CASA Ratio: What It Means for Banks and Investors

The CASA ratio is one of the most closely watched metrics in the banking sector. It tells you how much of a bank’s total deposits come from current and savings accounts, as opposed to more expensive fixed deposits and certificates of deposit. A high CASA ratio is generally a sign of a strong, well-run bank with a stable, low-cost funding base.

What is the CASA Ratio?

CASA stands for Current Account and Savings Account. The CASA ratio is the percentage of a bank’s total deposits that are held in current accounts and savings accounts.

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

Why is the CASA Ratio Important?

Banks pay little or no interest on current accounts and relatively low interest on savings accounts (2.5% to 4%). Fixed deposits, on the other hand, cost banks 6% to 8% per year. The more deposits a bank has in CASA, the lower its overall cost of funds.

A lower cost of funds allows the bank to:
– Lend at competitive rates and still maintain a healthy Net Interest Margin.
– Earn higher profits.
– Be more resilient during interest rate cycles.

What is Considered a Good CASA Ratio?

Generally:
– CASA ratio above 40%: Excellent. Indicates a strong retail banking franchise with a loyal, low-cost deposit base.
– 30% to 40%: Good. The bank has a reasonable balance between CASA and term deposits.
– Below 30%: Relatively weaker. The bank relies heavily on term deposits, making its funding costs sensitive to interest rate changes.

As of recent years:
– HDFC Bank and Axis Bank have maintained CASA ratios around 40-45%.
– SBI, being the largest bank, has a CASA ratio around 40-42%.
– Smaller private banks and new age banks often have lower CASA ratios in the 25-35% range as they are still building retail franchises.

How Banks Build CASA

Banks build CASA deposits through:
– **Salary Account Tie-ups:** Corporate payroll arrangements ensure regular, low-cost credit inflows.
– **Retail Branch Network:** More branches mean more individual account holders.
– **Zero Balance Accounts:** Financial inclusion accounts (Jan Dhan, BSBD) add CASA with minimal cost.
– **Digital Banking:** User-friendly apps encourage new account openings and keep existing customers engaged.
– **Merchant Current Accounts:** Business banking relationships bring large current account balances.

CASA Ratio and Net Interest Margin (NIM)

There is a direct relationship between CASA ratio and NIM. A bank with a 45% CASA ratio has a lower average cost of funds than a bank with a 20% CASA ratio, assuming similar lending rates. The higher the CASA ratio, the wider the potential NIM.

This is why analysts compare CASA ratios when evaluating banks’ earnings quality and competitive positioning.

Limitations of the CASA Ratio

While a high CASA ratio is generally positive, it has some limitations:

– In a rising interest rate environment, savings account rates also rise, partially eroding the CASA advantage.
– High CASA does not automatically mean high profitability if the bank has poor credit quality or high operating costs.
– Some CASA deposits are “sticky” (do not move out easily), while others are highly sensitive to rate differentials.

Practical Example

Bank A has total deposits of Rs. 5 lakh crore. Current account deposits = Rs. 80,000 crore. Savings account deposits = Rs. 1.5 lakh crore. CASA = Rs. 2.3 lakh crore. CASA Ratio = 2.3/5 = 46%. This means 46% of Bank A’s deposits are low-cost, giving it a significant funding advantage over a bank with 25% CASA.

Key Takeaways

– CASA ratio = (Current + Savings Account deposits) / Total Deposits x 100.
– Higher CASA means lower cost of funds for the bank, supporting better Net Interest Margins.
– A ratio above 40% is generally considered strong.
– Banks build CASA through salary accounts, retail branches, and digital banking.
– Investors use CASA ratio to assess a bank’s funding quality and competitive position.
– CASA advantage is strongest in stable or falling interest rate environments.

When evaluating bank stocks, always check the CASA ratio alongside NIM, NPA ratios, and return on equity for a complete picture of the bank’s financial health.