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The CASA Ratio and Its Significance in Finance

The ratio of current and saving deposits to the total deposits in the bank is called the CASA ratio. Full form of CASA is 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 health of an organisation is known by the CASA ratio. The bank is in a healthy state if the CASA ratio is on the higher or positive side, 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 account.

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 purpose of 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 the frequent withdrawals and deposits of money. Current account holder does not require a tenure for holding a current account.

Savings Account:
A savings account promotes an individual to save their money. Accumulation of deposits for a long tenure helps an individual gain some interest on his savings. However, the current account allows you to use the overdraft facility which is not available for a savings account. Also, for a savings account, you need to maintain a minimum amount in your account.

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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 account. People usually use a fixed deposit or a recurring deposit to gain profits in the long run. Non-term deposits are used for transactions on a daily basis.

Borrowers who need funds are given money from term deposits in the form of loans for which a higher interest is charged. Deposits of customers in the form of FD will be used by the banks as loans to the borrowers. Deposits from bank customers are equally important, because if the deposits of customers are more, then the bank will have more lending capacity.

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Hence, the CASA ratio is important for a bank. Source of funds become cheaper when the CASA ratio is higher, and the bank has a better standing in order 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 in order to increase deposits in current accounts and help banks reduce their borrowing cost.

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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 profit margins are determined by this ratio. Also, it acts as a performance indicator for the banking sector of a company.