2. DIFFERENT DEPOSIT PRODUCTS OR SERVICES
The major functions of a bank are to
mobilize deposits from the public and
to invest and/or lend these deposits to
individuals, firms and corporate
institutions.
Types of Deposits:
Demand Deposits and Time Deposits.
3. Demand Deposits
Payable on demand.
Low interest rates or no interest. .
includes current, savings, overdue
deposits and unclaimed deposits.
Interest is paid on half yearly basis in
saving accounts.
5. Current Deposits:
Current deposit accounts are opened to meet the
transactions of business and trade and hence are not
entitled to any interest from the bank.
On the contrary, the bank could levy charges for
maintaining the accounts in the form of per page fees,
per cheque leaf debit charges, minimum balance fees
etc.
The minimum balance could differ from bank to bank.
There are no restrictions on the number of transactions
per day but the customer has to pay cheque leaf
charges at the time of issue of cheque books by the
bank.
Current account is meant, normally for trading or
business transactions where every transaction made is
only through cheque.
6. Saving Deposits:
Its purpose is to inculcate a habit of saving.
It is opened by individuals/trusts, etc. Interest is paid at
a rate as determined by RBI.
At present, it is 3.5 (4) per cent per annum on the
minimum balance in between 10th and last day of the
month.
The bank's customers can withdraw amounts either by
cheque or withdrawal form.
Interest paid is on a half yearly basis.
Nomination facility is available.
In the case of frequent return of cheque due to
insufficient funds, the bank can impose a penalty and
ultimately close the account after due notice to the
customer.
The numbers of withdrawals are restricted by each
bank and the minimum balance to be maintained could
vary between Rs. 100 and Rs. 25,000.
7. Time Deposits
Repaid after expiry of the Deposit
Period.
High interest rates, which vary
according to period.
Time deposits from 7 days to 120
months period with or without
reinvestment plans.
Interest is paid on quarterly rests and
is *cumulative every quarter
8. Features of Time Deposit
Accounts may be opened by individuals or firms or corporate or by
designated institutions.
Amount is repayable on maturity. Banks issue deposits with maturity
from seven days to one hundred and twenty months.
Rate of Interest is fixed for each bank for different periods.
Deposits are kept for a fixed period but could be withdrawn before
maturity at a reduced rate of interest.
The interest is cumulative on quarterly rests.
Tax has to be Deducted at Source (TDS) by banks, if the interest
paid on deposits is Rs. 10,000 or more at a time. The rate of TDS is
10 per cent and surcharge as applicable as per extant Income Tax
Rules.
Term deposits are not transferable.
Term deposits maturing on Sundays and other public holidays or
non-business days are paid with interest for such days at the
contract rate since the amount is not paid on the due date.
Cash payment of term deposits is possible if the amount of the
deposit receipt, including interest thereon does not exceed Rs.
20,000. Amount exceeding this limit can be paid only through
cheque or is credited to operative saving or current account of the
depositor,
9. Term Deposits are classified
under various schemes as:
Fixed Deposits (with simple interest payable
every 6 months),
Monthly Interest Deposits (interest payable
monthly),
Quarterly Interest Deposits (interest is payable
every quarter),
Short-term Deposits (period of deposit less than
a year),
Reinvestment Deposit Scheme (interest is not
paid out but reinvested by the bank. The interest
is capitalized),
Recurring Deposit Scheme (deposits are credited
in equal installments on monthly basis by the
customer).
10. SERVICES TO CUSTOMERS AND INVESTORS
The main objective of services to
customers and investors is to provide
a comprehensive range of services to
the corporate sector, besides
augmenting revenue earnings for the
banks.
The primary activity of a merchant
banker is to help a body corporate to
mobilise funds either through an IPO,
popularly called a Public issue or
Private Placements of Debt or Equity.
11. Merchant Banking
Merchant bankers are financial
intermediaries.
They act as intermediaries of transfer of
capital from those who own it (Investor or
Bond Subscriber) to those who use it
(Corporate or Governments).
Merchant bankers assist in introducing or
selecting or appointing outside
technical consultants in addition to in-
house technical personnel for
preparation of a detailed project report,
market survey report, feasibility studies
etc.
12. If the company has already prepared the project
report, the viability of the project is seen from the
financial angle; effective implementation is carried
out by guiding the corporate, with regards to
procedural matters, viz.:
Obtaining regulatory clearances such as RBI, SEBI, Ministry of Finance (MoF),
stock exchanges (BSE, NSE), and Registrar of Companies etc.
