Current Account Savings Account (CASA): Definition and Formula

What Is a Current Account Savings Account (CASA)?

A current account savings account (CASA), offered by some banks, combines the functions of a checking account and a savings account. The customer gets little or no interest on the current account money that is used routinely to pay bills but is paid interest on the savings portion.

Although it is available globally, CASA is most commonly used in Western Asia and Southeast Asia,

How Current Account Savings Accounts (CASAs) Work

A CASA is a non-term deposit, meaning it is used for the everyday banking and savings needs of the consumer and does not have a specific maturity or expiration date. It is valid for as long as the account holder wants it to remain open.

This is in contrast to a term deposit, such as a certificate of deposit (CD), which commits the customer's money for a certain period of time. On the maturity date, the bank or institution returns the money with the agreed interest payment.

How CASAs Benefit Banks

A CASA works like a checking account. The money deposited can be withdrawn or paid out at any time. The interest on the savings portion, meanwhile, acts as an incentive to keep some money on deposit and add to it over time.

Most banks offer CASAs to their customers for free or for a small fee, depending on minimum or average balance requirements.

A CASA tends to be a cheaper way for a bank to raise money than issuing term deposits, such as certificates of deposit (CDs), which offer higher interest rates to the customers. Because the interest paid on the CASA deposit is lower than on a term deposit, the bank’s net interest income (NII) is higher. Thus, CASAs are a cheaper source of funding for banks.

Their main drawback is uncertainty. In the case of on-demand deposits, a bank can't be sure how much money it will actually have available to lend.

How CASAs Benefit Consumers

The CASA is designed to encourage regular saving by making it easier and keeping it flexible.

By using a CASA, customers forego a higher rate of interest in return for better liquidity. They're not tying up their money for a period of months.

Consumers and small businesses also get to build a working relationship over time with a bank.

Current Account vs. Savings Account

As noted above, the current account portion of the CASA pays little or no interest. There are generally no limits on deposits or withdrawals.

The savings account portion typically has restrictions on the number of withdrawals a person can make. These vary by bank.

CASA Ratio

In regions where CASA accounts are common, the percentage of total bank deposits that are in a CASA is an important metric to determine the bank's liquidity. The CASA ratio indicates how much of a bank’s total deposits are in both current and savings accounts.

A higher CASA ratio indicates that a bank has a higher proportion of stable deposits available for lending, according to Navi, a financial services firm based in India.

The ratio can be calculated using the following formula:

CASA Ratio = CASA Deposits ÷ Total Deposits

The Bottom Line

CASA accounts are offered to consumers are small businesses as a way to maintain maximum flexibility while still earning a little bit of interest on the money they save.

They are essentially a combination of a checking account and a savings account.

In terms of function, they aren't much different from separate but linked checking and savings accounts that are common in the U.S. They are designed to encourage consumers to save a bit of their income from week to week, and to provide the bank with a steady stream of money to reinvest at higher rates of return.