Current Account, Savings Account (CASA)

What is a 'Current Account, Savings Account (CASA)'

A current account savings account (CASA) is an attempt to combine savings and checking accounts to entice customers to keep their money in the bank by paying no or very low interest on the current account while the savings portion pays an above-average return. They are offered free or for a fee depending on minimum or average balance requirements, and are an attempt to limit the disintermediation that occurs when bank-deposit interest is lower than other available short-term investments. These deposits tend to be cheaper than the bank issuing certificates of deposit (CDs) and are also considered more dependable.

BREAKING DOWN 'Current Account, Savings Account (CASA)'

A CASA operates like a normal bank account in which funds may be utilized at any time. Because of this flexibility, a CASA has a lower interest rate than a term deposit as the bank does not have a guarantee all the funds are available to loan for a specific period of time. Demand deposits like a CASA exchange a higher rate of interest for higher liquidity and access to funds. The amount of money deposit into a CASA is an important metric to determine the profitability of a bank.

Use of a CASA is only functional under the assumption that depositors will not withdraw all funds in the very near future. Likewise, because of the uncertainty relating to when a depositor will withdraw funds, a CASA is not to be utilized by a bank for long-term financing.

How Banks Utilize a CASA

Financial institutions encourage the use of a CASA as it results in a higher profit margin for the bank. Because the interest paid on the deposits is lower when compared to a term deposit, the bank’s net interest income (NII) is greater. Thus, a CASA is a cheaper source of funding for financial institutions.

CASA Ratio

The CASA ratio indicates how much of a bank’s total deposits are in current and savings accounts. A higher ratio means a larger portion of a bank’s total deposits are in current and savings accounts. For a bank, this is favorable as the institution is getting money at low cost. Therefore, the CASA ratio is a reflection of a bank’s profitability or likelihood of generating profit as it is an indicator of the expense to raise funds.

Global Use of CASA

The use of a CASA is mostly prevalent in certain parts of Asia. The Reserve Bank of India determines the interest rates paid on a CASA in India. Approximately 48% of the funds held by the State Bank of India are deposits held in a CASA. The highest ratio - 52% of deposits being held in a CASA – is found at the HDFC Bank in India.