Everything About - BANKING ACCOUNTS

Two major activities in the banking sector are accepting deposits and giving loans. Accordingly, almost all banks accounts can be broadly classified in two categories – Deposit Accounts and Loan Accounts.

All deposit account, normally, show credit balance, indicating that this amount has to be repaid to the customer. On the other hand, all loan accounts show debit balance, indicating that this amount has to be recovered from the borrower. Holders of deposit accounts are called“depositors” and those of loan accounts are called “borrowers”.

All deposit are classified as liabilities of the bank and loans as assets of the bank. Total deposits of the bank are also referred to as Gross demand and time liabilities (DTL). After deducting interbank deposits, the net deposits are called Net demand and time liabilities (NDTL).

TYPES OF BANK ACCOUNTS
DEPOSIT ACCOUNTS		LOAN ACCOUNTS
DEMAND DEPOSITS	TIME DEPOSITS	DEMAND LOANS	TERMS LOANS
Savings Accounts	Recurring Deposit	Cash Credit Account	Housing Loan, Vehicle   Loan, Loan for Machinery
Currents Accounts	Fixed Deposits	Over Draft Account

Deposits accounts of the banks can be classified into two types:

1. DEMAND DEPOSITS

These accounts are running accounts and tenure for these accounts is not fixed. These can be maintained for as long as the customer maintains them satisfactorily. The customer has the facility to make repeated deposits and withdrawals in them. Also, facilities of cheque book is available in these accounts. Further, in these accounts, there is a condition of maintaining some minimum prescribed balance, violation of which attracts monetary penalty. These are of two types; Savings Accounts and Current Accounts.

2.SAVINGS ACCOUNTS

Also known as Savings Bank Accounts or SB Accounts in short, is the most popular bank account. These accounts are primarily meant for parking and safe keeping the savings of “individual” depositors. As their primary role is to encourage saving, there is a restriction on number of withdrawals / debits that can be made in these accounts. Usually, most of the banks do not allow more than fifty withdrawals in a six month period and in case this limit is crossed, some penalty is charged to the customer.

Savings accounts can be opened by businessmen for personal use but cannot be used for business purposes. Only individuals, one or more, are allowed to open Saving Bank Accounts or SB Accounts. Institution, Firms, Organization etc. (except those permitted by RBI) are not allowed to open savings account.

• Can be opened by individuals only for personal use.
• Business transactions are not allowed.
• Numbers of transactions are limited.
• Interest is payable on daily balance.
• Rate of interest is decided by the respective banks.
• Minimum balance has to be maintained except in case of Basic Savings Bank Account and Small Account.
• Cheque book facility is available.

SAVING BANK ACCOUNT FOR MINORS

Recent RBI guidelines state that children of age 10 years and above may be allowed to open savings account in their own name and may be allowed to operate the account independently.

BASIC SAVINGS ACCOUNTS

RBI has asked banks to rename the existing ‘No Frills Accounts’ as Basic Savings Bank Account. These accounts can be opened with zero balance with no restrictions on number of deposits but not more than four withdrawals, including that from ATM, will be allowed in a month. However, KYC norms must be fulfilled to open these accounts.

SMALL ACCOUNTS

To facilitate the pace of financial inclusion, RBI introduced these simple accounts that can be opened with relaxed KYC norms, merely on the basis of a NREGA or Aadhaar card. To avoid misuse of these accounts, there are 3 conditions:

• Balance at any time not to exceed Rs. 50,000.
• Sum of credits in 12 months not to exceed Rs. 1 Lac.
• Withdrawals per month not to exceed Rs. 10,000.

INTEREST ON SB ACCOUNTS

Saving accounts earn interest and banks are free to fix their own interest rate, with no minimum or maximum limits. Most of the banks are paying interest in the range of 4% to 7% per annum. With effect from 01.04.2010, interest is calculated on daily balance maintained in the account and may be paid at less than quarterly intervals. In practice, most of the banks pay interest at half yearly intervals.

Interest upto Rs. 10,000 per annum is exempted from income tax.

CURRENT ACCOUNTS

These accounts are primarily meant for business purposes but there is no restriction on individuals opening current account for personal use. There are virtually no restrictions on number of transactions. Facility of overdraft is permissible only in current accounts and not in saving account.

INTEREST ON CURRENT ACCOUNTS

As per RBI guidelines, banks are not allowed to pay any interest in these accounts. On the contrary, banks recover service charges from the customer for maintaining these accounts.

Cheque books are allowed in both – savings and current accounts.

CASA DEPOSITS

Funds in savings and current accounts represents one of the cheapest sources of funds for the banks as no interest is payable on current account deposits and savings account deposits are the next best option with minimum interest payment liability. Thus, to minimize their cost of funds, bankers make all out efforts to garner as much deposits as possible in current and savings account. Put together, they are called CASA (Current Account/ Savings Account) Deposits.

Feature	Saving Account	Current Account
Who can open	Only Individuals	No restrictions, Anybody / Institutions / Firms / Companies etc.
Purpose	For Personal use only; Business transactions not allowed	No restrictions, All type of transactions allowed
No. of Transactions	Limited	Unlimited
Interest	Payable	Not payable
Rate of Interest	No restrictions, Banks are free to decide their own rate	Interest not allowed
Method of Calculation	On daily balance basis at monthly intervals	Interest not allowed
Payment of interest	May be paid at less than quarterly intervals; usually paid at half yearly intervals	Interest not allowed
Minimum balance	Has to be maintained; except in zero balance accounts	Has to be maintained
Use of cheque book	Allowed	Allowed

COMPARISON OF SAVINGS AND CURRENT ACCOUNTS

TIME DEPOSITS

Unlike demand deposits, time deposits are accounts of fixed tenure, usually not exceeding ten years. Usually, rate of interest increases with the maturity period i.e. lower the maturity lower the interest and vice versa. No cheque book is issued in these accounts.

RATE OF INTEREST ON TIME DEPOSITS

Banks are free to decide their own interest rates for these accounts. These rates are decided by Asset Liability Committees (called ALCO) of the banks. Interest payable is compounded every quarter.

There are two types of time deposits – Recurring Deposit and Fixed Deposit.

1. RECURRING DEPOSITS

In these accounts, usually a fixed sum is deposited every month for a fixed period ranging from 6 months to 10 years. At the end of the period, total amount along with interest is returned to the depositor. In case some installments are not deposited in time, a penalty is charged.

2. FIXED DEPOSITS

It is the most popular account with the depositors for the purpose of investment. In these accounts, a specific amount is deposited for a specific period and the amount is repaid on maturity. A Fixed Deposit can be made for period of minimum 7 days and maximum 10 years.However, facility of pre-mature payment is also available at the request of the depositor, though it attracts a penalty. There are two options of interest payment in FD – it can be paid at monthly or quarterly intervals. RBI has now banks to pay interest in deposit account even at fortnightly or monthly intervals. Banks also offer facility of loan against the security of FD. These are also very popular as collateral security for securing various loans.

COMPARISON OF DEMAND AND TIME DEPOSITS

FEATURE	DEMAND DEPOSITS  SB AND CA	TIME DEPOSITS RD AND FD
Duration	No fix duration	Duration is fixed
Time limits	No such limit	Maximum 10 years
Use of cheque book	Allowed	Not allowed
Number of entries	Both Debits/ Credits are allowed	Only Credits are allowed
Withdrawal of amount	Can be withdrawn any time	Withdrawal allowed only by closure or on maturity