CASA Ratio: What is it, and Why is it Important?
April 28, 2021
What is the CASA ratio?
CASA stands for Current Account Savings account. So, a CASA ratio is the ratio of deposits in current and savings accounts to the total deposits. It is generally used to determine how much amount a bank has in the form of current account and savings account deposits. It is the cheapest and major source of funds for banks. The savings accounts portion pays more interest compared to current accounts.
Why is it Important for a Bank?
A high CASA ratio means that a large portion of the deposits in the bank belongs to the current and savings deposit, which is cheaper from the bank’s perspective. This is because most banks pay a mere 3.5% to 4% interest on the savings deposit and no interest at all on the current deposit. So, is other words, a high CASA ratio indicates a low cost of obtaining and maintaining funds.
Usually, if a bank has a high CASA ratio it means it also has a good net interest margin^, which translates to a good operation efficiency of the bank.
Banks need capital to generate more capital, and since the CASA model is affordable, more and more banks are focusing on it to increase their funds. Lately, a lot of research is being done on how to maximize CASA. Cashback schemes and discounts on e-commerce stores are some of the techniques they are using today to attract new customers, especially those with large size digital wallets.
Net Interest Margin
Net Interest Margin or NIM is the difference between total interest income and expenditure. It is typically presented as a percentage of average earning assets.
Key Important points of CASA to remember
- Current Account Savings Accounts (CASA) are a type of non-term deposit account.
- A CASA has a lower interest rate than term deposits, such as a certificate of deposit, and is thus a cheaper source of funds for the financial institution.
- A CASA combines the benefits of both a checking account and savings account, and it is indicative of a competitive market in which banks need to offer new products to win over customers.