Priority Sector Deposits, A Case for More Low-Cost CASA Deposits

Priority Sector Deposits, A Case for More Low-Cost CASA Deposits

Why in News

Recently, a private bank in India faced a massive backlash on social media after it reduced its average minimum balance requirement in metro cities from ₹50,000 to ₹15,000. This change was also extended to other customer categories. The announcement reignited debate on the absence of policy guidance in determining minimum balance thresholds. While the Reserve Bank of India (RBI) maintains that these thresholds are beyond its regulatory purview, the issue has highlighted the urgent need for policy directions that strengthen the country’s deposit structure.

This controversy has also thrown light on the erosion of low-cost Current Account–Savings Account (CASA) deposits, which are fundamental to stable banking. With an increasing tilt of banks toward high-income depositors and neglect of middle- and lower-income segments, experts believe India’s deposit structure is becoming unbalanced, creating systemic risks.

Introduction

CASA deposits form the backbone of India’s banking system. They are low-cost deposits that provide banks with the much-needed liquidity to lend and operate profitably. However, a trend has emerged where banks increasingly focus on the “creamy layer” of CASA depositors—wealthier customers who maintain high balances and contribute significantly to total CASA deposits.

This focus has resulted in what is being termed as Cognitive CASA Bias—a strategic shift by banks toward the top 20% of depositors who contribute nearly 80% of CASA balances. While this benefits banks in the short term, it neglects a vast portion of the population, particularly low-income and middle-income households. Maintaining even a ₹10,000 balance is difficult for most Indians, yet banking structures increasingly demand higher balances.

The upcoming Unified Lending Interface (ULI) and wider coverage under social security schemes (covering 63% of the population under the International Labour Organization framework) offer opportunities to integrate low-income households into the financial system. However, without addressing the CASA imbalance, India risks creating a two-tier banking system—one serving the elite with favorable terms and another where the majority face exclusion or bear higher costs.

Key Issues and Background

1. Erosion of Low-Cost CASA Deposits

   • CASA deposits have historically provided banks with stable, low-cost funding.

   • With rising competition from fixed deposits, mutual funds, and equities, many depositors are moving their savings out of CASA accounts.

   • Banks, in turn, are focusing on wealthier depositors with premium CASA products, leading to neglect of ordinary savers.

2. Cognitive CASA Bias

   • Banks disproportionately rely on high-value CASA customers.

   • Top 20% of depositors provide nearly 80% of CASA balances.

   • This leaves the lower 80% of depositors underserved, despite their potential to contribute to financial inclusion.

3. Policy Gaps

   • No clear regulatory framework prevents banks from arbitrarily raising minimum balance thresholds.

   • Cash Reserve Ratio (CRR) and Statutory Liquidity Ratio (SLR) requirements are uniformly applied, regardless of deposit structure.

   • This creates an uneven playing field: banks with concentrated low-cost CASA enjoy wider margins, while others serving the broader population remain disadvantaged.

4. Systemic Risks

   • Banks with large low-cost deposits may over-deploy funds, leading to excessive lending or concentrated exposures.

   • If these loans turn bad, the entire banking system could face stress.

   • Meanwhile, banks catering to low-margin customers face liquidity constraints, limiting their ability to expand credit.

Specific Impacts

1. Exclusion of Middle and Lower CASA Tiers

   • Ordinary Indians find it difficult to maintain even a ₹10,000 balance.

   • Neglecting them excludes a large section from affordable banking services.

   • This exclusion also burdens banks that must fund services for these groups without adequate deposits.

2. Unequal Banking Growth

   • Premium CASA offerings and rising balance requirements tilt the system toward higher-income customers.

   • This inequality undermines the objective of financial inclusion.

3. Macroeconomic Risks

   • A skewed deposit base may lead to credit concentration, increasing systemic vulnerability.

   • Disadvantaged banks face pressure, which may affect credit availability for small businesses and low-income households.

4. Erosion of Trust

   • For common savers, rising charges and balance requirements create distrust in the formal banking system.

   • This could push people toward informal financial networks, undermining national financial stability.

Challenges and the Way Forward

1. Addressing Policy Gaps

   • The RBI must introduce a framework for Priority Sector Deposits (PSD), similar to priority sector lending.

   • Deposits from lower CASA tiers should be treated as vital for inclusion.

   • For example, savings accounts under ₹10,000 and current accounts under ₹20,000 could qualify as PSD.

2. Detailed CASA Segmentation

   • Banks should be mandated to report CASA deposits in granular bands:

     • Below ₹1,000

     • ₹1,000–₹5,000

     • ₹5,000–₹10,000

     • ₹10,000–₹1 lakh

   • This data will help track inclusivity in banking.

3. Incentive-Linked PSD Recognition

   • Rather than imposing rigid targets, the RBI could offer incentives to banks for growing deposits in lower CASA bands.

   • This would encourage organic growth instead of forced compliance.

4. Graduated CRR/SLR Incentives

   • Small deposits could be rewarded with lower reserve requirements. For example:

     • 2% CRR cut for balances under ₹1,000

     • 1.5% cut for ₹1,000–₹5,000

     • 1% cut for ₹5,000–₹10,000

   • Such measures would make it financially attractive for banks to serve lower-income customers.

5. Integration with NDTL Reporting

   • Priority sector deposits should be tracked through existing fortnightly submissions of Net Demand and Time Liabilities (NDTL).

   • This would provide oversight without adding reporting burdens.

6. Public Awareness and Trust-Building

   • Banks must also work on financial literacy programs.

   • Encouraging low-income households to save regularly—even small amounts—will strengthen financial inclusion.

Conclusion

India’s banking sector is at a crossroads. While CASA deposits remain the bedrock of stable funding, their structure has shifted toward high-income depositors, leaving behind the majority of Indians. This imbalance creates both social inequity and systemic financial risks.

Introducing Priority Sector Deposits (PSD), incentivizing banks to nurture low-balance accounts, and revisiting CRR/SLR requirements can help correct this bias. The focus should shift from rewarding only the top-tier depositors to building a broad-based, inclusive deposit structure.

With 63% of the population already covered by social security schemes and upcoming digital lending frameworks, India has an opportunity to integrate millions into the formal financial system. But without proactive policies, the divide between the elite depositors and the masses will only widen.

The need of the hour is balanced banking growth—one that ensures profitability for banks but also inclusivity for society. Strengthening low-cost CASA deposits at all levels is not just a financial necessity, but a step toward sustainable and equitable economic development.

5 Questions and Answers

Q1. What is the main issue with the current CASA deposit structure in India?
A1. The main issue is the Cognitive CASA Bias, where banks focus disproportionately on high-income depositors who contribute 80% of CASA balances, neglecting middle- and lower-income households.

Q2. Why is the erosion of low-cost CASA deposits a problem?
A2. It undermines stable bank funding, excludes ordinary depositors from affordable banking, and increases systemic risks by concentrating credit among a few large borrowers.

Q3. What policy solution has been suggested to counter this bias?
A3. Introducing Priority Sector Deposits (PSD), where deposits under certain thresholds (e.g., savings under ₹10,000, current accounts under ₹20,000) are given special recognition and incentives.

Q4. How can incentives encourage banks to serve lower CASA tiers?
A4. Incentives like graduated CRR/SLR cuts would make it financially beneficial for banks to attract small deposits, reducing their reliance on high-value customers.

Q5. How does this issue connect to India’s broader economic growth?
A5. Strengthening low-cost CASA deposits across all income levels will integrate more households into the financial system, driving both consumption and production, which are essential for sustainable economic growth.