Cost of Deposits
Cost of Deposits is the annualised interest expense paid by a bank as a percentage of its average deposit base, representing the funding cost side of the Net Interest Margin equation, with lower-cost Current Account and Savings Account deposits being the primary lever to keep this metric down.
Cost of Deposits measures how much a bank pays on average to mobilise the funds it subsequently lends out. It is computed by dividing total interest paid on deposits during a period by the average deposit balance, then annualising. This metric sits at the heart of bank profitability analysis: because interest income on advances minus interest cost on deposits and borrowings broadly equals net interest income, any change in deposit costs flows almost directly into the bottom line.
The deposit mix is the dominant driver of cost of deposits. Current accounts carry zero interest, while savings bank accounts pay between 2.5% and 7% depending on the bank and balance slab. Together they form the CASA (Current Account Savings Account) portfolio. A bank with a CASA ratio of 45% or above has a structural cost advantage over competitors with CASA ratios of 30%, because it funds a large share of its balance sheet with near-zero-cost or low-cost resources. Term deposits, which make up the balance of the deposit base, are priced at prevailing market rates and typically range from 5.5% to 7.5% for retail fixed deposits, with wholesale deposits (above Rs 2 crore) often priced slightly lower on a negotiated basis.
In a rising interest rate environment, cost of deposits lags the increase in benchmark rates because term deposits have contractual tenures of three months to ten years. When existing term deposits mature and get renewed at higher rates, the average cost of the deposit book rises gradually over several quarters — a phenomenon called 'repricing of liabilities'. This creates a temporary window where NIM expands as yields on advances reprice faster than deposit costs. Banks with a higher share of short-tenure fixed deposits face faster liability repricing than those with a longer-duration deposit book.
RBI periodically publishes data on the Weighted Average Domestic Term Deposit Rate and Weighted Average Lending Rate across the banking system, offering a sector-wide picture of the evolution of both yield on advances and cost of deposits. These series are closely monitored by analysts forecasting NIM trajectories.
For small finance banks and some cooperative banks that rely heavily on fixed deposits due to a nascent CASA franchise, cost of deposits can range from 7% to 9%, compressing margins even as they lend at relatively high rates to the microfinance or MSME segment. Large private sector banks with deep retail networks and strong brand loyalty typically enjoy cost of deposits below 4.5%, representing a durable competitive advantage in funding cost efficiency.