INTRODUCTION:
The CASA ratio is a current account and a savings account deposits with the bank. The ratio of CASA results from the ratio of current deposits and savings deposits to total deposits. A higher CASA ratio means lower costs because banks usually do not pay interest on current accounts. Interest rates on savings accounts are low and fluctuate around 3%, but for very few banks that offer more than 5%. If a substantial portion of bank deposits comes from these funds, this means that the bank will receive these funds at a relatively lower price. It is generally accepted that a higher CASA indicates an excellent net interest margin. In India, it is used as one of the measures to assess the profitability of the bank.
Deposits are commitments to the bank. There are two types of deposits: term deposits and demand deposits. Deposits "demand" are still two types depending on the value of the wedge funds. These are "free deposits" and "low-value deposits", also known as chequing accounts or savings bank accounts. "Demand and time" deposits, in addition to money for transfers, such as DD, etc., are the main source of funds for banks.
Importance of CASA Ratio to banks:
A higher CASA ratio represents a larger segment of the deposits of the bank has been got from current and savings deposit, which is a economical source of fund. Many banks are not paying any interest on the current account deposits and the savings bank deposits costs a mere 3.5% interest rate. Therefore, higher the CASA ratio enhances the net interest margin, which signifies better operational efficiency of the bank. This contributes to increased profitability.
Net interest margin is the difference between the total interest income earned on assets or advances and the interest expense paid on term deposits and demand deposits, and is expressed as a percentage of the average value of income. The increase in CASA's revenues will improve the net interest margin as fund costs are relatively cheaper. For example, most banks lend at more than 8%, while the deposit rate is only 3.5%. Although the difference is not entirely available, the actual achievement depends on other expenses.
Current and savings accounts can be operated daily. Depositors do not have to give notice to withdraw money. On the contrary, for term deposits, the money is for a specific period agreed with the bank. If an applicant wishes to withdraw the deposit before maturity, he may be required to pay a penalty. As a rule, it is one percent less on the interest rate applicable for the term of the deposit that was in the bank. Demand liabilities of the bank offers the facility of withdrawing money anytime exerting pressure on the Asset Liability Management of the bank.
OBJECTIVES OF THE STUDY:
To study the importance of low cost funds to banks.
To make a comparative study between CASA deposits and its impact on the profitability of the banks.
REVIEW OF LITERATURE:
Laxman (1985) studied the problem of drop in profitability of banks in India and proposed a special deposit mobilization cell, thoughtful borrowings, control on rising over-dues, and establishing a professional investment portfolio to augment the profitability of banks. Kishore Anil (1987) has stressed the importance of effective management of funds to counter the rise operative expenses, cost of deposits, mounting overdues, and tall customer expectations. Maintenance of optimum cash balance at the branch level, meticulous credit appraisal to avoid non-payment of installments and interest and periodical supervision of advances, reducing cost in all banking transactions are the vital recommendations of the study. Udeshi (1989) observed that funds management has become a challenge because of spread of large network of branches, expanded business and rising competition among banks.
Mishra (1993) pointed out that better credit mix, deposit mix, efforts to increase in non-fund based revenue and limiting non-performing assets to the lowest are needed for improving the profitability of the bank. PrashantaAthma and Obul Reddy (1997) opined that concentrating on net interest margin and discount income which constitutes more than 80% of the total income of the banks are the keys for increasing the profitability. Bhairav Desai and Mayuri (2000) opined that it is the efficiency with which available lendable funds is managed that decides its continued existence and standing in the banking industry. Vidwans and Kaveri (2001) found that reducing non-performing assets (NPAs) to a considerable extent coupled with reducing cost of operations are responsible for increase in bank's profitability. Uppal (2007) stated that banks would benefit if they organized funds through borrowing rather than public deposits. Thus, the review reveals that the management of funds in banks is examined by researchers from different points of view. A study on the profitability of fund management from the perspective of using cheaper funds, such as CASA deposits, is not very well studied by researchers. This objective is achieved to a certain extent by this study.
