De-jargoned: CASA

CASA is the amount of deposits in the current and savings accounts that a bank holds.

What is it?

CASA is the amount of deposits in the current and savings accounts that a bank holds. While that number in itself doesn’t say much, its proportion to the total deposits that a bank holds is an important financial metric for any bank. This proportion of CASA to the total deposit amount (including fixed deposits) of a particular bank is known as the bank’s CASA ratio.

There is no regulatory requirement for maintaining a CASA ratio. For you, the choice of depositing money in a savings or current account versus a fixed deposit (FD) is one of personal need for liquidity but for the bank it’s more about managing cost and profitability; higher the CASA ratio lower the costs of a bank.

Before getting into why it is so important, lets understand the two accounts that constitute CASA.

What is a savings account?

Most of you would be familiar with a savings account. It’s a normal operating account where you can park your salary and manage your daily expenses. The number of withdrawals are limited whether you withdraw from an automated teller machine or from a bank branch. For instance, if you are an ICICI Bank Ltd customer and have withdrawn four times in a month, each subsequent withdrawal after that will attract 90.

Savings account are best used for funds required in the near term for payments such as equated monthly instalment and bills.

What is a current account?

Current accounts are primarily meant for companies, public enterprises and entrepreneurs who need to transact frequently on a daily basis. These are not for retail investors since they do not pay any interest. Usually banks insist on a higher minimum balance to be maintained in a current account compared with a savings account. For instance, State Bank of India’s current account’s minimum balance requirement is 500-1,000 compared with no minimum balance requirement for its savings account. Similarly, ING Vysya Bank Ltd’s minimum balance requirement for its current accounts ranges from 10,000 to 1 lakh, while for its savings accounts, the range is between zero and 5,000.

Why is casa ratio important for banks?

From the bank’s point of view, CASA deposits are low maintenance in terms of interest paid as compared with FDs. A one-year FD offers an interest of 9-9.5%, while a savings account will earn only 4% for the year (in most cases). So for the bank, if it wants to manage its profit margin, one of the ways is to expand CASA and lower the overall cost of deposits.

Here’ s another example of CASA management: in 2011, savings rate was made flexible, but only banks that have relatively low CASA deposits raised the rate. This is because raising the savings rate on a low deposit base will not increase costs much. Ultimately banks use money received in deposits to lend forward and hence, low-cost deposits enable them to be more competitive.