What is CASA ratio and how does it affect fixed deposits?

With the Reserve Bank of India recently announcing a cut in the repo rate, the base rate for many banks have changed and soon to follow suit are loan rates as well as deposit rates. Understanding the interdependence of all these factors is the primary goal of this write-up. Let’s go by defining each of these terms before looking into how they are linked to each other.

What is CASA ratio? 

CASA ratio is defined as the ratio of Current and Savings Account deposits to the overall deposits of a bank. This ratio is an important financial figure for any bank as it depicts a lot of other relevant information that drives major bank-specific decisions. CASA ratio is not a value that has any regulation directives related to it. Nonetheless, it is a significant value for all banking entities. A higher CASA ratio for a bank means the deposits with current and savings are more as against the total deposits of the bank

Effect of CASA ratio on fixed deposit rates

Since the interest rate offered by banks on current account deposits is nil and that offered on savings account is very low, one of the ways for banks to improve its profit margin is to increase the deposits in current and savings accounts which in turn signifies a higher CASA ratio. But, since CASA is a ratio, in order to increase profits, while deposits with bank (current and saving) should be increased, the cost of term deposits should be decreased. This happens when the rates offered on term deposits are lowered to match the required CASA ratio.

Let us take an example. Suppose a bank offers savings account deposits an interest rate of 4% while the same bank offers an interest of 8% on fixed deposit of one year. In case this bank has a lower CASA ratio, means the deposits with the bank are low, in such a scenario, the bank may increase the interest rate offered on savings so as to encourage people to deposit more. This surplus cash can then be circulated by the bank and lent forward to gain more profit.

Ways in which banks increase their CASA deposits

Since a greater CASA is beneficial, banks have been employing several innovative techniques to increase their CASA value. Some of the recent tactics employed by banks to raise their savings plus current account deposits are listed as under –

·         Most banks have launched special saving deposit mobilization programs

·         Some banks have bundled up their savings account with insurance benefits for customers to get attracted to it

·         Others have tied up with various insurance companies to offer specific insurance products coupled with savings accounts. For example, Central Bank of India has partnered with Cholamandalam Insurance to offer free accident insurance with every savings deposit account

·         There are plans in progress to offer some minimum rate of interest on current accounts also in order to attract more current account deposits

·         Bigger banks are trying to merge with smaller banks with high casa ratio. For instance, in a strategic move, ICICI merged with Bank of Rajasthan which had a high CASA value

Why Loans Against a Fixed Deposit is a Good Idea?

Most of our excess money usually goes into one financial product and that is the fixed deposit. The fixed deposit is one of the most popular financial investments for two simple reasons. One is the high rate of returns and the other is guaranteed returns. Not to forget the ease with each you can use the fixed deposit as an investment unlike other financial investments which surely requires some understanding of basic jargon’s or at least some sort of advice from someone. 

However, in times of money shortage, we are hardly reminded about our fixed deposits. We invariably look at every other possible source to borrow money. Why do we not even think of availing a loan from the fixed deposit? Agreed, the money was for saving but you saved the money for troubled times right? So why hesitate?  The best part is you are not taking the burden of a loan from outside. So how do you avail a loan against fixed deposit?

How do you get the loan against fixed deposit?

Based on the amount of fixed deposit you have, you will be given the loan as an overdraft against your deposited amount. This not like breaking your fixed deposit and halve all the benefits. You will still be eligible for all the benefits once you have paid the fixed deposit loan.

What is the loan amount you can expect from your fixed deposit?

Usually you can easily ask for a loan amount of at least 70-90% of the fixed deposit amount. However, banks even offer more than the stipulated amount. In short there is no particular limit or standard rule on the amount of loan you can avail from your fixed deposit. It depends on the bank you have your fixed deposit.

Interest rates for loans against fixed deposit

Unlike personal loan, loans against fixed deposit have lesser interest rates of just 2 to 3 percent above the fixed deposit interest rate offered to you. The interest again depends on the bank and there is no standard interest rate but surely the interest rates are way less than personal loans.

What are the charges?

The best part is there no processing charges in most cases unlike home and personal loans. Even if they are applicable it would be very marginal compared to the usual processing charges compared to other types of loans.

Loan tenure and repayment

The loan tenure depends on the time of fixed deposit you have chosen. For eg: If your fixed deposit has a period of 10 years remaining, then you can repay the loan in ten years. The repayment would be like any other loan where you pay in monthly EMI’s on a regular basis or as decided by the lender.

Prepayment charges

There are no penalties for the repaying the loan earlier than the actual loan tenure in most of the cases.

Final decision

Loan against fixed deposit is simply the easiest and most convenient way of availing a loan when compared to personal loans in which the interest rates are very high and in some cases can go up to 30% p.a. The best part is you still get interest for the amount on your fixed deposit. Just remember that you once you avail a loan against your fixed deposit you cannot end or split the fixed deposit. Lastly, you cannot claim income tax deduction for the repayment of your loan against fixed deposit.