KOCHI: With the Reserve Bank of India (RBI) cutting the repo rate by 100 basis points since February and another reduction appearing likely, Indian banks are entering a tricky phase.
Lending rates have softened sharply due to the fall in repo as retail loans are mostly linked to external benchmarks like repo, but deposit mobilisation remains stubbornly difficult. The result is a shrinking cushion for profitability – with net interest margins (NIMs) under pressure across the industry.
The one lever left to steady the ship is building a stronger low-cost Current And Savings Account deposits (CASA) base – that are becoming the new holy grail for bankers.
(Fittingly, in Malayalam, the word “casa” literally means holy grail)
Margins under pressure
Falling policy rates are compressing yields on new advances, while the cost of funds is proving sticky. Even as the RBI’s benchmark rate has fallen by a full percentage point since February, deposit rates have not followed suit as competition for savings intensifies.
Federal Bank’s NIM, for instance, stood at 3.06 per cent in Q2 FY26, up only marginally from 2.94 per cent in the previous quarter despite robust loan growth – showing how difficult it is to protect spreads.
Axis Bank’s NIM fell 15 basis points sequentially to 4.08 per cent, while HDFC Bank’s margin contracted to 3.45 per cent from 3.57 per cent, hit by higher funding costs and slower deposit accretion.
The South Indian Bank (SIB) MD & CEO, PR Seshadry, also has acknowledged that maintaining the current NIM would certainly be a challenge in an environment of softening lending rates predominantly driven by the stances of central banks including RBI.
Private banks, in particular, are finding it tough to balance growth with profitability, as their incremental cost of funds has risen more steeply than their lending yields.
Deposits: the new battleground
Raising deposits has become harder than ever. Retail savers are increasingly chasing better returns elsewhere – in mutual funds, equity SIPs, and now even gold due to the ever rising price. Mutual fund inflows touched Rs52,000 crore in August 2025, and gold imports have surged driven by the festive season, diverting liquidity away from banks.
Even large private lenders are struggling to attract long-term deposits without hiking rates. The scramble has triggered what bankers call a “rate war” – one that shrinks the net interest margin (NIM) eroding the profitability even before loan pricing can adjust.
The CASA strategy: low cost, high value
Amid these challenges, banks are doubling down on CASA growth. The logic is simple: current and savings accounts provide stable, low-cost funding that cushions margins.
Federal Bank’s CASA ratio rose to 33.9 per cent in Q2 FY26, up 80 basis points year-on-year, aided by better savings account mobilisation. ICICI Bank maintained a healthy CASA ratio of 41.5 per cent, while SBI continues to dominate with nearly 39 per cent.
Smaller private banks like RBL, CSB Bank, and DCB have also stepped up efforts to improve CASA through digital account openings, cashback-linked savings products, and NRI offerings.
A senior private bank executive explained it succinctly:
“When lending yields are falling faster than deposit costs, CASA is the only shock absorber left. Every additional rupee of CASA adds more to margins than a hundred crore of term deposits.”
Public sector advantage, private sector push
Public sector banks continue to enjoy a natural lead in CASA owing to their vast branch networks and government-linked salary accounts. But private lenders are fighting back with technology-led strategies – from instant account onboarding to bundled financial services.
Kotak Mahindra Bank, for instance, continues to maintain one of the highest CASA ratios in the industry at 48 per cent, reflecting the payoff of its long-term savings franchise. HDFC Bank has rolled out new salary and premium accounts targeted at younger consumers, while Federal Bank is deepening ties with NRIs and fintech partners to improve savings inflows.
Why CASA is the new ‘holy grail’
In a falling-rate environment, protecting NIMs will be the single biggest challenge for banks. Loan demand may remain strong, but without adequate low-cost deposits, balance sheets will strain. CASA growth provides stability and cost efficiency – both critical as banks brace for another potential rate cut by the RBI.
As one senior banker put it hypothetically: “CASA isn’t just a number now – it’s a survival tool. It’s what separates those who can ride the rate cycle from those who’ll be crushed by it.”
The bottom line
With policy rates down 100 basis points and another cut on the horizon, Indian banks are navigating a delicate balance between growth and profitability. Amid deposit wars and shifting savings behaviour, the one metric that could decide winners from survivors is CASA.
And fittingly, in more ways than one, CASA remains the banking sector’s holy grail.
