- Current Account Deposits: Current Accounts are usually opened by businesspersons who have large number of regular transactions with the bank, both deposits and withdrawals. There is no restriction on number and amount of deposits. There is also no restriction on withdrawals. No interest is paid on current deposits. These accounts are also known as demand deposits as amount can be withdrawn on demand.
- Saving Account Deposits: Saving Accounts are opened by individuals and non-profit making organizations. There is no restriction on number and amount of deposits. Withdrawals are subject to certain restrictions. It earns Interest but less than fixed deposits. It encourages saving habit among salary earners and others. Saving deposits are an important source of funds for banks. These deposits are also known as demand deposits.
What is CASA?
CASA Deposits refers to Current Account Saving Account Deposits. As an aggregate the CASA deposits are low interest deposits for the Banks when compared to other types of the deposits. So banks tend to increase the CASA deposits and for this they offer various services such as salary accounts to companies, encouraging merchants to open current accounts, and use their cash-management facilities.
With a high CASA ratio, (CASA deposits as % of total deposits) banks are said to be in a more comfortable position than the Banks with low CASA ratios , which are more dependent on term deposits for their funding, and are vulnerable to interest rate shocks in the economy, plus lower spread they earn.
Main Advantages of CASA
CASA ratio is the ratio of CASA deposit to total deposits (other types of deposits with banks are term deposits, Call Deposits,). The same CASA deposit is lent at higher interest to corporate and individuals resulting in higher Net interest margin (NIM) which is difference between total interest income and interest expenditure and is shown as a percentage of average earning assets. CASA is important as it is directly correlated to NIM. CASA funds are cheap funds as bank pays no interest on current account and low interest of 4% to 6% on savings account deposits. A high CASA ratio reflects the bank’s ability to raise money with low costs. Hence, the more the CASA ratio, the better it is for banks (CASA ratio over and above 40% is considered healthy). For this reason, banks aim to aggressively reach out to retail customers to increase their low cost deposits. According to RBI data, private sector banks have seen a higher increase in CASA which means better operating efficiency of such banks.