What is CASA Ratio
Total deposits in relation to current and savings accounts in a bank are known as the CASA ratio.
The percentage of deposits (monetary value) in current and savings accounts to the bank’s total deposits is known as the CASA (Current Account and Savings Account) Ratio. Banks do not pay interest on deposits made into current accounts, and savings account interest is often just between 3-4%.
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Calculating CASA Ratio
CASA Ratio = CASA Deposit / Total Deposit
CASA Deposits = Deposits in Saving AC + Deposits in Current Account
For example, consider ABC bank has Rs. 50 Crores in saving accounts, Rs. 75 Crores in current and total deposits as Rs. 225 Crores.
Then,
CASA Deposits = Deposits in Saving AC + Deposits in Current Account = 50 Cr + 75 Cr = 125 Crores.
Then,
CASA Ratio = CASA Deposits / Total Deposits = 125 / 225 = 0.55.
This ratio of 0.55 indicates that 55% of the money in the banks is utilized for transactions and 45% are long-term deposits for banks to lend money.
Significance of CASA Ratio
A higher ratio indicates a lower cost of funds since a greater proportion of a bank’s total deposits are in current and savings accounts.
Therefore, the cost of handling the funds will be cheaper the bigger the deposits are in both of these accounts.
Banks give interest on savings deposits between 3 and 4%, which is significantly less than their lending rate and lowers the cost. For instance, whereas most banks charge over 10% for loans, they only charge 3-4% for savings deposits.
In order to encourage consumers to keep their money in the bank, Current Account Savings Accounts (CASA) combine the benefits of current and savings accounts.
It offers an above-average return on the savings section while paying extremely little or no interest on the current account.
Importance of CASA Ratio
Before understanding the importance of the CASA ratio, we need to understand how banks make money and what type of people participate in banking activities.
There are 3 major types of people involved in the activities of banking:
Retail Participants: These constitute people who use a saving account for daily baking transactions. People in this category have their money saved up in a savings account.
Corporate Bodies: This category constitutes the organization and institutes that deal in large transactions. They majorly have their money held in current accounts.
Long-Term Stakeholders: In this category, firms/individuals park their money in fixed deposits/banking bonds and other investment tools.
The money that is parked in the banks for the long term is then utilized by the banks in providing loans. This money is utilized in the form of loans/credit benefits the bank from charging higher interest from its borrower.
Here are 3 Major Importance of CASA Ratio
Interest Margin
The more money parked in long-term investments, the more money the bank has to provide loans. Thus, the higher the CASA ratio, the more money will be present in the banks for transactions and lesser to lend in the form of loans. This is an indication that the bank is bound to make fewer gains in the long term.
Involvement of Corporate/Retail Entities
The higher the CASA ratio, the higher the active money of corporate and retailers parked in the bank. This indicates that the bank is majorly in daily transactions and less in the lending business.
In terms of More Revenue for the Banks
The lower the CASA ratio, the higher the long-term deposits in the bank. These deposits can be further used in lending. Since there is more money for lending, the higher returns the banks can generate in the form of interest.
Conclusion
A CASA Ratio combines the advantages of a checking account and a savings account, and it is a sign of a competitive market where banks must introduce innovative products to attract clients.
A CASA Ration is less expensive for the financial institution to obtain funds from than term deposits, like certificates of deposit.