The CASA ratio in banking represents the proportion of a bank's total deposits held in current accounts and savings accounts. It is a crucial metric for assessing a bank's profitability and cost of funds.
Understanding the CASA Ratio
The CASA ratio is calculated as follows:
CASA Ratio = (Current Account Deposits + Savings Account Deposits) / Total DepositsSignificance of the CASA Ratio
A higher CASA ratio is generally favorable for banks because:
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Lower Cost of Funds: Banks typically offer little to no interest on current account deposits and relatively low interest rates (around 3-4%) on savings account deposits. This means a larger proportion of CASA deposits reduces the bank's overall cost of funding its operations.
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Improved Profitability: Reduced interest expenses contribute to higher net interest margins and overall profitability.
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Stable Funding Base: CASA deposits are generally considered more stable than term deposits, providing a reliable source of funding for the bank.
Example
For instance, a bank with:
- Current Account Deposits: $200 million
- Savings Account Deposits: $300 million
- Total Deposits: $1000 million
Would have a CASA Ratio of:
($200 million + $300 million) / $1000 million = 0.5 or 50%This indicates that 50% of the bank's total deposits are in the form of current and savings accounts.
Benefits of a High CASA Ratio Summarized
| Benefit | Description |
|---|---|
| Lower Cost of Funds | Current accounts offer no interest, and savings accounts have low interest rates (3-4%), reducing overall funding costs. |
| Improved Profitability | Lower interest expenses lead to higher net interest margins, boosting overall profitability. |
| Stable Funding Base | CASA deposits are generally more stable compared to term deposits, providing a consistent and dependable funding source. |
