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 DepositsTime Deposits

Samir K Mahajan

Demand Deposits/ TRANSACTION ACCOUNT/PAYMENT DEPOSITS

Samir K Mahajan

Demand Deposits/ TRANSACTION ACCOUNT/PAYMENT DEPOSITS

TYPES OF DEMAND DEPOSITS

oNon-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 demand deposits are maintained in current account

Businessmen, Firms or  Corporate depositors who carry out large number of transactions prefer current accounts for ease of operation

current accounts are never used for the purpose of investment or savings. 

Samir K Mahajan

Demand Deposits contd.

Non-interest Bearing Demand Deposits /Current Account contd.

These deposits are the most liquid deposits, and there are no limits/restrictions on number or amount of transactions in a day

These are quite volatile source of funds for the banks.

  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

Demand Deposits contd.

Samir K Mahajan

 Interest bearing demand deposits/Saving Account contd.

The deposits normally carry a low rate of rate of interest around 4 per cent, and are primarily meant for households savings who keep their earnings in these accounts for routine and other payments.   

 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 2012-13, 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 oFixed /Term depositso Recurring depositso Reinvestment depositsoAccumulated deposits oCertificates of depositsoFixed 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.

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.   

are normally allowed for maturities ranging from 6  to 120 months.

some banks besides offering a fixed instalment recurring deposit , have also introduced a flexible / variable  recurring

withdrawal of accumulated amount 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.

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.

Time Deposits contd.

Samir K Mahajan

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.

Time Deposits contd.

Samir K Mahajan

Certificates of DepositsA 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 AccountAutomatic Transfer Service Account Certificates of Deposits (CD)

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 an interest bearing checking account (demand deposits) in which unlimited number of check/cheque can be drawn. Bank holding the NOW account must reserve the right to require at least 7 days’ notice period of withdrawal (which is rarely exercised). 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 AccountIn 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

Predominates type 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

Predominates type 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

NRI ACCOUNTS FOR NRI / PIO IN INDIA

NRI ACCOUNTS allows Non-Resident Indians (NRI) or a Person of Indian Origin (PIO) and an Overseas Citizen of India (OCI) hold and maintain the different types of accounts with an Authorised Dealer in India (a bank authorised to deal in foreign exchange) without the permission from the Reserve Bank. However, individuals/ entities of Bangladesh and Pakistan require prior approval of the Reserve Bank. o Non-Resident Ordinary Rupee Account (NRO Account)o Non-Resident External Rupee Account (NRE Account)o Foreign Currency Non-Resident (Bank) Account – FCNR (B) Accounto Resident Foreign Currency Account(RFC)

Both NRO and NRE accounts are Rupee accounts. A Non-Resident Indian is often faced with the situation of maintaining a Rupee account in India. Primarily there are two reasons for opening such account: NRI wants to repatriate overseas earned money back to India and/or NRI wants to keep India based earnings in India.

One needs to maintain an average monthly balance of Rs 75000 in both NRE and NRO accounts.NRO Savings accounts can also be maintained with the Post Offices in India.

Non-Resident Ordinary Rupee Account (NRO Account)

NRO Accounts may be opened / maintained by NRIs/PIOs/OCIs in the form of current, savings, current and fixed in which balances are denominated in Indian Rupees.

Tax-ability: NRO accounts are taxable. Interest earned in NRO account and credit balances are subject to income tax, wealth and gift tax.

 Credits: Permissible credits to NRO account includes inward remittances in permitted currency from foreign countries through normal banking channels, transfers from other NRO accounts, deposits of funds originating from India such as current income earned (like rent, dividend, pension,interest, etc) in India, sale proceeds of assets including immovable property acquired out of rupee/foreign currency funds or by way of legacy/ inheritance.

NRI Account contd.

NRIs may also convert their existing resident savings account into an NRO account when their status changes from resident to non-resident.

Debits: Eligible includes local payments, transfers to other NRO accounts or remittance of current income abroad. Balances (current income) in an NRO account are remittable by NRIs/ PIOs up to USD 1 (one) million per financial year after payment of eligible taxes. Funds can be transferred to NRE account within this USD 1 Million facility. Hence balance in NRO has restricted repeatability

NRI Account contd.

NRO Account

Non-Resident Ordinary Rupee Account (NRO Account) contd.

 Joint Accounts:The accounts may be held jointly with residents and / or with non-resident Indian.  The NRO account holder may opt for nomination facility.

Loan Facilty: Loans against the deposits can be granted in India to the account holder or third party subject to usual norms and margin requirement. The loan amount cannot be used for re-lending, carrying on agricultural/ plantation activities or investment in real estate.

Loan outside India is not permitted to account holder.

NRI Account contd.

