Current, savings accounts losing charm for depositors

Savers are now putting relatively less money into current and savings accounts (CASA) of banks over the last three years, preferring to save their growing disposable incomes in term deposits, government-backed savings instruments and long-term insurance products.

In 2010-11, bank deposits accounted for 42 per cent of all household savings, a sharp drop from 53 per cent in 2008-09, data released by the Reserve Bank of India (RBI) last week in its latest annual report showed. This is limiting the ability of banks to raise low-cost resources.

At present, commercial banks offer 4 per cent interest on savings accounts after the Reserve Bank of India raised the rate by 50 basis points in May. The revision came after eight years.

On the other hand, term deposit rates are an attractive option having moved up around 250 basis points over the past six months in the one-three year maturity periods following regular interest rate hikes by the central bank. Deposits of terms between one and two years are generally drawing interest of 9 per cent or more.

With the rate gap widening, bankers have been witnessing a decline in demand deposits (like current and savings accounts), while term deposits have shown a strong growth. This shift has affected the banks' CASA ratio - the proportion of current account and savings account deposits in total deposits - during the first quarter of this fiscal.

Life insurance products and government-backed savings instruments such as national savings certificates (NSCs) and post-office savings also appear to have caught the fancy of households.