Full Form of CASA, CASA Ratio Formula

What is CASA?

The current and savings account ratio is referred to as the CASA ratio. The bank's CASA ratio measures how much of its total deposits are in current and savings accounts. Because banks typically do not pay, interest on current account deposits and savings account interest is often relatively low—between 3 and 4%—a greater CASA ratio denotes a lower cost of funding.

There are two main types of accounts that banks offer. Term deposits, such as fixed or recurring deposits, or non-term deposits, such as current or savings accounts, could be used.

A term deposit is good for a set amount of time, and in exchange, the bank will pay interest at a set rate as long as you don't use the funds during that time. For instance, the bank will pay you interest at 12% per year if you deposit Rs 10,000 in a fixed deposit for seven years.

On the other hand, current and savings accounts are used for regular transactions and are good for however long the client desires. They charge less interest than terms deposits subject to the terms and circumstances set forth by the bank. For instance, ICICI Bank offers 4.0% interest on a savings account with a chequebook in an urban location with a minimum balance of Rs 10,000.

Why is CASA Necessary? 

In comparison to providing term deposits, which provide clients with greater interest rates, CASA is a more affordable option for banks to raise capital. Financial institutions support the use of CASA because it increases profit margins.

Impact of CASA

If this money makes up a sizable portion of a bank's deposits, the bank is likely receiving them at a discounted rate. Since the interest earned on CASA deposits is smaller than earned on term deposits, it is generally accepted that a higher current account to savings account ratio results in better net interest income. 

Therefore, a greater CASA ratio translates into a higher net interest margin, which improves the bank's operational efficiency. Deposits made into current and savings accounts are less expensive ways to raise money than those made into certificates of deposit or term deposits, which generally demand higher interest rates.

Calculation of CASA Ratio Formula

CASA Ratio (%) is equal to CASA Deposits/Total Deposits.

Assume bank ABC has deposits of Rs. 50,000 crores, of which Rs. 15,000 crores are in savings accounts and Rs. 8,000 crores are in current accounts.

CASA Ratio (%) = (15000 + 8000)/50000, which is 46%.

As a result, the bank's CASA ratio is 46%, which indicates that low-cost CASA deposits account for 46% of all deposits.

Savings Versus Current Accounts

As already mentioned, no interest is earned on the CASA's current account. Deposits and withdrawals are often not subject to restrictions. The quantity of deposits that an account holder may make into the savings account section is not limited in any way. However, there are frequent limitations on how many withdrawals a person may make. This is in place to motivate account holders to save money. Each institution has a different maximum amount of withdrawals.

CASA's Negative Aspects

Because current and savings account deposits can leave the bank's books at any time, which could result in an asset-liability mismatch, term deposits are the main emphasis for banks when it comes to long-term financing of large projects. By attracting additional deposits with a greater rate of interest on deposits, banks can increase their CASA ratio. Still, they will also have to pay higher interest rates to their depositors.

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