CASA DEPOSIT:
It is current account and savings account. It is cheapest form of source for banks.
CURRENT ACCOUNT:
It is opened by people who have regular transaction to be made. It may b also called as demand deposit account. In India, it can be made by depositing a sum of rs.5000.fney have the advantage of over draft facility but this type of accounts do not add interest to their accounts
SAVINGS ACCOUNT':
It is usually opened by salaried people who have fixed regular income. Its aim is to mobilize savings. It adds interest to account holders. It is usually charg4 at 4%-6% pa in India.
Demonetization and CASA deposits:
Demonetization has brought a number of trials besides the challenges which are already faced by Banks. The effects were long-term and short-term. In short-term, it dislocated the banking operations, the bank employees were stressed a lot to carry out bank operations and in long run it helped the banks to collect deposits at a lower cost. The following are some of the effects of demonetization on Banks.
Increase in CASA Deposits:
The demonetization has augmented the Banks Current and Savings Bank deposits. Unaccounted and accounted tax paid money in the form of demonetized currency were flowing to the Banks and the sizes of CASA deposits have swelled to a greater extent It indirectly assisted the banks to increase their deposits, especially in Current and Savings bank deposits.
Lower cost of Funds:
After the announcement of demonetization, the amount of bank deposits have increased. It resulted in the banks keeping a majority deposits in the form of cash deposits. Over 70% of these deposits were made in PSU Banks and they had been the biggest gainers of the rise in deposits, which led to lower cost of funds for them in this financial year ending 31.3.2017, the deposits of commercial banks increased by 11.2% as against 9/3% during the last financial year. This is mostly because of demonetization of higher value currency notes. Though the interest rates were declining the deposits have grown due to demonetization. The CASA deposits have witnessed a phenomenal growth of 21.4% during this financial year when compared to 9.8% during the last financial year (chart No.1)
Bank Operations and Demonetization:
Both positive and negative effects wett there on Bank operations in the areas like liquidity, profitability and employees workload.
On the positive side increase in deposits, increase in customer base could be mentioned.
Increase in deposits: Banks have secured deposits significantly after demonetization which they can invest for increasing the liquidity and profitability.
Increase in Customer base: The public had to come and deposit the demonetized notes with the banks. It made even a non customer to visit bank and open an account. This resulted in the increase of the customer base besides the amount of deposit.
On the negative side, it disturbed the operational efficiency of the banking personnel as they could not do normal banking transactions. Requiring to keep full Cash Reserve Ratio on the incremental deposits, stress on employees and non repayment of loans due to drop in sales and profitability of the customers could also be mentioned as the problems faced on account of demonetization.
Cash Reserve Requirement: The RBI required that the banks maintain 100% CRR on incremental deposits which meant that banks could not utilize around Rs. 3 Lakh crores for earning any interest income.
Non Granting of Loans: Banks were focusing mainly co exchanging currency notes and receiving demonetized currency deposited by their customers, they were not able to grant any loan.
Reduced Sales and profitability of customers: Due to demonetization, some SME businesses' sales dropped to a large extent affecting their profitability due to which they might have defaulted in the repayment installments to the banks. This may bring about an increase in the NPA level in the bank and their profitability maybe affected due to provisioning. Employees Level of Stress: The Bank Employees were under pressure and their level of stress was high due to their working overtime. It resulted in depression and work life imbalance for the bank employees.
Growth of CASA deposits on Profitability of the bank:
This study took the example of Syndicate Bank to study the effect of growth of CASA Deposits on Profitability of the bank which is detailed in Table No.1.
