Banking Awareness: CASA

In continuation to our Banking Awareness series, today we are providing you a brief about CASA.

Casa Ratio: Casa is
basically the current and savings account deposits. The CASA ratio shows how
much deposit a bank has in the form of current and saving account deposits in
the total deposit. 

If the CASA
ratio is higher than it means that a higher portion of the deposits have come
from current and savings deposit.

This means
that the bank is getting money at low cost, since no interest is paid on the
current accounts and the interest paid on savings account is usually low.

Current and
Saving Accounts are demand deposits and therefore pay lower interest rates
compared to term deposits where the rates are higher.

In India,
interest rates paid on current and savings account deposits is administered by
banking regulator – the Reserve Bank of India.
Why are
banks keen on gained a higher share of CASA?

Interest rate
paid on Casa is much lower compared to other deposits like term deposits or
recurring deposits. While banks do not pay any interest on current account,
interest paid on savings account deposit is 4%.

Banks
therefore make maximum effort to increase the share of Casa on their books to
reduce their overall cost of deposits. HDFC Bank has the highest share of Casa
to total deposits at 52%, followed by the State Bank of India at 48% and ICICI
Bank at 45%.
What does
Casa mean for customers?

Recently
interest paid on savings account deposits is 4%. Banks pay interest on savings
deposits on a daily basis rather than paying on the minimum balance maintained
by them in six months.
As a result,
savings account customers earn better returns compared to what they earned a
year ago.

Further,
interest earned on savings account deposits does not attract TDS (tax deduction
at source). Interest income above 10,000 a year attracts TDS of 10% in case of
term deposits. However, there is no major benefit for current account deposits,
which is mainly maintained by corporates and traders.


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.