CASA Crunch and Credit Push: FinMin’s Dual Directive to Public Sector Banks

Image Source: The Hindu

In a decisive move to fortify India’s financial backbone, the Ministry of Finance has urged public sector banks to double down on two critical fronts: improving their Current Account Savings Account (CASA) ratios and ramping up lending to micro, small and medium enterprises (MSMEs) and the agriculture sector. This directive was issued during the first day of the two-day PSB Manthan summit held on September 12, 2025, where top officials from the Department of Financial Services met with senior executives from leading banks including SBI and Punjab National Bank.

The twin focus reflects the government’s intent to stabilize banking margins while catalyzing credit flow to sectors that are vital for employment and rural growth.

Key highlights from the summit

1. CASA under pressure
- Public sector banks have seen a steady decline in their CASA ratios over the past year
- SBI’s CASA ratio dropped to 39.36 percent in the June quarter, down from 40.70 percent last year
- Bank of Baroda reported a 64 basis point fall, landing at 39.33 percent for the same period
- Lower CASA ratios are squeezing net interest margins, prompting the ministry to call for urgent corrective measures

2. Lending boost to MSMEs and agriculture
- Banks were asked to increase credit disbursement to MSMEs, which are the second-largest employment generators after agriculture
- The agriculture and allied activities sector employs nearly 46.1 percent of India’s population, making it a priority for inclusive growth
- Institutional credit via Kisan Credit Cards (KCC) rose from Rs 4.26 lakh crore in 2014 to Rs 10.05 lakh crore by December 2024
- Overall agricultural credit flow surged from Rs 7.3 lakh crore in FY 2013–14 to Rs 25.49 lakh crore in FY 2023–24

3. Strategic implications for banks
- Improving CASA deposits will reduce banks’ cost of funds, enabling more competitive lending rates
- Enhanced MSME and agri lending aligns with government goals of job creation, rural development, and financial inclusion
- Banks were encouraged to innovate in outreach, simplify loan processes, and strengthen digital onboarding for small borrowers

4. Leadership and accountability
- The meeting was chaired by Department of Financial Services Secretary M Nagaraju
- Key attendees included SBI Chairman C S Setty and PNB CEO Ashok Chandra
- The ministry emphasized that CASA and sectoral lending performance will be closely monitored in the coming quarters

Why this matters now

The timing of this directive is crucial. With global economic headwinds and domestic inflationary pressures, India’s banking sector must maintain profitability while supporting grassroots growth. MSMEs, often starved of formal credit, are essential to manufacturing, services, and exports. Agriculture, meanwhile, remains the bedrock of rural livelihoods and food security.

By nudging banks to rebalance their deposit mix and expand credit outreach, the government is attempting to create a more resilient and inclusive financial ecosystem.

Public sector banks at a crossroads

The challenge for banks lies in execution. Attracting low-cost CASA deposits requires trust, convenience, and competitive returns. Lending to MSMEs and farmers demands risk management, local engagement, and streamlined processes. Success will depend on how well banks can adapt their models to meet these dual goals without compromising asset quality.

Looking ahead

If implemented effectively, this strategy could mark a turning point in India’s financial architecture. A healthier CASA ratio will give banks breathing room, while targeted lending can unlock economic potential in underserved sectors. The next few quarters will reveal whether public sector banks rise to the occasion—or require further nudges to stay on course.

Sources: Economic Times, Rediff Money, PTI News