Non-Resident External Rupee Account (NRE Account) NRE Accounts may be in the form of savings, currents, recurring, fixed by NRIs/PIOs/OCIs in which balances are maintained in Indian Rupees.  Balances held in the NRE account are freely repatriable (i.e. Principal and interest earned of any amount can be transferred from India to NRIs’ residents countries). Banks are free to fix the interest rates but in case of term deposits interest rates can not be higher than those offered on domestic rupee deposits .

 Tax-ability: Income earned in the NRE accounts is exempt from income tax and balances exempt from wealth tax

Credit: Permissible credits to NRE account includes inward remittance to India in permitted foreign currency, interest accruing on the account, interest on investment, transfer from other NRE/ FCNR(B) accounts, maturity proceeds of investments (if such investments were made from this account or through inward remittance).

Current income such as salary, rent, dividend and other such income earned in India is not permitted in NRE account.

NRI Account contd.

Non-Resident External Rupee Account (NRE Account) cotd.

Debit: Eligible debits includes local disbursements, remittance outside India, transfer to other NRE/ FCNR(B) accounts and investments in India.

Joint Account: An  NRI can open joint account with a resident close relative (as defined in Section 6 of the Companies Act, 1956). The resident close relative will be eligible to operate the account as a Power of Attorney holder in accordance with extant instructions during the life time of the NRI/ PIO account holder. Nomination facilities are available.

Loan Facility: Authorised dealer can sanction loans in India to the account holder/ third parties without any limit, subject to usual margin requirements. These loans cannot be repatriated outside India and can be used in India only for the purposes specified in the regulations. Authorised Dealers may allow their branches/ correspondents outside India to grant loans to or in favour of non-resident depositor or to third parties at the request of depositor for bona fide purpose against the security of funds held in the NRE/ FCNR (B) accounts in India, subject to usual margin requirements

NRI Account contd.

Foreign Currency Non Resident (Bank) Account – FCNR (B) Account 

FCNR (B) accounts not savings accounts but term deposit accounts for a period of 1 to 5 years . The  balance in such account can be mantained in any freely convertible currency i.e. a foreign currency which is freely convertible. The interest rates are stipulated by the Department of Banking Operations and Development, Reserve Bank of India.  When an account holder becomes a person resident in India, deposits may be allowed to continue till maturity at the contracted rate of interest, if so desired by him. Balances held in the FCNR Account accounts are freely repatriable

Tax-ability: Income earned in the FCNRaccounts is exempt from income tax and balances exempt from wealth tax

NRI Account contd.

Permissible credits: Credits permitted to this account are inward remittance from outside India, interest accruing on the account, interest on investment, transfer from other NRE/ FCNR(B) accounts, maturity proceeds of investments (if such investments were made from this account or through inward remittance).

Premature withdrawals: One can withdraw form FCNR before completion of the selected term. Premature withdrawal is subject to a penal interest of 1%. Moreover, no interest is payable if the deposit is closed within a year.

NRI Account contd.

Resident Foreign Currency Account(RFC)-Domestic

 Returning NRIs /PIOs may open, hold and maintain with an authorised dealer in India a Resident Foreign Currency (RFC) Account to transfer balances held in NRE/FCNR(B) accounts. RFC accounts may be maintained in the form of current, savings (without cheque facility) or term deposit accounts and held singly or jointly only in the names of eligible persons. The term deposit accounts can be maintained for one to three years. Balances are maintained in permissible and freely convertible foreign currencies such as: Pound Sterling (GBP), US Dollar (USD), Japanese Yen and (JPY), EURO (EUR).

No loan/overdraft is granted by banks against balances in RFC accounts.

Interest rates offered on RFC account varies by term and by currency. Interest credited is taxable. However, TDS (tax deducted at source) exemption can be claimed on interest earned basis declaration of RNOR (resident but not ordinarily resident) status, if eligible, at the start of the financial year.

Permissible credits: Any foreign exchange from sale of eligible assets abroad; eligible assets include bank accounts, overseas shares and securities, immoveable property and investment in business outside India. Proceeds of assets /Any income earned from assets held outside India at the time of return such as dividends, interest.

NRI Account contd.

Resident Foreign Currency Account(RFC)-Domestic contd.

o Transfer funds from your NRE or FCNR account into the RFC account once account holder become a resident Indian; in such cases, no penalty for premature withdrawal will be levied on your NRE or FCNR accounts.

o Pension, superannuation etc. received from employer outside India

Funds in RFC account can be used for following purposes:o for any remittances or investment abroad.o for maintenance of dependents or any personal purposes abroad.o for expenses and investments to be made in India.

The funds in RFC accounts are free from all restrictions regarding utilisation of foreign currency balances including any restriction on investment in any form outside India.

RFC accounts are permitted to be held jointly with the resident close relative(s) as defined in the Companies Act, 1956. However, such resident Indian close relative as joint account holder shall not be eligible to operate the account during the life time of the resident account holder.

NRI Account contd.

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 systemo 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 1962. India is the second country in the world to introduce such a scheme - the first being the United States in 1933.

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'.

1971 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