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Banks’ CASA deposits grow 33%: What it means

Banks’ CASA deposits grow 33%: What it means

India’s banks saw a 33% rise in CASA deposits in FY13, the Reserve Bank of India said on Wednesday. CASA is the amount of money customers put in banks’ current and savings accounts. It is an important metric to understand a bank’s profitability.

An increase in CASA deposits helped overall bank deposits grow 15.1% in the fiscal from a 14.9% growth in FY12, the RBI added. This means Indians are putting more money in bank accounts.

Here’s all you need to know about bank deposits and CASA:

1. Banks offer two main kinds of accounts where customers can keep their money. These could be term deposits – like fixed and recurring deposits, or non-term deposits – like current and savings accounts. In return, they pay interests to customers.

2. A term deposit, like the name suggests, is valid for a certain period of time. For example, you put in Rs 1000 in a fixed deposit for a period of 5 years. In return, the bank pays you an interest at the rate of 10% per annum, with the condition that you will not touch the money.

3. A current and savings account, on the other hand, is a normal bank account used for your daily operations. It is valid for as long as the customer likes. A savings account is for individuals while a current account is for companies. These have lower interest rates than term deposits.

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4. Banks give out this deposit money as loans on which they charge a higher interest. This difference in the interest between loans and deposits earns profits for banks. This is called Net Interest Income (NII).

5. Effectively, deposits are banks’ borrowings while loans are its assets. However, deposits are important despite being a liability. Higher the deposits---preferably at lower interest rates, the greater is the capacity of a bank to offer loans and earn interest income.

6. Since interest rates are much lower than term deposits, CASA is an important and a cheaper source of funds for banks. For this reason, analysts also look at the ratio of deposits in bank accounts to total deposits. This is called CASA ratio. A high CASA ratio reflects the bank’s ability to raise money with low costs.

7. Apart from this, banks also borrow from each other or the RBI. However, the RBI has kept interest rates high. This means banks incur more costs while borrowing from the RBI. On the other hand, there is rise in bad loans along with a fall in demand for loans. In FY13, growth in bank credit or lending slowed to 13.6% from 17.1% in the previous fiscal.

8. This is affecting the profitability of banks, measured by Net Interest Margin (NIM), which fell to 2.8% in the fiscal ended March 2013 from 2.9%.

9. For this reason, banks are aggressively reaching out to retail customers to increase their deposits. This helps lower the cost of borrowing.

10. According to RBI data, private sector banks have seen a higher increase in CASA due to higher savings deposit rate – the interest rate on savings accounts. This is particularly so for the new set of private banks, whose CASA deposits grew 18.5%.

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