Chapter IV

Deposit Products After reading this chapter, you will be conversant with

Types of Bank Deposits

Computation of Interest on Deposits

Deposit Schemes

Composition of Bank Deposits

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 Overview of Banking 

“The process by which banks create money is so simple that the mind is repelled.”

– John Kenneth Galbraith

Credit creation and investment in securities, both require banks to mobilize deposits heavily from the marketplace. Equity capital serves very little purpose in meeting these fund requirements. Deposits are the foundation upon which banks thrive and grow. The ability of a bank’s management and staff to attract money from customers and businesses is an important measure to gauge a bank’s acceptance by the public. Deposits are the basis for bank loans and thus represent the ultimate source of bank profits and growth. These generate cash reserves through which new loans are created. The management effectiveness of a bank can be gauged by finding whether the deposits are raised at the lowest possible cost and whether enough deposits are available to fund those loans the bank proposes to make.

In today’s intensely competitive and increasingly deregulated market place, both the cost and amount of deposits of the banks are heavily influenced by the pricing schedules and competitive maneuverings of scores of bank and non-bank institutions offering similar services. The globalization of the financial markets has widened the avenues of funds for banks in the capital market. Banks are now able to raise capital both in national and international markets. Nevertheless, deposits gathered from the local markets are considered the primary support for assets in most of the banks. Deposits have typically lower interest costs than the other types of funds. Another important feature of these deposits is their relative stability compared to hot money i.e. the money raised from the money market etc. These two features of the deposits – stability and low cost source of funds, make them more preferred source of funds by banks. All things being equal, banks that have a greater deposit base are more valuable than the banks with poor deposit base.

In India, traditionally banks have been offering only mass banking products. Some of the most common deposit products are savings bank, current account, and term deposit account. The common lending products are cash credit and term loans. In the past, banks had little choice in the matter and had to accept deposits at rates and amounts fixed by Reserve Bank of India. Bank rate, which is dictated by the RBI, is the benchmark for interest on the lending products. Further, remittance products were limited to issuance of drafts, telegraphic transfers, bankers’ cheque and internal transfer of funds. 

With several developments ushered in by the liberalization and financial sector reforms, in the 1990s the entire banking product structure has undergone a major change. The banking sector has been deregulated and made more competitive. New private and foreign participants have been allowed entry into the sector. IT initiatives have made the banking operations easy and flexible to customers. Rapid strides in technology have, in fact, redefined the role and structure of banking. Further, due to exposure to global trends led by Internet, customers – both individuals and corporate – are now demanding better services with more products from their banks. Financial markets have turned into buyers’ markets. Banks are also changing with time and are trying to become one-stop financial supermarkets. Market focus is shifting from mass banking products to class banking with introduction of value added and customized products.A few new generation banks have already introduced customized banking products like Investment Advisory Services, SGL II accounts, Photo-credit cards, Cash Management services, Investment products and Tax Advisory services. Very few banks have also gone into money market mutual fund schemes. Eventually, the banks are planning to market bonds and debentures also. Banks selling insurance has already become a reality, which was considered a distant dream some time back. For eg. Aviva Life Insurance has tied up with ABN-Amro Bank to market its insurance products. Banks also offer advisory services termed as ‘private banking’ to “high relationship-value” clients.

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New distribution channels have transformed the way banking is conducted. More and more banks are outsourcing services like disbursement and servicing of consumer loans, credit card business, etc. Most of the new generation banks have been aggressively selling their products through Direct Selling Agents (DSAs). Home banking, telephone banking and Internet banking have already become common. ICICI bank was the first among the new private banks to launch its net banking service, called Infinity. It allows the user to access account information over a secure line, request chequebooks and stop payment, and even transfer funds between ICICI Bank accounts. Citibank has been offering net banking through its Suvidha program to customers. Products like debit cards, credit cards, flexi deposits, ATM cards, personal loans including consumer loans, housing loans and vehicle loans have been introduced by a number of banks. 

Corporates are also deriving benefits from the increased variety of products and competition among the banks. Certificates of deposit, Commercial papers, Non-convertible Debentures (NCDs) that can be traded in the secondary market are gaining popularity. Recently, market has also seen major developments in treasury advisory services. With the introduction of Rupee floating rates for deposits as well as advances, products like interest rate swaps and forward rate agreements for foreign exchange, risk management products like forward contract, option contract, currency swap are offered by almost every bank in the market. The list is growing day by day. 

Box 1: What’s Happening to Bank Deposits?

