Bank DepositsPrepared ByNILESH SEN1
Bank DepositsDeposits are a key source of low cost funds for banks. The bank isprofitable, when it is able to lend or inve...
Savings account deposits•This is the normal bank account that individuals and HinduUndivided Families (HUFs) maintain. The...
Example: Traditionally, banks paid an interest on the lowestbalance in the bank account between the 10th and the end of th...
 Since April 1, 2010, scheduled commercial banks have beendirected to pay interest on the daily balances. Thus, banks hav...
Current account depositsThis is maintained by businesses for their banking needs. It canbe opened by anyone, including sol...
 Current accounts do not earn an interest. Therefore,it is prudent to leave enough funds in currentaccount to meet the da...
Term Deposits•These are deposits that are maintained for a fixed term. The timeperiod can be anything from 7 days to 10 ye...
Suppose the bank offers 6% for deposits of 1 year, and 7% fordeposits of 2 years. The depositor placed money in a 2-yearde...
•Banks may also offer the facility of loan against fixed deposit.Under this arrangement, a certain percentage of the fixed...
•The term deposits may also be structured as recurring i.e. thedepositor would invest a constant amount every month / quar...
Hybrid Deposits / Flexi DepositsThese are value added facilities offered by some banks. Forinstance, a sweep facility may ...
 Superior interest earnings, as compared to normal CASA Less paperwork – no need to sign papers etc. for eachsweep in or...
Non-Resident AccountsThese can be opened by Non-Resident Indians and OverseasCorporate Bodies with any bank in India that ...
The depositor will have to bring in money into the accountthrough a remittance from abroad or through a transfer fromanoth...
Non-Resident External Rupee Account (NRE)As in the case of FCNR,o The money has to come through a remittance from abroad, ...
Non-Resident Ordinary Account (NRO)As with a NRE account,o It can be operated with a cheque, as in the case of any savings...
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Ch 4 DEPOSITS IN COMMERCIAL BANKS

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Ch 4 DEPOSITS IN COMMERCIAL BANKS

