What is CASA and how does it affect a banks profitability?
CASA pays very low or no interest on the current account and an above-average return on the savings portion.
Current Account Saving Account (CASA) is a normal bank account from which funds can be utilised at any time. CASA is aimed at combining the features of saving and checking accounts – a deposit account held at a financial institution that allows withdrawals and deposits – to attract customers to keep their money in the bank. CASA pays very low or no interest on the current account and an above-average return on the savings portion.
How does CASA work?
CASA operates like a normal bank account, and the money from the account can be withdrawn at any time. As compared to term deposits, CASA is a cheaper way for banks to raise money.
Financial institutions encourage the use of CASA as it helps them generate a higher profit margin. As the interest paid on a CASA deposit is lower than the interest paid on a term deposit, and Net Interest income (NII), the difference between the interest income a bank earns from its lending activities and the interest it pays to depositors, is higher.
Customers can exchange a higher rate of interest for greater liquidity by using CASA. On the downside, as there is uncertainty about when a depositor will withdraw their funds, a bank should not use CASA funds for long-term financing.
What is CASA ratio?
One of the metrics used to determine a bank’s profitability is CASA as the CASA ratio indicates how much of a bank’s total deposits are in both current and savings accounts. The CASA ratio is an indicator of the expense to raise funds, thus reflecting a bank's profitability or likelihood of generating profit.
Why CASA ratio is important?
If there is growth in the CASA ratio, it means the bank has a higher portion of deposits, which can also be seen as a cheaper source of funds for banks.
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