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Banking Awareness Capsule 24: What is CASA ratio?

Banking Awareness Capsule 24: What is CASA ratio?

Dear Aspirant,

In this article we are going to learn about CASA ratio.

What is CASA ratio?

Different kinds of deposits such as current account, savings account and term deposits form the major source of funds for banks.

CASA ratio stands for Current And Savings Account ratio. The CASA ratio shows how much deposit a bank has in the form of current and saving account deposits in the total deposit.

What are the advantages of high CASA?

Interest rate paid on current and savings account deposits 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 usually very low 3-4%.

If a large part of a bank's deposits comes from CASA funds, it means that the bank is getting those funds at a relative lower cost.

It is generally understood that a higher CASA ratio indicates a lower cost of funds and leads to higher net interest margin.

Banks therefore make maximum effort to increase the share of CASA on their books to reduce their overall cost of deposits. In India, it is used as one of the metrics to assess the profitability of a bank.

What are the disadvantages of high CASA ratio?

CASA 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.

Hope you have now understood what CASA ratio is.

Keep your preparation on till we come up with the next banking awareness capsule.

If you are planning to appear for SBI Clerk(JA and JAA) Exam 2016, you might find this Question Bank from Cosmos Book Hive helpful:

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Happy Learning!

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