give an indication of a bank’s
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operational efficiency. As a concept, NIM and spread are very similar, but there is a
Blogs subtle difference between the two. While NIM is arrived at by dividing a bank’s net Why Kochhar must kick off growth
Slideshows interest income by its average interest-earning assets, spread is the margin Indicators point to a policy rate hike
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interest income and interest expense as a percentage of assets. NIM can be higher
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or lower than the net interest spread.
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When a bank cuts its loan rate, its interest income declines, and if it’s not able to Allow banks to compete with MFIs
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cut its deposit rates by an identical margin, its NIM gets affected. Normally, in a
RBI not done with rate hike yet, but bias shifts
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rising interest rate scenario, banks are in a hurry to raise their loan rates, but slow
No time to pause on rate hike yet
Wall Street Journal in offering higher interest to depositors. Conversely, when the rates move
Tools southwards, banks are quick to cut their deposit rates, but they take time when it
comes to passing on the benefit to borrowers. There is a reason behind this. The
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impact of any hike or cut in loan rates is felt immediately as a bank’s entire loan
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RSS Story book is repriced, but that’s not the case with deposits as the new rates are
mint e-paper applicable only when the existing deposits mature or new deposits flow in.
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Daily Newsletter Indeed, CASA plays an important role in lowering the cost of deposits. The “CA” of
Follow us on Twitter CASA, or current account, is primarily meant for companies, public enterprises and
Follow us on Facebook entrepreneurs who have numerous banking transactions daily. Such accounts are
ADVERTISEMENT cheque-operated and a customer can deposit or withdraw any amount of money
any number of times. Banks generally insist on a higher minimum balance to be
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maintained in a current account and as it involves many transactions and the
Hindustan Times balances maintained in the account are too volatile, banks generally levy certain
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service charges for operating a CA. The money kept in such an account comes free
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Fever 104 to a bank as no interest is paid on current accounts.
More videos >>
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Movie reviews ratings A savings account, or the “SA” of CASA, is the most common operating account for
individuals and others for non-commercial transactions. Banks generally put a
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ceiling on the total number of withdrawals permitted and stipulate a certain
minimum balance to be maintained in such accounts. The savings account rate is Most Read Most E-mailed Editor's Picks
currently pegged at 3.5%, but the average cost of banks is around 2.8% as banks

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Of CASA, NIM and Indian banks’ profitability - Columns - livemint.com Page 2 of 2

pay interest only on the minimum balance kept between the 10th and the end of a
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No wonder, then, that every bank wants to increase its CASA, as a higher portion of remains in second spot Policy Terms of
CASA in the overall deposit liability brings down its cost of money. Among private Novelis may buy BP out of joint venture Use Advertising About HT
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lenders, Axis Bank Ltd has the maximum CASA, some 46%, followed by HDFC Bank Map
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Ltd, 44.4%. Among public sector banks, State Bank of India and Punjab National
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Bank have high CASA ratios, at least 40% of their total deposits. The cost of CASA gas assets
will go up from April 2010 when banks will have to pay interest on the daily balance True story here is the economic growth
in SAs, which means banks will have to pay 3.5% on savings deposits instead of miracle
the 2.8% they have been paying. The Indian banking system’s deposit liability is
Rs39 trillion, and roughly 26% of the pile is in savings accounts. This means the
banking system will have pay Rs7,000 crore extra to its savings bank account
holders. This is one-fourth of the profits of public sector banks in fiscal 2009.

HDFCBank has an NIM of 4.2%, probably the highest in the Indian banking
industry. IDBI Bank Ltd’s 1.06% NIM is the lowest. A high NIM alone cannot make
a bank profitable as a substantial portion of NIM can be eroded by operating
expenses and credit costs, including provisions for bad assets and write-offs. The
operating expenses of public sector banks, which account for about 75% of the
Indian banking industry in terms of assets, is higher than their private sector peers,
at least 2% of assets. Their wage bill accounts for three-fourths of operating
expenses. The wage bill of private banks is much lower, but their overall overhead
costs, too, are not very low. The average cost of making provisions and writing off
bad assets has been low in the past few years, less than 0.5% of total assets, but it
will go up as banks are likely to pile up stressed assets with the slowdown denting
borrowers’ ability to repay loans. So, banks need to cut their operating cost and
increase efficiency. Also, despite a dropping NIM, they can remain profitable
provided they start generating more fee income.

Tamal Bandyopadhyay keeps a close eye on all things banking from his perch as a
deputy managing editor of Mint. Please email comments to
bankerstrust@livemint.com

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Current Account Savings Account Axis Bank HDFC Bank State Bank of India
Punjab National Bank Interest

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