Monday, 23 March 2015

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