What is a Current Account Savings Account (CASA)
A current account savings account (CASA) is aimed at combining the features of savings and checking accounts to entice customers to keep their money in the bank by paying very low or no interest on the current account and an above-average return on the savings portion.
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, which are considered a more dependable source of funds for a bank, tend to be a cheaper way to raise money rather than through issuing certificates of deposit (CDs).
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 because the bank does not have a guarantee that all the funds are available to lend for a specific period of time. Demand deposits, such as a CASA, let customers exchange a higher rate of interest for higher liquidity and access to funds. The amount of money deposited 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, CASA funds are not to be utilized by a bank for long-term financing.
How Banks Utilize a CASA
Financial institutions encourage the use of a CASA because it generates a higher profit margin. Because the interest paid on the CASA deposit is lower than on a term deposit, the bank’s net interest income (NII) is higher. Thus, CASAs can be a cheaper source of funding for banks.
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 deposits are in current and savings accounts. This is beneficial to a bank because it's getting money at a lower cost. Therefore, the CASA ratio is an indicator of the expense to raise funds, and therefore, a reflection of a bank’s profitability or likelihood of generating profit.
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 in a CASA. The highest ratio is found at the HDFC Bank in India, with 52% of its deposits being held in a CASA.