Financial institutions encourage the use of CASA because the interest paid on it is lower than that paid on a term deposit.
CASA ratio means the amount of a bank’s total deposits that are in both current and savings accounts
Some Indian banks are dealing with low CASA (current account savings account) ratio these days, leading to concern among investors. Federal Bank saw its shares fall over 3 percent on April 5, despite a strong loan growth trajectory, due to its multi-quarter low CASA ratio. As concerns mount over CASA ratios of Indian banks, take a look at what the term means and how it affects a bank’s probability.
What Is CASA Ratio?
A CASA account is one way banks use to entice customers. Combining the features of both savings account and checking account to fulfil a user’s everyday banking needs. CASA account is a non-term deposit with lower interest rate than term deposits. It offers an above-average return on the account’s savings portion. The account is mostly popular in West and Southeast Asia.
CASA ratio means the amount of a bank’s total deposits that are in both current and savings accounts.
CASA ratios are an indicator of a bank’s profitability and its ability to raise money. A higher ratio mean that a larger amount of the bank’s deposits are in savings and current accounts, which can enable it to get money at a lower cost.
A decline in CASA ratio means that a bank has to turn to other, more expensive alternatives to raise money.
According to a report by Business Insider, since FY14 the share of CASA in overall deposits was the highest in FY22 at 12.7 per cent. It has seen a sharp decline of 106 basis points since then, as per data from the Reserve Bank of India. CASA deposits of banks have hit a seven-year low of 11.7 percent as part of the overall deposits.
Effect on CASA Ratio on Bank’s Profitability
Financial institutions encourage the use of CASA because the interest paid on it is lower than that paid on a term deposit. The net interest income (NII), which is the difference between the interest a bank earns from its lending activities and the amount it pays to depositors, will be higher in CASA accounts.
The accounts let depositors trade off higher rate of interest for higher liquidity, giving them immediate access to their funds.
The Reserve Bank of India has frequently hiked interest rates in the past year. This has made fixed deposits an attractive option for many investors. This has caused the ratio of CASA deposits to fall, causing shares of bank to fall despite their strong performance.
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