BANK DEPOSITS & DEPOSIT MANAGEMENT Samir K Mahajan

Bank Deposits Banks accepts deposits from the public. Banks deposits are classified by type of customers, the tenure and its cost to the bank. Based on these parameters, deposits can be classified as follows.  Demand Deposits  Time Deposits Samir K Mahajan

Demand Deposits/ TRANSACTION ACCOUNT/PAYMENT DEPOSITS Demand Deposits/ are repayable by the bank on demand from the depositors. Such deposits facilitate the transfer of fund by deposit holders to third parties primarily through cheque and other forms,and cheques are readily accepted as a mode of payment. TYPES OF DEMAND DEPOSITS o Non-interest bearing demand deposits /Current account o Interest bearing demand deposits/Saving Bank Account Samir K Mahajan

Demand Deposits contd. Non-interest Bearing Demand Deposits /Current Account Non-interest bearing demand deposits are typically held by the individuals, businessman or government. Explicit interest payments on these deposits are prohibited on these deposits in most countries.  In India, non-interest bearing care maintained current account to meet the transaction need of the customers.  Current Accounts are basically meant for businessmen and are never used for the purpose of investment or savings.  These deposits are the most liquid deposits, and there are no limits/restrictions on number of transactions or the amount of transactions in a day or in the customers eligible to open these accounts. These are quite volatile source of funds for the banks.  Firms / Corporate depositors prefer these accounts for ease of operation.  Cheque book facility is provided, and the account holder can deposit all types of the cheques and drafts in their name or endorsed in their favour by third parties.  No interest is paid by banks on these accounts. On the other hand, banks charge certain service charges on such accounts. Samir K Mahajan

Interest bearing demand deposits/Saving Account Interest bearing demand deposits are held by individuals/households or certain types organisations say Trusts. Similar to current deposits, these deposits are used by the purpose of transactions by deposits holders, and a major portion of these are volatile.  These are called saving bank account in certain countries including India. These deposits not only provide cheque facility but allow withdrawal of funds from the accounts  The deposits normally carry a low rate of rate of interest around 4 per cent, and are primarily meant for households savings keep their earnings in these accounts for routine and other payments. RBI prohibits certain incorporated bodies from operating saving account.  Most of the banks have rules for the maximum number and amount of withdrawal in a period but hardly any bank enforces these. However, banks have every right to enforce such restrictions if it is felt that the account is being misused as a current account.  Since the financial year , interest earned up to Rs. 10,000 in a financial year on Saving Bank accounts is exempted from tax. Demand Deposits contd. Samir K Mahajan

Time deposits are deposits which are repayable after expiry of specified period varying from seven days to ten years or more. TYPES OF Time DEPOSITS o Fixed /Term deposits o Recurring deposits o Reinvestment deposits o Accumulated deposits o Certificates of deposits o Fixed deposits under various schemes conceived and marketed by individual banks Time Deposits

Fixed Deposit or Term Deposits/ FD accounts Fixed deposits are deposited for a fixed period of time, and are not supposed to be withdrawn before expiry date. However, in case of need, the depositor can ask for closing the fixed deposit prematurely by paying a penalty.  Interest rates are higher than any other deposits. The longer the period of maturity, higher is the rate of interest.  Banks offer fixed deposits schemes with a wide range of tenures for periods from 7 days to 10 years.  The rate of interest for fixed deposits differs from bank to bank.  Usually a bank FD is paid in lump sum on the date of maturity. If one desires to get interest paid every month, then the interest paid will be at a marginal discounted rate. Time Deposits contd. Samir K Mahajan

