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You are here: Home / Finance / Understanding Bank’s Current Account-Savings Account (CASA) ratio

Understanding Bank’s Current Account-Savings Account (CASA) ratio

Last modified on October 9, 2024 by CA Bigyan Kumar Mishra

The Current Account-Savings Account (CASA) ratio is a key financial metric used in the banking industry to assess the proportion of a bank’s deposits that are held in current accounts and savings accounts compared to its total deposits.

The CASA ratio is a crucial indicator of a bank’s funding structure and efficiency. Regular monitoring of this ratio helps banks manage their funding costs and liquidity effectively.

Current Accounts are typically non-interest-bearing accounts that allow for frequent transactions. They are primarily used by businesses and individuals for day-to-day banking needs.

Savings Accounts usually offer low interest on deposits and are used for saving money over time. They have some transaction limitations compared to current accounts.

Total Deposits is the sum of all deposits held by the bank, which includes current accounts, savings accounts, fixed deposits, and other types of deposits.

The CASA ratio is calculated using the formula:

CASA Ratio = (CASA Deposits / Total Deposits) *100

CASA Deposits = Current Account Deposits + Savings Account Deposits

Example: How CASA Ratio is calculated?

Current Account Deposits: Rs 200 Crore

Savings Account Deposits: Rs 300 Crore

Total Deposits: 1000 Crore

CASA Deposits = Current Account Deposits + Savings Account Deposits = 200+300 = 500 Crore

CASA Ratio = (CASA Deposits / Total Deposits) 100 = (500/1000)*100 = 50%

In our example, a CASA ratio of 50% means that 50% of the bank’s total deposits are in current and savings accounts, indicating a healthy balance of low-cost funding.

What Current Account-Savings Account (CASA) ratio Indicates?

The CASA (Current Account-Savings Account) ratio is a key financial metric that indicates the proportion of a bank’s deposits held in current and savings accounts relative to its total deposits.

A higher CASA ratio suggests that a greater portion of a bank’s deposits is in low-cost accounts (current and savings), which typically offer lower interest rates compared to term deposits. This can enhance the bank’s profitability by reducing overall funding costs.

A healthy ratio indicates a stable and easily accessible deposit base, which is crucial for meeting withdrawal demands and regulatory liquidity requirements.

Banks with a higher CASA ratio may have a competitive edge in attracting customers and reducing reliance on high-cost funding sources.

Banks aim for a high CASA ratio to enhance margins. A balanced CASA ratio can mitigate risks associated with fluctuating deposit bases.

A high CASA ratio can imply a strong customer base and trust in the bank.

What are the factors influencing CASA Ratio?

Economic conditions and competition can affect deposit mobilization and consumer behavior, impacting CASA ratios. Banks are required to adhere to specific liquidity and capital adequacy regulations, which can influence their desired CASA ratio.

Banks focused on retail banking may aim for higher CASA ratios, while those with a broader funding strategy might have lower targets.

In India, private banks have a higher CASA ratio compared to PSU banks. 

Private banks have a higher CASA ratio as they have a strong retail banking presence, offer a wide range of products and digital banking services, vast customer base and extensive branch network.

CASA ratios can fluctuate based on market conditions and bank strategies, so it’s always a good idea to check the latest financial reports or news articles for the most current figures. 

Additionally, the ratios may vary by quarter, so it’s helpful to look at trends over time rather than a single data point.

Frequently Asked Questions (FAQs)

Current Account vs. Savings Account: What is the difference?

Current Account is designed for day-to-day transactions. Ideal for businesses and individuals who need to manage regular payments and withdrawals. These accounts do not earn interest. Based on minimum balance and other criteria, these accounts offer unlimited transactions without any restrictions, and come with an overdraft facility. Current account is primarily used by businesses, freelancers, and individuals with frequent banking needs.

A Savings Account is intended for saving money and earning interest. It’s suitable for individuals looking to set aside funds for future use. Interest will vary based on the bank and the account balance. 

A Savings account usually does not offer overdraft options and has restrictions on the number of transactions.

How Does the CASA Ratio Benefit Banks?

