CASA Ratio: Meaning, Formula and Banking Importance Explained

Key takeaways: meaning, examples and importance

• The full form of CASA is Current Account and Savings Account. It is an important aspect of business and personal banking. 
   
• CASA accounts in banking provide the benefits of liquidity and easy access to funds. 
   
• CASA ratio is determined by the CASA accounts. It is an important method of estimating financial stability and efficiency. 

Bonus tip: 

Do you know? The CASA ratio of Indusind Bank reduced to 30.3% from 34.9%. This indicates a pressure on low cost deposit mobilisation. 

 CASA or current Account and Savings Account is a banking concept that provides you needs of both business and personal banking. These accounts are important to manage your everyday transactions and long term savings. 

Imagine yourself as a restaurant owner and you need vegetables everyday. In a week, 3-4 days you get free vegetables from your own farm and on rest 2-4 days you get high cost vegetables. 

But if you get vegetables from your farm daily, your cost will be lower and profits higher. 

Similarly , CASA ratio means current account and savings account which means low cost money like farm vegetables. In simple words, if a bank has a Current Account and Savings Account, its CASA ratio is also higher. This means more profit. 

For example, Karnataka Bank has following deposits: 

CASA = ₹200 crore + ₹300 crore divided by ₹1000 crore x 100 =50%

This means that 50% of the bank’s deposits come from Current Account and Savings Account (CASA). 

What do you mean by CASA in banking? 

CASA stands for Current Account and Savings Account. The current and savings account acts like a backbone of a bank and the low cost funds. Bank customers deposit their money either in the savings account or in the current account. 

For banks, CASA deposits are attractive because they have low or no interest rates. This further reduces the bank cost of funds as compared to the term deposits. In relation to this, it is important to understand the term CASA ratio. 

What is CASA Ratio? 

The CASA ratio estimates the proportion of deposits that are held by a bank in current and savings accounts. 

Below is the formula used to know the CASA ratio: 

CASA Ratio = current deposits + savings deposit / total deposits x 100

For example 1, The SBI Bank has ₹1,00,000 crore in deposits. Out of this total amount, ₹40,000 crores is in the current and savings account. By using the CASA formula, CASA ratio is calculated which is 40%.

A high CASA ratio means that the bank has access to cheaper funds and there will be more profits.

Example 2, the HDFC bank has ₹1,00,000 crore in deposits. Out of this total amount, ₹70,000 crores is in the current and savings account. By using the CASA formula, the CASA ratio of the HDFC bank is calculated. 

CASA =  ₹70,000 crores / ₹1,00,000 crores x 100 = 70%

The CASA ratio of the HDFC bank is 70%. 

Example 3,  the ICICI Bank has following deposits: 

CASA =₹300 crore + ₹400 crore divided by ₹1300 crore x 100= 53%

The CASA ratio of ICICI bank is 53%. 

What is the importance of CASA Ratio? 

Refer the below table to know the importance of CASA ratio: 

Therefore, CASA ratio plays an important role in banking. 

For example, The CASA ratio of Federal Bank is aimed to rise to 36-38%. It will shift towards segments of medium yield like SME, LAP, gold loans to increase the net interest margin. 

Conclusion: 

Overall, it is important to understand the CASA ratio in the banking sector.  The current and savings account acts like a backbone of a bank and the low cost funds. CASA ratio is determined by the CASA accounts. It is an important method of estimating financial stability and efficiency. CASA deposits are attractive because they have low or no interest rates.

FAQS: 

What is the formula of CASA ratio? 

The formula of CASA ratio is “CASA Ratio = current deposits + savings deposit / total deposits x 100”.

Should I have a high yield savings account? 

Yes, you should have a high yield savings account to have emergency money or savings for the short term. 

Why use a current account instead of a savings account? 

Current account is used for frequent and daily business transactions. It also offers unlimited deposits and withdrawals. 

Why do banks prefer a high CASA ratio? 

A higher CASA ratio increases a bank’s net interest margin.

What is the significance of the CASA ratio for banks? 

CASA deposits are attractive because they have low or no interest rates. This further reduces the bank cost of funds as compared to the term deposits. A higher CASA ratio increases a bank’s net interest margin.