Focus on commercial banks’ reliance on non-deposit funding sources seems to have overshadowed a fundamental area of liability management – bank deposits. It has almost become a cliché that bank deposits are dwindling, but that is not the case. In fact, total domestic deposits of FDIC-insured commercial banks have increased 6 percent (annualized) over the past five years (1995-2000). In the deposit mix, savings and time deposits increased incrementally in 1999, while demand deposits declined less than 1 percent (annualized). Deposit growth since 1994 has been dampened by competition, customer attraction to equity markets, low interest rates on deposits, poor service, and a host of other reasons. However, some concerns remain: While bank deposits have grown 6 percent (annualized) over the past five years, in 1999 they posted a growth rate of 2.1 percent, the lowest of the period. Moreover, with industry loan growth exceeding deposit growth over the past five years, the funding shortfall has necessitated increased use of noncore funding, a trend that shows no signs of reversal.

The industry’s inability to increase demand-deposit growth, which has partially contributed to margin compression, is also cause for concern. If the banking industry cannot establish itself as a dominant and trusted choice in the emerging electronic bill payment and presentment area, significant bank-deposit migration could occur. A Federal Reserve Bank of New York study shows the internal growth rates of the 50 largest banking companies lagging the industry, with growth in these companies primarily attributed to mergers and acquisitions. With a lack of recent merger and acquisition activity, larger companies may need to focus more on internal growth.

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Considering the modest growth in deposits relating to loan and asset growth, banks’ increasing reliance on higher-cost noncore funding, and the significant impact of deposit disintermediation, analysts and examiners may increase their focus in this area. Further compounding liquidity risk is evidence to suggest that some correspondent banks have been reducing or eliminating funding to their community bank correspondents. In addition, some community banks may be approaching their limit for Federal Home Loan Bank borrowing. As such, an effective strategy for the retention and growth of bank deposits becomes more critical in this environment.

Source: Federal Reserve Bank of Cleveland, volume1, issue 2, 2000

TYPES OF DEPOSITS OFFERED BY BANKSDeposits are accepted in different ways. Differentiation in deposit types may arise from the type of customer who holds the deposit, tenure of the deposit, its nature and the interest factor. Based on these parameters, the deposits can be broadly classified into transaction and non-transaction deposits.

Transaction (Payments) DepositsA deposit which facilitates the account holder to transact through a negotiable or transferable instrument, cheque, a written order of withdrawal, a telephone order to transfer funds, or other similar means of making payments and transferring monies to third parties is known as a transaction account. These are one of the oldest deposit services offered by banks where banks make payments on behalf of its customers. This transaction or demand deposit service requires the bank to honor cheques and withdrawals. Transaction deposits include regular non-interest bearing demand deposits, which do not earn an explicit interest payment but provide the customer with payment services, safe keeping of funds and record keeping for any transactions carried out through cheques. They also include interest bearing demand deposits that provide all of the foregoing services and pay interest to the depositor. Current account and Savings account are the most widely used transaction accounts.

Non-interest bearing demand depositsThere are no interest payments on the current accounts. Payment of interest on checking accounts has been prohibited with the passage of the Glass-Steagall Act in the US. These demand deposits are among the most volatile and least predictable of a bank’s sources of funds, with the shortest potential maturity as they can be withdrawn without notice. Most non deposit bearing liabilities are held by business firms. Many of the individual account holders have moved towards other types of deposits that pay interest.

Interest bearing demand depositsIn the early 1970s in New England, hybrid checking-savings accounts were introduced in the form of Negotiable Order of Withdrawal (NOW accounts). NOWs are interest bearing saving deposits that give the bank the right to insist on prior notice before the customer withdraws funds. As the notice requirement is rarely exercised, the NOW can be used like checking account. In US with the passage of the Depository Institutions Deregulation Act, 1980, NOWs became a nationwide phenomenon.

In US, two other important interest bearing transaction accounts were created in 1982 with the passage of the Garn-St Germain Depository Institutions Act. Banks and non-bank thrift institutions could offer deposits competitive with the share accounts offered by money market funds that carried higher, unregulated interest rates and were backed by a pool of high quality securities. The result was

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the appearance of Money Market Deposit Accounts (MMDAs) and Super NOWs (SNOWs), offering flexible money market interest rates but accessible via cheque or preauthorized draft to pay for goods and services. MMDAs are interest-earning short maturity savings accounts with limited transaction privileges. Banks pay interest rates enough to attract and hold the customers deposit. The customer is usually restricted to limited transfers or withdrawals per month, with no more than three transactions as cheques written against the account. The interest rate paid on a money market account is usually higher than that of a regular passbook savings rate. Money market accounts also have a minimum balance requirement.

Box 2: Non-deposit Investment Products in Banking

In the beginning of 1990s, many of the customers of the banks have been moving out their funds from out of deposits at banks and thrift institutions into so called non-deposit investment products that promise better returns than are available on many conventional bank deposits. The shift of preferences from the conservative investments in bank deposits into uninsured stocks, mutual funds, annuities, and other investment products has forced the banks to relook at their business strategies to win back their customers. The potential advantages to banks include generating considerable fee income that may be less sensitive to interest rate movements than traditional bank services such as loans and deposits. In addition, it is possible that it might add prestige to a bank’s name and may help position the bank well for the future as more and more individuals’ start planning for retirement. Of late even in India, many of the new age retail banks are offering several non-deposit investment products.

