CASA (Current Account Savings Account) Ratio

The CASA (Current Account Savings Account) Ratio indicates the percentage of a bank’s total deposits held in current and savings accounts. It reflects the bank’s profitability and operational cost efficiency, as higher CASA deposits provide low-cost funding and improve margins.

What is the CASA Ratio?

The CASA ratio is specific to banks as it measures the proportion of total deposits held in current and savings accounts. It helps indicate how much of a bank’s deposits are low-cost, making it an important metric for assessing the bank’s profitability and liquidity.

A higher value of the CASA ratio shows that the bank is getting more funds from low-cost deposits (current and savings accounts); if not, it is relying more on expensive deposits like fixed deposits.

Formula and Example of CASA Ratio

Formula of CASA Ratio:

Components of CASA Ratio:

• Current Account Deposits: Money kept by businesses or individuals in accounts used for daily transactions. These accounts usually don’t earn interest.
• Savings Account Deposits: Money is saved by people in accounts that earn a small amount of interest. These are meant for personal savings.
• Total Deposits: All the money the bank has collected, including:
• Current account deposits
• Savings account deposits
• Fixed deposits (money locked for a fixed time with higher interest).

Example

Imagine HDFC Bank reported the following figures:

• Current Account Deposits = ₹50,000 crore
• Savings Account Deposits = ₹1,00,000 crore
• Total Deposits = ₹3,00,000 crore

CASA Ratio = ((Current Account Deposits + Savings Account Deposits) / Total Deposits) × 100 CASA Ratio = ((₹50,000 + ₹1,00,000) / ₹3,00,000) × 100 CASA Ratio = (₹1,50,000 / ₹3,00,000) × 100 CASA Ratio = 50%

HDFC Bank’s CASA Ratio is 50%, meaning half of its total deposits are from low-cost current and savings accounts.

This shows the bank has a strong deposit base, which helps reduce its overall cost of funds and supports better profitability.

Importance of CASA Ratio

The CASA ratio is one of the most important metrics used to evaluate a bank’s financial strength and operational efficiency. Since current and savings accounts generally carry lower interest costs than fixed deposits, a higher CASA ratio helps banks access cheaper funds and improve profitability.

Indicates Cost of Funds

A higher CASA ratio means a larger portion of a bank’s deposits comes from low-cost current and savings accounts. This reduces the bank’s overall funding cost and improves its ability to earn profits from lending activities.

Improves Profitability

Banks with a strong CASA ratio can maintain better spreads between the interest they earn on loans and the interest they pay on deposits. This directly supports higher Net Interest Income (NII) and Net Interest Margin (NIM).

Reflects Customer Trust

A consistently high CASA ratio often indicates that customers prefer to keep their money with the bank for daily banking needs. This reflects strong brand trust, customer loyalty, and a stable deposit base.

Supports Liquidity Management

CASA deposits provide banks with a steady source of funds that can be used for lending and investment activities. This helps maintain adequate liquidity and reduces dependence on costly borrowing.

Useful for Investors

Investors and analysts closely track CASA ratios when evaluating banking stocks. A rising CASA ratio often signals operational efficiency, stronger profitability, and better long-term growth prospects.

Features of CASA Ratio

The CASA ratio has several characteristics that make it an important indicator of a bank’s financial health.

Measures Low-Cost Deposits

It shows the percentage of deposits held in current and savings accounts compared to total deposits.

Banking-Specific Metric

Unlike many financial ratios that apply to all companies, the CASA ratio is primarily used to analyse banks and financial institutions.

Indicator of Operational Efficiency

A higher ratio suggests that the bank can raise funds at a lower cost, helping improve overall profitability.

Direct Impact on NIM

Since CASA deposits carry lower interest expenses, they positively influence the bank’s Net Interest Margin (NIM).

Useful for Peer Comparison

Investors often compare CASA ratios across banks to identify institutions with stronger deposit franchises and lower funding costs.

Changes Over Time

The ratio is influenced by customer behaviour, interest rate cycles, economic conditions, and the bank’s deposit mobilisation strategies.

How CASA Ratio Impacts a Bank’s Profitability?

The proportion of a bank’s deposits held in savings and current accounts significantly influences its profitability by affecting the cost of funds and the net interest margin (NIM).

Cost Of Funds

Banks pay very low interest on savings accounts and no interest on current accounts. For example, many banks offer no interest on current account deposits, while savings account deposits typically earn only around 3.5% interest. A higher proportion of deposits in current and savings accounts compared to total deposits reduces the overall cost of funds for banks. This allows banks to allocate more resources toward profitable lending and investment activities.

NIM(Net-Intrest-Margin)

Net Interest Margin (NIM), which is the difference between the interest income generated by banks and the interest paid to their lenders (such as depositors), is directly influenced by the bank’s CASA ratio. A higher CASA ratio indicates a greater proportion of deposits in low-interest accounts, which enhances NIM. This, in turn, improves the bank’s operating efficiency and profitability.

