Definition of the current account savings account (CASA)
What is a current savings account (CASA)?
A current account savings account (CASA) aims to combine the functionality of a savings account and a current account to encourage customers to keep their money in the bank. It earns very low or zero interest on the current account and a higher than average return on the savings part. CASA is most commonly used in West and Southeast Asia, although the CASA structure is available worldwide.
A CASA account earns no interest or, in some cases, low interest on the current account and an above-average return on the savings part.
CASA is a non-term deposit, which means it is used for the consumer’s daily banking and savings needs. This type of account does not have a specific expiration or expiration date, so it is valid for as long as the account holder needs it to stay open. This contrasts with a term deposit, which is open for a certain period of time. After the due date, the bank or institution pays a certain amount of interest on the principal balance.
How current account savings accounts (CASA) work
A CASA works like a normal bank account in which funds can be used at any time. It combines both checking and saving functions into one. Because of this flexibility, a CASA has a lower interest rate than a term deposit, in which money is set aside to be intact for a specific period with a guaranteed interest rate.
Most banks offer CASAs to their customers for free. In some cases, there may be a nominal charge, depending on certain minimum or average balance requirements. These types of accounts attempt to limit the disintermediation that occurs when the interest on bank deposits is lower than other available short-term investments.
A CASA tends to be a cheaper way for a bank to raise funds than to issue term deposits, such as certificates of deposit (CDs), which offer higher interest rates to customers.
Financial institutions encourage the use of a CASA because it generates a higher profit margin. Since the interest paid on the CASA deposit is lower than on a term deposit, the net interest income (NII) of the bank is higher. Thus, CASAs can be a cheaper source of funding for banks.
Demand deposits like CASAs allow clients to exchange a higher interest rate for higher liquidity by giving them immediate access to their funds. However, due to the uncertainty of when a depositor will withdraw funds, CASA funds should not be used by a bank for long-term funding.
Key points to remember
- Current account savings accounts (CASA) are a type of deposit account with no term.
- A CASA has a lower interest rate than term deposits, such as a certificate of deposit, and therefore is a cheaper source of funds for the financial institution.
- A CASA combines the advantages of a checking account and a savings account, and it is indicative of a competitive market in which banks must come up with new products to appeal to customers.
Current account vs savings account
As indicated above, the current account portion of CASA does not earn any interest. There are generally no limits on deposits or withdrawals. The savings account portion has no restriction on the number of deposits an account holder can make. However, it usually has restrictions on the number of withdrawals a person can make. This is set up to encourage account holders to save. The maximum number of authorized withdrawals varies by institution.
Savings account current account ratio
The percentage of total bank deposits that are in a CASA is an important metric in determining a bank’s profitability. The CASA ratio indicates how much of a bank’s total deposits are in both checking and savings accounts.
The ratio can be calculated using the following formula:
- CASA Ratio = CASA Deposits Ã· Total Deposits
A higher ratio means that more of a bank’s deposits are in checking and savings accounts, rather than term deposit accounts. It is advantageous for a bank because it obtains money at a lower cost. Therefore, the CASA ratio is an indicator of the expense to raise funds and, therefore, reflects a bank’s profitability or the likelihood of generating a profit.
The existence of CASA can be seen as the product of particularly competitive or saturated markets, in which financial services companies must create a constant stream of new products and features that differentiate them between different providers. As it stands, very few people agree that a market has a single best bank. Globally, most people think that all banks and financial institutions are pretty much the same.