Table No.1 Table Showing
Growth of Casa Deposits and Profitability Of Syndivate Bank 
in Lakhs
|
Year |
CASA Deposit |
Operating Profit |
|
2011-2012 |
46424 |
3347 |
|
2012-2013 |
51954 |
3450 |
|
2013-2014 |
55911 |
3563 |
|
2014-2015 |
63671 |
4007 |
|
2015-2016 |
67925 |
4209 |
Figure No. 1: CASA Deposit Trend
Source: CARE Ratings and Banks
CORRELATION BETWEEN CASA DEPOSITS AND OPERATING PROFITS IN SYNIDICATE BANK:
From Table No.2, we come to conclusion that Pearson’s correlation CASA deposit and operating profitis+0.981** It says that, there is positive correlation between both the variables and a change in one variable will result change in other variable in the same direction.(Figure No.2)
Figure no. 2 Chart Showing
Growth of Casa deposits and Profitability of Syndivate Bank
in Lakhs
Null Hypothesis:
H0 There is no significant relationship between increase in CASA Deposits and increase in profitability.
H1 There is no significant relationship between increase in CASA Deposits and increase in profitability.
Table No.2 Table Showing Positive Correlation between Casa and Operating Profits in Synidicate Bank Correlations
|
|
CASA |
OPERATING_PROFIT |
|
Pearson Correlation |
1 |
.981** |
|
CASA |
|
|
|
Sig. (2-tailed) |
|
.003 |
|
N |
5 |
5 |
|
Pearson Correlation |
.981** |
1 |
|
OPERATING PROFIT |
|
|
|
Sig. (2-tailed) |
.003 |
|
|
N |
5 |
5 |
**. Correlation is significant at the 0.01 level (2-tailed).
The Sig. value (2 tailed value): is 0.003 which is less than 0.05 therefore, the null hypothesis stands rejected. There is relationship between casa deposits and operating profit.
It is concluded from Pearson’s correlation CASA deposit and operating profit are positively correlated. Hence an increase in the CASA deposits will result in increase in profitability.
FINDINGS AND SUGGESTIONS OF THE STUDY:
Presently the Indian banking is in the process of undergoing a series of changes, where global trends are affecting banking activity by increasing competition, liberalization, growing customer expectations, price differentials, increasing disintermediation, competitive prices and higher prices. Opportunity for macro-volatility. Profitability, productivity and financial efficiency have become a key goal to achieve. In today's markets, credit risk, market risk, interest rate risk and operational risk are the real challenges facing banks in the areas of Asset Liability Management and profitability.
Banks are to take some precautions as CASA deposits increase the ALM challenges to a greater extent. Most banks offer many types of savings products with contrasting characteristics to cater to the ever-changing market needs. The ALM challenge lies in the differentiation properties of each product.The aim of ALM is to retain a balance between interest-sensitive assets and their sources of finance (savings, deposits, equity and external credit) and to reduce interest rate risk besides maximizing profitability.Savings and current account marketing through better service to customers or change in the ALM mix could have a negative effect on liquidity if they are not followed closely.
CONCLUSION:
It is clear that only growth in deposits and demand for credit will increase the profitability of any bank, regardless of size. Having obtained this hypothesis, the researcher covered only the part of the deposits for the realization of the financial performance study. CASA is a low-cost deposit as it offers only low interest rates on deposits, unlike term deposits. This type of increase in deposits will reflect positive growth in maintaining the number of branches, increasing net interest margins as the spread (interest received - interest paid) increases and will lead to phenomenal growth in operating profits. What is concluded in this study is that CASA deposits did not create a positive impact on the three variables of the criterion in the case of nationalized banks. Profitability is therefore achieved only because of other factors. While in the case of new generation banks, CASA has created all kinds of positive impacts on all variables, namely branch growth, net interest margin and operating profits.
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Received on 14.03.2018 Modified on 09.04.2018
Accepted on 20.04.2018 ©A&V Publicatons All right reserved
Asian Journal of Management. 2018; 9(2):978-982.
DOI: 10.5958/2321-5763.2018.00154.3