Planning and timing of IPO.
Underwriting (guaranteeing) of IPO by financial institutions or brokers. At present
major banks act as both merchant bankers and underwriters. But it is not
mandatory that all banks acting as merchant bankers to be underwriters.
Selection and appointment of Principal Broker and Sub-Brokers. With book
building now in vogue for IPO, the merchant bankers also help in identifying lead-
book-runners and sub-book runners.
Selecting and appointing the registrar for the Issue and fixing their remuneration.
Selecting and appointing advertising consultants or agencies for publicity
campaigns, investor conferences, analyst conferences and road shows.
Printing and distribution of prospectus and application forms to brokers and sub-
brokers and book runners.
Making application to stock exchanges for listing of the security.
Monitoring and reporting the progress of the offering to the company and
regulatory bodies and other stake holders if any.
13. Lease Financing
This means leasing out the capital purchase
of assets to another company against
monthly rents for asset's consumption or use.
Here, the finance is arranged by the
institution, which does not enjoy the use of
asset, called Lessor.
The Lessor is entitled to write off a certain
amount of capital cost against its taxable
profits until it is suspended.
While the lessee is benefited in not investing
for capital cost plus lease expenses are
permitted as revenue expense in the books
for the lessee.
14. The lease can also be arranged on
any existing freehold asset(s) or
long leasehold property by either
mortgaging it or
by selling it at market price to a
leasing company;
this leasing company in turn would
lease it back to seller of the asset on
lease thus benefiting both. In a lease,
the hirer of the equipment will not
become the owner thereof.
15. Advantages to Lessee
Use of asset without incurring the capital
cost, thus saving on cost benefit of capital
use.
As lease rentals are permitted as a
permitted business revenue expense, they
lead to depression in profits and ultimately
less taxation on profits.
Since there is no capital cost, this does not
impact the liability side of the balance
sheet.
Credit worthiness of the lessee is intact if
lessee approaches a financial institution for
other credit related facilities.
16. Disadvantages to Lessee
Ownership of the asset is with the lessor and
not the lessee.
Since the lessor imposes usage terms and
conditions on assets, asset is permitted to be
used for agreed business purposes only; this
takes away the leverage from lessee for
utilising the asset for alternative business
purposes, if any.
Confiscation or repossession of asset by
lessor on breach of terms and conditions of
use of asset.
Possibility of lessor/owner becoming
insolvent or going into liquidation; thus in
such a scenario, the asset may be attached
by the creditor's official liquidator
17. Plastic Money
Payments for purchases can be made in cash,
cheques or cards. In respect of cash, there is
the limitation that bigger payments cannot be
made in cash on account of the need to carry
bulk.
Cheques are not often accepted as the credit
standing of the person issuing a cheque is not
apparent. In the circumstances,
plastic money in the form of credit and other
cards has become a preferred mode of
payments and has wide acceptance among
public.
With the increasing use of plastic money the
financial system is moving towards cashless
18. There are different types of plastic money, some of
which are discussed below:
Charge
Card
Credit
Card
Debit
Cards
ATM
Card
19. Charge Card
In this, transactions by the cardholder
are accumulated over a period of time,
generally a month and the total amount
is charged, i.e. debited to the account of
the cardholder.
The cardholder is given time of about 25
to 50 days to credit his account, in case
there are insufficient funds in his account
at the time of debit.
Since the transactions are only
accumulated and charged when the
holder is expected to pay the amount,
such cards are called charge cards.
20. Credit Card:
The difference between the credit and charge card is
that in case of charge card, the amount becomes
payable immediately on the debit to the account.
In case of credit cards, the cardholder is sent a bill
indicating the dues and he/she has the option to pay the
entire amount as soon as the bill is received or choose
to pay only certain percentage of the amount billed, in
which case the cardholder gets a credit to the extent of
the balance amount of the bill.
Whereas no fee is levied if the full amount billed is paid
within a given due date, a service fee/interest is
charged on the payment which is deferred.
Whereas charge card would require the cardholder's
account in the concerned bank, the dues on the credit
card can be paid by a cheque drawn on any bank.
In other words, a credit cardholder need not maintain an
account with the card issuing bank.
21. Like other loans and advances, credit card
dues may also be defaulted.
Thus, Credit Cards might cause credit risk for
the card issuing banks.
