What is CASA in Banking?

CASA

Each industry is unique in its functioning, structure, and organizational abilities. Banks are intermediaries between people with surplus and deficit.

Banks do not directly manufacture anything, but it indirectly supports all the economic activities, supports entrepreneurial spirit and drives the economic growth of the country.

 As a bank is a financial institution judging banks’ profitability requires a different matrix. Three prime ratios to analyze bank stock include: Net Interest Margin, Return on Assets, Return on Equity and few other ratios include CASA ratio, Loan-to-Assets ratio, Provision for Credit losses and efficiency ratios are few important ratios used to analyze the profitability and solvency of banks.

Related; 21 Financial Ratios Every Investor should know

This article tries to decompose one of the important ratios of the bank which is the CASA ratio.

What is CASA?

Banks support an entrepreneur by financing, helps households in maintaining savings, promote the growth of the business, contribute to the development of the Nation by funding infrastructure projects, facilitates retired by serving their needs, etc.

Every individual and institutional need is fulfilled by banks by maintaining various types of accounts, which serve’ their unique demands and needs.

Related; Types of Bank Accounts

To understand the CASA ratio knowing the nature and features of the CASA Account is imperative. CASA is the acronym for the Current Account and Savings Account of a bank.

Now the question that comes to mind is what are Current Account and Savings Account, how are they different? How CASA ratio is significant to banks?

The answer is available in the next part of the article, let’s explore more about it.

Point of difference

Savings account

Current account

Meaning

As the name suggests, this account is maintained by  individuals to pool their small savings

Whereas current account is maintained by businesses having frequent transactions

Purpose

Individuals or households open this account to park their short-term savings like for school fees, vacations, festivals, acquisition of short-term assets, etc involving withdrawals shortly

This account is required by businesses for their continuous or frequent business transactions according to their business needs. This account may be opened by an entrepreneur, or a business, or by a trust, etc.

Interest

Very low interest of 2.5% to 4% is paid to the depositors

No interest is paid on the deposits in the current account. 

Frequency of transactions

The frequency of transactions is very less in savings accounts. 

It is a high-frequency transaction account


Overdraft

Overdraft facility is not provided for savings banks account

Overdraft is the facility offered by banks to current account holders, to overdraw their account, when their Current account balance reaches zero. Interest is charged on the overdrawn amount. It is harnessed by businesses to meet their working capital needs

Minimum balance

A Lesser Minimum balance is required to be maintained by an account holder to operate this account

  A higher minimum balance is required to be maintained to operate this account

 

CASA Account

If you are a frequent visitor to the bank, you would have noticed in the bank displays “Know your CASA”. This CASA is an Acronym of the Current Account Savings Account (CASA).

CASA deposit is the amount of money that gets deposited in the current and savings accounts of bank customers. These are demand deposits of the bank. Money deposited in these accounts has to be repaid to customers when demanded.

In the case of a CASA account, there is low or no interest on the current account and an above-average return on the savings portion, depending upon the terms and conditions of the bank. In India, interest rates are monitored and administered by the banking regulator RBI I,e. Reserve Bank of India

This account is used for daily transactions as long as the customer is willing to use it. This account may be free or with minimal charges, which varies from banks to banks. The minimum balance to keep the account active also depends on banks. It also provides higher access to liquidity.

Banks usually offer 3% to 4% interest on CASA account, which is much lesser than the interest paid on term deposits I.e., Certificate of Deposits, which varies from 5% to 7%. It implies that if you deposit ₹100 in Savings Account, you will receive ₹3 as interest.

These are cheaper sources of funds for banks for their lending operations. As this account involves frequent transactions, banks should not utilize funds in this account for long-term lending operations.

Banks or Financial institutions always encourage the use of a CASA as it can generate a higher profit margin. It is a cheaper source of funds because the interest paid on the CASA deposit is lower than on a term deposit, the bank’s Net Interest Margin (NII) (The net interest margin is the difference between total interest income and expenditure and is shown as a percentage of average earning assets) is higher. The deposits of CASA can be utilized to provide Personal loans, Vehicle loans, etc.

Differences between CASA and RAFA

Banks offer two types of deposits: Demand deposits and Term deposits. The CASA is a non-term deposit against RAFA. RAFA is a Recurring deposit account and Fixed deposit account. It is a term deposit account.

This account will have a fixed maturity period or expiration date.  After the completion of the fixed maturity period, the bank repays the principal along with the interest earned for the said period.

But CASA unlike RAFA account does not have a specific maturity or expiration date, so it is valid for as long as the account holder needs it to remain open. Banks are required to honor their demands when requested by the account holders. Therefore, it is a demand deposit account.

What does the CASA ratio mean to the banks?

It is the ratio of deposits in current and savings accounts to total deposits of the bank.

 If the CASA ratio is higher then it indicates that a higher portion of the funds has come from low-cost current and savings deposits.

CASA Ratio = (Current Account + Savings Account)/ Total deposits

As of 30th September 2020 out of the top ten private banks in India,  Kotak Mahindra Bank had the highest CASA ratio of 57.1%, followed by  J and K Bank with a CASA ratio of 53.3%  and IDBI was in third place with a 48.3% CASA ratio.

It means that out of ₹100 deposits in Kotak Mahindra bank ₹57.1 was from the Current account and Savings account, similarly in the case of J and K bank ₹53.3 out of ₹100 was from CASA account.

It denotes how much deposits of the total deposits in the bank are from the Current Account and Savings Account.

As mentioned earlier, it is a cheaper source of funding. If the CASA ratios are higher it indicates that the Net Interest Margin (the difference between total interest income and expenditure and is shown as a percentage of average earning assets) or the operating efficiency of the bank is good.

Related; What is NPA (Non-Performing Assets) and Bad Banks

CASA ratio is used by financial analysts to analyze the financial health of banks. It depicts the ability of banks to generate low-cost funds. A higher CASA ratio means better Net Interest Margin (NIM) and higher operating efficiency. It is used as one of the metrics to assess the profitability of the banks.

 

The downside of CASA deposits

The downside of the CASA deposits to the bank is that, as is it involves frequent transactions or withdrawals and the cash moves out of the bank’s book anytime and may lead to an asset-liability mismatch. This does not support lending for long-term infrastructure projects. Banks cannot rely on CASA deposits to fund bigger-ticket projects.

From the Customer’s perspective, interest earned on CASA deposits is lower than RAFA deposits and other investments. It may reduce his interest income. 

Closing Thoughts

Low-cost sources, higher CASA deposits indicate higher profitability and credibility of banks and, better financial position to sustain in the long run. Therefore, the CASA ratio is one of the prime ratios to be considered while investing in banking stocks.

Ramya N & Chaitra Karanth
Ramya N & Chaitra Karanth both are Assistant Professor at NMKRV College For Women. Ramya N has 7 years of experience in teaching. Chaitra Karanth is skilled in Microsoft Word, Public Speaking, Teamwork, and Microsoft Excel. Strong accounting professional with a Master of Finance and Accounting (M.F.A.) focused in Accounting and Finance.