A bank’s Current Account and Savings Account (CASA) Ratio is a key indicator of its financial health and efficiency, influencing investor perception and stock market performance.

Stock market participants often prefer banks with a higher CASA ratio compared to their competitors. A high CASA ratio helps banks lower their overall cost of funds, thereby enhancing profitability. It also reflects operational efficiency and financial stability, which boosts investor confidence and can lead to higher stock valuations.

The CASA ratio is widely used to compare banks. For instance, consider the CASA ratios of three banks and their interpretations:

Kotak Mahindra Bank, with a CASA ratio of 60.6%, demonstrates a stronger low-cost deposit base compared to IndusInd Bank and Axis Bank, both at 42%. This indicates Kotak’s better efficiency in managing funds, likely leading to higher profitability and stability.

Banks employ various strategies to enhance their CASA (Current Account and Savings Account) ratios, focusing on customer acquisition and product innovation.

Customer Acquisition:

• Offer better services like free cards, insurance, or discounts to attract account holders.
• Expand branch networks to reach more people, especially in underserved areas.
• Run targeted campaigns for specific groups like women or small businesses.

Product Innovation:

• Launch unique account products tailored to specific customer needs (e.g., microbanking accounts).
• Provide easy-to-use digital banking apps to attract tech-savvy customers.
• Introduce innovative deposit schemes with value-added benefits to promote and encourage savings.

Limitations and Risks of CASA Ratio

While a high CASA (Current Account and Savings Account) ratio can indicate a bank’s access to low-cost funds, it’s essential to consider the following limitations and factors:

High CASA ratio

While a high CASA ratio suggests access to low-cost funds, it doesn’t automatically translate to profitability. Factors such as asset quality, operational efficiency, and effective risk management are also crucial in determining a bank’s financial health.

Balanced Deposit Portfolio

Over-reliance on CASA deposits without adequate term deposits can pose liquidity risks, especially during periods of high withdrawal demand. A balanced deposit mix is essential for maintaining financial stability.

Interest Rate and Economic Sensitivity

CASA deposits are highly sensitive to changes in repo rate and overall economic conditions. During rising interest rate cycles, customers may prefer shifting funds to higher-yielding term deposits or market instruments, which can reduce CASA balances.

Difference Between Current Account and Savings Account

Conclusion

The CASA ratio is a critical metric for assessing a bank’s financial health, profitability, and efficiency. It measures the proportion of a bank’s total deposits held in low-cost current and savings accounts. A higher CASA ratio indicates a strong low-cost deposit base, which helps banks reduce their cost of funds and improve their Net Interest Margin (NIM). This, in turn, enhances profitability and operational efficiency.

Banks with higher CASA ratios are better positioned to maintain financial stability and attract investor confidence, often resulting in better stock market performance. However, while a high CASA ratio is beneficial, it is not the sole indicator of profitability. Balanced deposit portfolios, effective risk management, and operational efficiency are equally important. Banks employ strategies like customer acquisition initiatives and innovative products to improve CASA ratios while mitigating risks associated with over-reliance on these deposits.

Frequently Asked Questions (FAQs)

What is the CASA Ratio in Banking?

CASA Ratio refers to the proportion of a bank’s deposits held in Current Account and Savings Account (CASA) compared to its total deposits. A higher CASA ratio indicates that the bank has access to more low-cost funds, since current accounts typically pay no interest and savings accounts offer relatively low interest.

What is the CASA formula?

CASA Ratio = ((Current Account Deposits + Savings Account Deposits) / Total Deposits) × 100

Is a high CASA ratio good or bad?

A high CASA ratio is good as it reduces costs and boosts profitability, but requires balanced deposits.

Which bank has the highest CASA ratio in India?

The bank with the highest CASA ratio can change from time to time based on quarterly financial results. Historically, banks such as Kotak Mahindra Bank, HDFC Bank, and ICICI Bank have maintained strong CASA ratios compared to many peers. Investors should always refer to the latest annual reports or quarterly results to determine the current leader, as CASA ratios fluctuate with changing deposit patterns and market conditions.

How do you increase the CASA Ratio?

Banks increase their CASA ratio by attracting more current and savings account deposits while reducing reliance on high-cost deposits.

Some common strategies include:

• Offering better digital banking services and mobile banking experiences.
• Expanding branch and ATM networks to improve accessibility.
• Launching salary accounts and corporate banking partnerships.
• Providing value-added services such as debit cards, rewards, and insurance benefits.
• Running targeted campaigns for retail customers, businesses, and specific customer segments.
• Encouraging customers to maintain higher balances through customised products and relationship banking.

A successful CASA strategy helps banks lower funding costs, improve profitability, and strengthen their competitive position in the market.

Further Read:

• Credit-Deposit Ratio
• Gross (NPA)
• Non-Performing Assets (NPA)
• Cash Ratio
• Efficiency Ratio
• Leverage Ratio