All about CASA ratio!

It is observed that in banking examinations, terms with special reference to Banking are regularly asked. These terms are useful for written examination as well as interview of almost every banking examination.  Aspirants are advised to read current news related banking industry on regular basis to enhance their overall general knowledge.

Here the banking team of Jagran josh is providing brief information on CASA ratio.

What is CASA Ratio?

CASA stands for Current and Savings Account. Different kinds of deposits like current account, savings account and term deposits form the major source of funds for banks. CASA ratio is the share of current and savings account deposits to the total deposits of the bank. In India, interest rates paid on current and savings account deposits is administered by banking regulator - the Reserve Bank of India.

Why 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 limited interest rate.

Hence, higher the CASA ratio means better the net interest margin, which means better operating efficiency of the bank. 

Note: Net Interest Margin (NIM) 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.

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/she 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.

What are the disadvantages of high CASA?

These deposits can move out of banks' books anytime, leading to asset-liability mismatches. While in case of term deposits, banks are almost certain that the depositor may not withdraw money before the maturity of the deposit and may also renew the deposit on maturity. Further, to finance long-term projects, banks need to have long-term liabilities on their books to avoid mismatches. Banks cannot rely on CASA deposits to fund long-term loans.