The ratio of current and saving deposits to the total deposits in the bank is called the CASA ratio. The full form of CASA is the current and savings account ratio.
The higher the CASA, the lower the cost of funds. This is because you get an interest of 3 to 4% on savings, and financial institutions do not give interest on current accounts.
The CASA ratio knows the health of an organization. The bank is in a healthy state if the CASA ratio is on the higher or positive side.
Current Account and Savings Account Ratio in Finance
It means that it has an excess amount of funds and surplus deposits. Let’s understand it by knowing an overview of current and savings accounts.
Current Account
It is used to have stress-free transactions by people in business and traders for their day-to-day monetary transactions.
A current account allows people in business to make multiple transactions in a day for the smooth running of their business deals.
A businessman does not need to take permission beforehand from the bank. Also, one benefit for a bank is that the account holder does not earn any interest.
This is because the bank is allowing frequent withdrawals and deposits of money. The current account holder does not require tenure for holding a current account.
Savings Account
A savings account promotes an individual to save money. Accumulation of deposits for a long tenure helps an individual gain some interest in his savings.
However, the current account allows you to use the overdraft facility, which is unavailable for a savings account. Also, for a savings account, you need to maintain a minimum amount in your account.
Significance of CASA Ratio
On the one hand, recurring deposits and fixed deposits are the term deposits that banks offer, whereas non-term deposits are the savings and current accounts.
People usually use a fixed deposit or a recurring deposit to gain profits in the long run. Non-term deposits are used for transactions daily.
Borrowers who need funds are given money from term deposits in the form of loans for which a higher interest is charged. The banks will use deposits of customers in the form of FD as loans to the borrowers.
Deposits from bank customers are equally important because if the customers’ deposits are higher, the bank will have more lending capacity.
Hence, the CASA ratio is important for a bank. The Source of funds becomes cheaper when the CASA ratio is higher, and the bank has a better standing to increase money with higher costs.
However, when banks need funds, they go to retail customers rather than going to the RBI. Banks, at times, to fill their insufficiency of funds borrow from other banks or RBI.
Hence, banks constantly approach people in business to increase deposits in current accounts and help banks reduce their borrowing costs.
Private Banks benefit from a higher CASA ratio. This is because they offer a higher interest rate on FD.
Hence, the current and savings account ratio is important as this ratio determines profit margins. Also, it acts as a performance indicator for the banking sector of a company.
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