Recurring Deposit Account/ RD Account Recurring Deposit Accounts are suitable for people who do not have lump sum amount of savings, but are ready to save an fixed amount on monthly instalment basis.  Normally, such deposits earn interest on the deposited at the rates similar to fixed deposits. Any default in payment within the month attracts a small penalty.  However, some banks besides offering a fixed instalment recurring deposit, have also introduced a flexible / variable recurring deposit in the depositor is allowed to deposit higher amount of instalment with an upper limit fixed for the same.  Recurring deposit accounts are normally allowed for maturities ranging from 6 to 120 months. Premature withdrawal of accumulated amount permitted is usually allowed however, penalty may be imposed for early withdrawals.  These accounts can be funded by giving Standing Instructions by which bank withdraws a fixed amount on a fixed date of the month from the saving bank account of the customer (as per his mandate), and the same is credited to recurring deposits account. Time Deposits contd. Samir K Mahajan

Reinvestment Deposit Re-investment deposit allows interest gets reinvested every quarter in term deposit till the date of maturity. Thus, Interest is compounded every quarter, and reinvested to make the saving grow faster. Existing term deposit accounts can freely be converted to reinvestment term deposit accounts and vice versa. Thus, interest gets interest. Accumulated Deposit Accumulated Deposit is the time deposits for corporate customers. Under this product, customers can make additional deposit to their accounts at any time during the deposit term, and enjoy attractive interest rates which best suits enterprises’ demand for fund accumulation to implement their assets procurement plan or project investment in the future. Accumulated deposits are safe way of ensuring growth of savings. Interest is accrued on monthly basis, and is paid to the same. Certificates of Deposits A certificate of deposit (CD) is a short-term fixed deposits issued by banks which can be transferable/tradable, and matures within one year. It is intended that the CD be held until maturity, at which time the money may be withdrawn together with the accrued interest. Fixed rates are common, but some institutions offer CDs with variable interests. Certificate of deposit is a negotiable money market instruments giving investors greater flexibility in deployment of their short-term surplus funds. Time Deposits contd. Samir K Mahajan

TYPES OF BANK DEPOSITS IN DIFFERENT COUNTIES Types of Bank Deposits in USA  Transaction or checking account  Demand Deposits Account (DDA)  Negotiable Order of Withdrawal (NOW) Account  Money Market Deposits (MMD) Account  Saving Account  Certificates of Deposits (CD)  Automatic Transfer Service Account Samir K Mahajan

Types of Bank Deposits in USA contd. Predominates type are:  Demand Deposits Account (DDA): Demand Deposits Account (DDA) is non-interest bearing checking account predominantly held by commercial units though individuals also can hold them. Similar to current account in India, it is also called basic checking account which require very low minimum balance, and in which unlimited number of check/cheque can be drawn. As the name suggests, withdrawal can be made on demand (without any advance notice). Charges are applicable to such accounts. Negotiable Order of Withdrawal (NOW) Account: Negotiable Order of Withdrawal (NOW) Account is hybrid of checking and saving deposits. NOW account requires the customers to give notice (at least 7 days’ notice) to the bank before withdrawing funds. However, the notice requirement is hardly exercised by bank and the NOW is being used like an interest bearing checking account in which unlimited number of check/cheque can be drawn. If balance in such account falls below a certain minimum level, service fee is charged.  Money Market Deposits (MMD) Account :Money Market Deposits (MMD) Account is basically short term deposit with limited cheque writing privilege and transaction (transfer). These accounts are not generally suited for day-to- day business transactions, given the restrictions on their use. Balances in such account are invested in short-debt in money market. If balance in such account falls below a certain level, service fee is charged. Rate of interest is higher than NOW Account. MMDs are primarily introduced to compete with money market mutual funds. Samir K Mahajan

Types Of Bank Deposits In Different Counties contd. Types of Bank Deposits in USA contd.  Saving Account Saving Account is intended to provide an incentive to holder to save money. Holders can usually make deposits and withdrawals, but usually cannot write cheque/check. Such account pays an interest higher than NOW account but lower than MMD account and certificate of deposits. A service fee will be charged if balance in such account falls below a certain level.  Certificates of Deposits Certificates of Deposits are time deposits with rate of interest higher than regular saving account. CDs are similar to savings accounts in that they are insured and thus virtually risk-free. They are different from savings accounts in that the CD has a specific, fixed term (often monthly, three months, six months, or one to five years), and, usually, a fixed interest rate. It is intended that the CD be held until maturity, at which time the money may be withdrawn together with the accrued interest. A substantial penalty is imposed for an early /premature withdrawal. Samir K Mahajan

