CASA, as per banking terms, simply stands for Current Account and Savings Account. If this is the first time you’ve come across this term, then fret not! Here’s everything you need to know about CASA and its importance in the banking sector.
What is the CASA Ratio?
The CASA ratio refers to the ratio of Current Account and Savings Account deposits, as against the total deposits of a bank, including bonds and Fixed Deposits. It’s an indicator of a bank’s financial health and reflects the bank’s capacity to raise money with lower borrowing costs.
But, before we proceed any further, let’s learn a little more about the two accounts that constitute CASA.
What is a Savings Account?
A Savings Account is an operating account where you can park your idle cash and manage your day-to-day expenses. Banks usually put a limit on the number of withdrawals you can make from your Savings Account each month. They may charge a small fee if you are unable to maintain a certain average monthly balance in the account.
For example, the country’s largest lender, State Bank of India, has the Monthly Average Balance (MAB) requirement of Rs. 5,000 for branches in metro cities.
You can open a Savings Account with any public or private sector bank, Indian post office or co-operative bank. Banks usually offer a low-interest rate of 3.5% – 6% on a Savings Account.
You can compare Savings Account interest rates of major Indian banks here.
Additional Reading: Savings Account Rates Are Falling. What Can You Do?
What is a Current Account?
A Current Account, on the other hand, is primarily meant for companies, entrepreneurs, firms, and enterprises who usually transact money on a daily basis. It offers the flexibility to deposit and withdraw funds at any time without giving any prior notice to the bank.
Unlike a Savings Account, no interest is earned on the balance maintained in a Current Account. However, banks provide unlimited withdrawals along with an overdraft facility and payment on standing instructions. A Current Account holder needs to maintain a minimum balance that varies from bank to bank.
Additional Reading: The Difference Between A Current Account And Savings Account
Importance of the CASA ratio
Banks primarily offer two types of accounts: term deposits like Fixed Deposits and Recurring Deposits, and non-term deposits like Current Accounts and Savings Accounts. A term deposit helps you earn a good amount of interest, while non-term deposits are used for daily banking operations.
CASA deposits are low maintenance in terms of interest paid as compared with Fixed and Recurring Deposits. For instance, a one-year Fixed Deposit offers an interest rate of 8% – 8.5%, while a Savings Account, in most cases, will earn only 3.5% in a year.
That’s when the CASA ratio comes into play and acts as a cheaper source of funds for banks. A higher CASA ratio signifies better net interest margin and better operating efficiency of the bank. Therefore, the higher the CASA ratio, the better the bank’s ability to raise money with lower costs.
Since banks generally offer low-interest rates on Savings Accounts and don’t pay any interest on Current Account deposits, they always reach out to retail customers to increase their deposits in Current Accounts to lower their cost of borrowing.
The CASA ratio of a bank, thus, helps determine its profit margins and is an important indicator of the overall performance of a country’s banking sector.
Now that you have a fair idea about Current and Savings Accounts, it’s time to explore other savings options.