While analyzing the financial results of banking sector stocks, we often come across the term CASA ratio. In this article, we will understand this concept in detail and explore its significance in the banking sector. So, let us begin.

What is the CASA Ratio?

The CASA ratio stands for Current Account and Savings Account ratio. It’s a key metric used by banks to measure the amount of money deposited in current and savings accounts compared to the total deposits.

This ratio helps banks understand the proportion of low-cost funds (current and savings accounts) they have, which is crucial for their profitability.

Why is the CASA Ratio Important?

Banks prefer a high CASA ratio because:

1. Lower Cost of Funds: Interest paid on current and savings accounts is lower compared to fixed deposits. This means the bank’s cost of acquiring funds is less.
2. Higher Profit Margins: With lower costs, banks can maintain higher profit margins.
3. Liquidity: Money in current and savings accounts is more liquid, meaning it can be easily used for lending and other banking activities.

Understanding through a Scenario

Let’s consider a simple scenario to understand the CASA ratio better.

Suppose Bank ABC has the following deposits:

• Current Account Deposits: ₹2 crore
• Savings Account Deposits: ₹3 crore
• Fixed Deposits: ₹5 crore

First, let’s calculate the total deposits:

Using the values provided:

Now, we can calculate the CASA ratio:

So, Bank ABC has a CASA ratio of 50%. This means that half of the bank’s deposits come from current and savings accounts, which is favorable for the bank.

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Real-Life Application

Let’s look at a real-life example to see how the CASA ratio affects a bank’s operations.

Example: Bank XYZ

Bank XYZ has been working on increasing its CASA ratio. Initially, the bank had a CASA ratio of 30%, which means that only 30% of its deposits were in current and savings accounts. The remaining 70% were in fixed deposits, which are more expensive for the bank due to higher interest payments.

Bank XYZ decided to launch new savings account schemes with attractive features and better interest rates. They also introduced special current account services for businesses. As a result, more customers started opening current and savings accounts.

After a year, Bank XYZ’s efforts paid off. Their CASA ratio increased to 45%. This improvement meant that the bank’s cost of funds decreased because a larger portion of their deposits were now in lower-cost accounts. With reduced costs, Bank XYZ could offer more competitive loan rates and increase its profitability.

Is a High CASA Ratio Good?

Yes, a high CASA ratio is generally considered good for banks. It indicates a higher proportion of deposits in current and savings accounts, which typically carry lower interest costs compared to fixed deposits. This lower cost of funds can enhance the bank’s profitability and financial stability.

Why Do Banks Want to Increase CASA?

Banks strive to increase their CASA ratio for several reasons:

1. Lower Cost of Funds: Current and savings accounts usually offer lower interest rates compared to fixed deposits. This reduces the bank’s overall interest expense.
2. Higher Profit Margins: With a lower cost of funds, banks can achieve higher profit margins on the loans they provide.
3. Improved Liquidity: Funds in CASA accounts are more liquid and can be easily accessed for lending and other operational needs.
4. Stable Funding: CASA deposits are considered more stable compared to fixed deposits, which might be withdrawn after maturity.

What Does a Low CASA Ratio Mean?

A low CASA ratio means that a smaller proportion of the bank’s deposits are in current and savings accounts, while a larger proportion is in fixed deposits. This can have several implications:

1. Higher Cost of Funds: Since fixed deposits typically offer higher interest rates, a low CASA ratio indicates higher interest expenses for the bank.
2. Lower Profit Margins: Higher cost of funds can reduce the bank’s profit margins.
3. Potential Liquidity Issues: Fixed deposits are less liquid compared to CASA deposits, which might affect the bank’s ability to meet sudden withdrawal demands.
4. Increased Financial Risk: A higher reliance on fixed deposits can make the bank more vulnerable to changes in interest rates and economic conditions.

In summary, a high CASA ratio is beneficial for banks as it reduces their cost of funds and increases profitability, while a low CASA ratio indicates higher costs and potential liquidity challenges.

Conclusion

The CASA ratio is a critical metric for banks, indicating the proportion of low-cost funds they have. A higher CASA ratio means lower costs and better profitability for banks. Understanding this ratio helps us appreciate the strategies banks use to manage their deposits and maintain financial health.

In summary, a bank’s CASA ratio is like a health check-up. The healthier the ratio, the better the bank’s ability to generate profits and offer competitive services.

You Can Check HDFC Bank’s CASA Ratio Here