As credit cardholders are dispersed in a large
geographical area where the card issuing
bank may not have adequate reach and a
majority of the cardholders may not have
accounts with the bank, the card issuing
banks have to select the clients for issue of
cards after a thorough appraisal.
Collection of card dues should also be done
carefully and methodically. Banks, credit card
subsidiaries of banks and card companies
use call centers and collection/recovery
agents in managing card dues.
22. There are a number of parties involved in the
credit card business. They are:
i)Cardholder: The person on whose name the card has been issued,
ii) Card Issuing Bank: This is the bank which identifies the customer and issues the
card. This bank will raise a bill on the customer as per agreed billing schedule,
iii) Merchant: The person who has accepted payment through the credit card,
iv) Merchant Bank or Acquiring Bank: Once the card is swiped in the shop, the
merchant will seek credit from his/her bank. The bank which reimburses the merchant
is known as the merchant bank or acquiring bank,
v) Collecting Bank: The Merchant Bank will claim the payment from the card issuing
bank. This is known as the collecting bank,
vi) VISA and MasterCard are companies which run the credit card operations and they
capture all deals and settle the dues among the different intermediaries.
23. Debit Cards:
Debit cards are same as the credit cards. The only
difference in this card is that the amount of dues from
the cardholder for each and every transaction is debited
to cardholder's account as soon as each transaction is
notified to the issuer.
If the balance is insufficient to cover the debit, the
difference becomes payable immediately or else a
service fee is levied. If the amount payable is overdue
for a long period, the card may be cancelled.
Quite obviously, a debit card may not be the appropriate
card for those who would like to have a credit.
This has, however, an advantage in the sense that it
replaces the requirement of carrying cash or cheque
book, when the transactions are being carried out.
24. As the transactions in the Debit Card are debited
to the account instantaneously, they are relatively
less risky to banks than credit card.
Debit cards are thus suitable to customers who
are willing to avoid the debt trap-like situations
and lately debit cards are replacing paper money
in wallets; more so after banks started issuing
ATM-cum-debit cards.
Here, unlike in the case of credit cards, the
cardholders do not fall into debt trap, because
with debit cards, the cardholders' accounts are
directly and immediately debited up to the limit of
the balance available, as there is no prescribed
credit limit on debit cards.
25. Let us now list down some salient features of
debit cards:
Works like a passbook withdrawal, thus withdrawals
more than that of available balance in the account of
the customer are not allowed.
No credit loss to banks since the system works on
available funds in the customers' account.
It is a paper-less system of payment, i.e. no paper
money or cheques are required.
Payees and/or member establishments are sure of
payments, as the system operates only upon the debit
to account of the payee.
No transaction costs to customers.
(f) Since the payments are directly debited from the
account of payee, there is no late payment fees payable
by payee nor there any interest earnings for banks as
there is no credit involved.)*
g) Zero-risk weightage on debit cards as compared to
credit cards where the same has a 125 per cent risk
weightage.
26. ATM Card:
These are cards issued to the savings
account holders for drawing cash from
Automated Teller Machines which can
be placed in the branch or off site.
Some of the debit/credit cards are also
used as ATM cards. The ATMs ensure
availability of cash round the clock and
the customer need not visit the branch
for small transactions.
27. Advantages of the Credit Card
System:
The advantages of credit card system to all those who
are concerned are as under:
To the cardholder:
It is convenient for a cardholder to carry a credit card in
his/her wallet and make payment towards travel or
purchase. It allows the cardholder to draw cash too.
It inculcates a sense of financial discipline in them.
It provides a proof of purchase through banking
channels to strengthen the cardholders' position in case
of disputes with sellers etc.
It also allows giving spending power to add-on
members.
It also extends additional facilities like insurance
cover/discount etc.
28. To the merchant establishment:
Increase in sales because of increased purchasing
power of the cardholder due to credit available to the
card holder
Preferred locations by a cardholder.
Merchant establishments can avoid provision of direct
credit to customers.
Systematic accounting since sale receipts are routed
through banking channels.
Advertising and promotional support on a national
scale.
Development of a prestigious clientele base.
Assured and immediate settlement / payment.
Avoidance of the cost and security related problems
involved in handling cash.
29. To banks:
Scope and potential for better profitability out
of share earned from the traders' turnover.
Helps in establishing banking relationship
with new customers.
This also provides additional customer
service to the existing clients.
Better network spread of cardholders and
their increased use means higher popularity
and image for the banks.
Savings of expenses on cash
holding/stationery printing and manpower to
handle clearing transactions.