Types Of Bank Deposits In Different Counties contd.  Automatic Transfer Service Account In Automatic Transfer Service Account, customer has both demand deposit account and saving account. On a general level, it can mean any automatic transfer of funds between two accounts of a customer. For example, a regular transfer from a checking account to pay off a bank loan, or a monthly transfer from a checking account to a savings account. More specifically, it describes the overdraft protection provided when there is an automatic transfer of funds from a customer's savings account to his or her checking account when there are insufficient funds to cover unpaid checks or maintain a minimum balance. Ordinarily, the bank will transfer the exact amount of funds required to cover unpaid checks. The customer avoids any overdraft fees and all the hassle associated with returned checks. Types of Bank Deposits in USA contd. Samir K Mahajan

Types Of Bank Deposits In Different Counties contd. Types of Deposits in U.K Predominant types are:  Current Account which provided a cheque-book but usually pay no interest. These accounts are primarily used to pay bill.  Deposits Account which pays interest, and is used primarily for short term saving.  Investment /Saving Account which pays higher interest, and is used primarily for long term saving. Notice of withdrawal is given in writing. Samir K Mahajan

Types Of Bank Deposits In Different Counties contd. Types of Deposits in Canada Predominant types are:  Checking account/transaction account with a bank debit card and low interest rate  Saving account with higher interest rate subject to maintenance of minimum balance and restriction on number of withdrawal  Term Deposits  Guaranteed investment certificates which are term investments with higher interest rate but are not often redeemable (cashable) before maturity. Samir K Mahajan

Types Of Bank Deposits In Different Counties contd. Types of Deposits in U.K Predominant types are:  Transaction Deposits/checking account/no interest deposit is primarily used not for saving but for business purpose  Non-transaction deposits /saving account deposits bears interest  Certificate of deposits  Term deposit account Samir K Mahajan

Deposit insurance is a measure implemented in many countries to protect bank depositors specially small depositors, in full or in part, against the risk of losing their savings in the event of bank’s inability to meet its liabilities/debt due. The purpose of the scheme is o to protect depositors in case of bank failures o to instil the confidence of the depositors in the banking system o to help banks mobilise deposits which is catalyst to economic growth and development o to promote financial stability, and growth of the banking system o to avoid panic in case of bank run Deposit Insurance was introduced in India in India is the second country in the world to introduce such a scheme - the first being the United States in DEPOSIT INSURANCE in India Samir K Mahajan

The Deposit Insurance Corporation (DIC) Act 1961 was initially extended to the functioning of commercial banks. In the early 1960s, 287 banks got registered with it as insured banks which were reduced to 100 as a result of RBI’s policy of reconstruction and amalgamation of small and financially weak banks. In 1968, the DIC was amended to extend deposit insurance to 'eligible co-operative banks' witnessed the establishment of another institution the Credit Guarantee Corporation of India Ltd (CGCI). The establishment of the CGCI was essentially in the realm of affirmative action to ensure that the credit needs of the hitherto neglected sectors, and weaker sections were met. The essential concern was to persuade banks to make available credit to not so creditworthy clients. In 1978, the DIC and the CGCI were merged to form the Deposit Insurance and Credit Guarantee Corporation (DICGC). With the financial sector reforms undertaken in the 1990s, credit guarantees have been gradually phased out, and the focus of the Corporation is again back to its core function of Deposit Insurance with the objective of averting panics, reducing systemic risk, and ensuring financial stability. DEPOSIT INSURANCE CONTD. Samir K Mahajan

DEPOSITS MANAGEMENT One of the main functions of banks is to accept deposits. Deposits are used for the purpose of lending. Since banks are using other peoples money to do business, it should make sure that it will be able to repay the deposits to the respective customers when they claim for it. The management of all this is called deposit management. Samir K Mahajan