What is CASA ratio

What is CASA ratio?
CASA stands for Current and Savings account. Different kinds of deposits - current account, savings account and term deposits - form the major source of funds for banks. The CASA ratio shows how much deposit a bank has in the form of current and saving account deposits in the total deposit.

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How is it important for banks?
A higher CASA ratio means higher portion of the deposits of the bank has come from current and savings deposit, which is generally a cheaper source of fund. Many banks don’t pay interest on the current account deposits and money lying in the savings accounts attracts a mere 3.5% interest rate.

Hence, higher the CASA ratios better the net interest margin, which means better operating efficiency of the bank. Net interest margin is difference between total interest income and expenditure and is shown as a percentage of average earning assets. Higher income from CASA will improve the net interest margin as the cost of this fund is relatively lower.

For instance, most banks lend at over 10%, whereas, the rate of interest that they pay on saving deposit is just 3.5%. However, actual realisation depends on other expenditure, too.

How is CASA different from term and demand deposits?
Current and saving accounts remain operational. Depositors don’t need to give prior notice to withdraw money, however, in case of term deposits; the money is locked in for a specific period. If a depositor wishes to withdraw the money before maturity, he may have to pay a fine. Usually, an overdraft facility is available with the current account deposit. Demand deposit gives you the facility to withdraw your money anytime.