  1. 1. Bank DepositsPrepared ByNILESH SEN1
  2. 2. Bank DepositsDeposits are a key source of low cost funds for banks. The bank isprofitable, when it is able to lend or invest these funds and earn ahigher return.The deposit accounts serve various purposes of the accountholders:• A safe avenue to park surplus funds• Earn a return on surplus funds• Receive payments from others, and make payments to othersKinds of DepositsDemand DepositsThese are deposits which the customer can get back on demand orwhich are placed for very short time periods. For example:2
  3. 3. Savings account deposits•This is the normal bank account that individuals and HinduUndivided Families (HUFs) maintain. The account can be openedby individuals who are majors (above 18 years of age), parents /guardians on behalf of minors and Karta of HUFs.•Clubs, associations and trusts too can open savings accounts asprovided for in their charter.•Banks insist on a minimum balance, which may be higher if theaccount holder wants cheque book facility. The minimum balancerequirement tends to be lowest in the case of co-operativebanks, followed by public sector banks, private sector Indian banksand foreign banks, in that order.•Banks do impose limits on the number of withdrawals every month/ quarter. Further, overdraft facility is not offered on savingsaccount. 3
  4. 4. Example: Traditionally, banks paid an interest on the lowestbalance in the bank account between the 10th and the end of themonth. Suppose the balance in the depositors account in aparticular month was as follows:1st to 10th Rs. 50,00011th Rs. 10,00012th to 31st Rs. 50,000Although Rs. 50,000 was maintained for all but one day in themonth, the depositor would receive interest as if only Rs. 10,000(the lowest balance between 10th and the end of the month) wasmaintained in the account during the month.The bank thus got “free money” of Rs. 50,000 less Rs. 10,000 i.e.Rs. 40,000 for all but one day in the month.4
  5. 5.  Since April 1, 2010, scheduled commercial banks have beendirected to pay interest on the daily balances. Thus, banks havelost on the free money, and their cost of funds has gone up. Interest is paid on a half-yearly basis, every September andMarch.5
  6. 6. Current account depositsThis is maintained by businesses for their banking needs. It canbe opened by anyone, including sole-proprietorships, partnershipfirms, private limited companies and public limited companies.The current account comes with a cheque book facility.Normally, there are no restrictions on the number of withdrawals.Subject to credit-worthiness, the bank may provide an overdraftfacility i.e. the account holder can withdraw more than the amountavailable in the current account.6
  7. 7.  Current accounts do not earn an interest. Therefore,it is prudent to leave enough funds in currentaccount to meet the day-to-day business needs, andtransfer the rest to a term deposit. CASA is a term that is often used to denote CurrentAccount and Savings Account. Thus, a bank or abranch may have a CASA promotion week. Thismeans that during the week, the bank would takeextra efforts to open new Current Accounts andSavings Accounts7
  8. 8. Term Deposits•These are deposits that are maintained for a fixed term. The timeperiod can be anything from 7 days to 10 years. This is not like anormal operating bank account. Therefore, cheque book facility isnot offered.•Benefit of term deposits is that the interest rate would be higher.Weakness is that if the investor needs the money earlier, he bearsa penalty. He will earn 1% less than what the deposit wouldotherwise have earned, if it had been placed for the time periodfor which the money was left with the bank.8
  9. 9. Suppose the bank offers 6% for deposits of 1 year, and 7% fordeposits of 2 years. The depositor placed money in a 2-yeardeposit (at 7%), but did a premature withdrawal after 1 year. Theinterest earning would be limited to 6% (the rate applicable for thetime period for which the money was placed with the bank) less 1%i.e. 5%.9
  10. 10. •Banks may also offer the facility of loan against fixed deposit.Under this arrangement, a certain percentage of the fixed depositamount may be made available as a loan, at an interestrate, which would be higher than the term deposit rate. This is analternative to premature withdrawal.•Unlike interest rate on savings account, the interest in termdeposits is de-regulated. Therefore, every bank decides its owninterest rate structure. Further, it is normal to offer 0.50% extrainterest to senior citizens.•For large deposits of above Rs. 1 crore, the bank may beprepared to work out special terms.10
  11. 11. •The term deposits may also be structured as recurring i.e. thedepositor would invest a constant amount every month / quarter,for anything from 12 months to 10 years.•Benefit of such an account is that the interest rate on the futuredeposits is frozen at the time the recurring account is opened.Thus, even if interest rates on fixed deposits, in general, were togo down, the recurring deposits would continue to earn thecommitted rate of interest.•Interest rate in a recurring deposit may be marginally lowerthan the rate in a non-recurring term deposit for the same timeperiod11
  12. 12. Hybrid Deposits / Flexi DepositsThese are value added facilities offered by some banks. Forinstance, a sweep facility may be offered in their CASA accounts.Under the facility, at the end of every day, surplus funds beyondthe minimum balance required, is automatically swept into aninterest earning term deposit account. When more money isrequired for the regular operations, it is automatically swept fromthe interest earning term deposit account. Benefit for depositorsare:12
  13. 13.  Superior interest earnings, as compared to normal CASA Less paperwork – no need to sign papers etc. for eachsweep in or sweep out. Sweep out of money from the interest earning termdeposit account does not attract premature withdrawalcharges. However, unlike in a normal term deposit, interest rate isliable to be changed by the bank at any time.13
  14. 14. Non-Resident AccountsThese can be opened by Non-Resident Indians and OverseasCorporate Bodies with any bank in India that has an AuthorisedDealer license.• Foreign Currency Non-Resident Account (FCNR)These are maintained in the form of fixed deposits for 1 year to 3years. Since the account is designated in foreign currency(Pounds, Sterling, US Dollars, Japanese Yen and Euro), theaccount holder does not incur exchange losses in first convertingforeign currency into rupees (while depositing the money) – andthen re-converting the rupees into foreign currency (when hewants to take the money back).14
  15. 15. The depositor will have to bring in money into the accountthrough a remittance from abroad or through a transfer fromanother FCNR / NRE account. If the money is not in thedesignated foreign currency, then he will have to bear the cost ofconversion into the designated currency.On maturity, he can freely repatriate the principal and interest(which he will receive in the designated currency that he canconvert into any other currency, at his cost).Interest earned on these deposits is exempt from tax in India.15
  16. 16. Non-Resident External Rupee Account (NRE)As in the case of FCNR,o The money has to come through a remittance from abroad, or atransfer from another FCNR / NRE account.o The principal and interest are freely repatriable.o Interest earned is exempt from tax in India.The differences are:o It can be operated with a cheque, as in the case of any savingsbank account.o It is maintained in rupees. Therefore, a depositer bringing moneyin another currency will have to first convert them into rupees; andthen re-convert them to the currency in which he wants to take themoney out.16
  17. 17. Non-Resident Ordinary Account (NRO)As with a NRE account,o It can be operated with a cheque, as in the case of any savingsbank account.o It is maintained in rupees with the resulting implications in termsof currency conversion losses for the depositor.The differences from NRE are:o The money can come from local sources – not necessarily aforeign remittance or FCNR / NRE account.o The principal amount is not repatriable, though the interest canbe repatriated.o The bank will deduct tax at source, on the interest earned in thedeposit.o A non-resident can open an NRO account jointly with a resident.17

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