CASA accounts typically have lower or no interest rates compared to other deposit types, allowing banks to reduce their overall cost of funds.

With low-cost deposits, banks can lend to borrowers at higher interest rates, leading to a favorable interest spread and increased profitability.

Current and Savings Account provide a stable source of funding for banks. 

Customers tend to maintain these accounts for long periods, contributing to a steady deposit base.

Maintaining a healthy CASA ratio helps banks meet regulatory liquidity requirements, ensuring they have enough liquid assets to cover short-term obligations.

Due to low cost of funds many banks offer current and savings accounts with low or no maintenance fees, especially if a minimum balance is maintained, making them cost-effective.

What is the best CASA ratio?

The “best” CASA (Current Account-Savings Account) ratio can vary depending on several factors, including the type of bank, its operational strategy, market conditions, and regulatory requirements. 

A CASA ratio of 40% to 60% is often considered healthy for most banks.

This range indicates a good balance between low-cost deposits (current and savings accounts) and total deposits.

Ratios above 60% may be viewed favorably, suggesting that the bank has a strong base of low-cost funding, which can enhance profitability.

Ratios below 40% might raise concerns, as they may indicate reliance on higher-cost deposits or wholesale funding sources, potentially affecting profitability.

Why is CASA ratio important?

CASA ratio is important for several reasons, both for banks and consumers. 

Here’s a breakdown of its significance:

  • Lower interest rates compared to other deposit types, allowing banks to reduce their overall cost of funds, this enhances profitability.
  • Provide a stable source of funding as customers often keep their deposits for longer periods.
  • Increased Profit Margins.
  • A healthy CASA ratio helps banks meet liquidity requirements imposed by regulators, ensuring they have sufficient liquid assets to cover short-term obligations.
  • Consumers can earn interest on their savings while maintaining the flexibility to make transactions without restrictions.

What happens if the CASA ratio is high?

A high CASA (Current Account-Savings Account) ratio generally indicates that a bank has a strong proportion of low-cost deposits.

With more deposits in current and savings accounts, which typically offer lower or no interest, the bank benefits from reduced overall funding costs. This can enhance profitability.

A higher CASA ratio allows banks to lend at higher interest rates while paying lower interest on deposits, leading to a better interest spread and increased profit margins.

A high CASA ratio indicates a stable source of funds, improving the bank’s liquidity position. This stability helps the bank manage withdrawal demands and unexpected cash flow needs effectively.

Is a low CASA ratio good?

A low CASA ratio suggests that a significant portion of the bank’s deposits is held in higher-cost accounts (like term deposits), leading to increased interest expenses. This can reduce overall profitability.

With higher costs associated with term deposits, the interest spread (the difference between the interest earned on loans and the interest paid on deposits) may narrow, leading to lower profit margins.

A low CASA ratio is generally not good for a bank, as it can lead to higher costs, reduced profitability, and increased risk. 

How to improve CASA ratio?

Improving the CASA (Current Account-Savings Account) ratio is crucial for banks to enhance their funding cost efficiency and overall profitability.

Here are several strategies that banks can adopt to boost their CASA ratio:

  • Offer tailored services and products that meet the specific needs of different customer segments to build loyalty and encourage deposits.
  • Offer competitive interest rates on savings accounts to attract new customers and encourage existing customers to maintain higher balances.
  • Provide promotional benefits such as fee waivers or bonuses for maintaining minimum balances in current accounts.
  • Invest in user-friendly mobile and online banking platforms to make it easier for customers to manage their accounts and access services.
  • Utilize targeted digital marketing campaigns to reach potential customers and promote current and saving accounts.
  • Implement loyalty programs that reward customers for maintaining higher balances in their current and saving accounts.
  • Encourage relationship managers to maintain regular contact with customers, addressing their needs and promoting current and saving accounts.

Categories: Finance

About the Author

CA. Bigyan Kumar Mishra is a fellow member of the Institute of Chartered Accountants of India.He writes about personal finance, income tax, goods and services tax (GST), stock market, company law and other topics on finance. Follow him on facebook or instagram or twitter.

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