What risks do non-deposit investment products pose for the banks?

There are several risks involved in the sale of these products. The value of these products is market driven and customers may blame the bank when they do not reach their earnings goals. Because of their reputation, customers may hold banks to a higher standard than securities brokers. As a result, banks may end up involved in costly litigation with customers who are disappointed or who claim that the risks involved were not adequately explained. In addition, banks may have compliance problems if they do not properly register their investment products or fail to follow the rules for the sale of these products.

Regulators already require banks to sell these products in a separate area from where deposits are taken and banks are required to prominently display that these products are not covered by deposit insurance. In addition, customers also must be informed that these products are subject to risks including potential loss of principal. In addition, banks must make sure that the names of these products cannot be confused with their regular banking products. Finally, banks must demonstrate that they are regularly monitoring themselves to ensure that their sales personnel are complying with the regulatory requirements and banks are also supposed to be sure that the products they sell meet the needs of each particular customer and situation. Compliance with these regulations would help minimize the risks inherent in these products to the bank.

Source: Office of The Comptroller of the Currency (OCC), USA

Non-Transaction (Savings, or Thrift) AccountsWhen the deposit account does not facilitate routine payments or transfer of funds for other transaction purposes, it is a non-transaction account. These deposits are designed to attract funds from customers who wish to set aside certain amount in anticipation of future expenditures or financial emergencies. These deposits pay

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higher interest rates compared to transaction deposits. While their interest cost is higher, thrift deposits are generally less costly for a bank to process and to manage. Most familiar examples of such accounts are the term deposit accounts.

Based on this differentiation of a transaction and a non-transaction account, the deposits mobilized by the Indian banks are generally classified into Current Account, Savings Bank Deposits and Term Deposits. A detailed discussion on the features of these deposit accounts, the computation of interests etc. is given below:

Banks receive deposits through three types of basic accounts: demand deposits (also known as a checking account or demand deposit account), savings deposits and fixed-time deposits.

Current AccountThe depositor can withdraw the money at any time (as long as the money is available in the account) and also can order the bank to use the money to pay third parties, generally through a cheque. Banks may or may not pay interest on these accounts. If they pay interest, the account is called a “NOW” (negotiable order of withdrawal) account. It is possible that banks may charge fees for demand deposit accounts, but in many cases these fees can be reduced or avoided by maintaining a minimum balance or by satisfying other criteria established by the bank.

As mentioned earlier, current accounts are transaction accounts and hence are offered to business firms. Due to the ease the business firms have in depositing and withdrawing funds from this account, it actually facilitates cash management for the firms. No advance notice is required to withdraw the amount. It being an operating account, the customer can easily withdraw funds from the current account using a cheque facility. However, banks do require the account holder to maintain a certain amount of minimum balance continuously. In some cases, depending on the credibility of the customer, the bank may also allow the deposit holder to overdraw (OD) from the current account. As the account enables easy liquidity, the deposit in this account does not earn any interest. Although these accounts are non-interest bearing liabilities of the bank, they are not expense free as they generate processing costs. To cover these costs, the banks usually collect service charges related to account activity or account balances or both.

Savings Bank AccountThe depositor usually plans to maintain the funds in the account for an extended period of time. Banks pay interest on these accounts. Banks may also charge fees for savings accounts, but in many cases these fees can be reduced or avoided by maintaining minimum balances. Other than for business purpose, operating accounts are also necessary for individuals, trusts, non-profit organizations, etc. However, these types of deposit holders have fewer transactions when compared to business firms. Savings bank (SB) account facilitates liquidity to these depositors.

A savings bank account however cannot be opened by banks in the name of:

– Government Departments.

– Municipal Corporations/Committees.

– Panchayat Samitis.

– Metropolitan Development Authority.

– Societies.

– State/District Level Housing Co-operative Societies, Housing Boards.

– Bodies depending on Budgetary Allocations for performance of their functions.

– Water and Sewerage/Drainage Boards.

– State Text Book Publishing Corporations.

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– Any trading, business or professional concern whether such concern is a proprietary/partnership firm/company/association.

– Any political party.

Similar to the current account, the banks do not generally require any advance notice for withdrawals for the SB account. While the SB account also has cheque facility, only a limited number of cheques can be written. Again, banks require the deposit holder to maintain a minimum balance. While the required minimum balance may vary from bank to bank, most banks require the depositor to maintain this amount on a continuous basis. Some other banks require the depositor to maintain the minimum balance on an average basis over a period of time, say three months. The bank may charge for any shortfall in this minimum balance. Some of the new private banks are however offering zero balance facility i.e. deposit holder need not maintain a minimum balance.

INTEREST RATES OFFERED ON DIFFERENT TYPES OF DEPOSITSDifferent deposit products generally carry different rate of interest. In general the longer the maturity the greater is the yield the depositors earn due to the time value of money and the frequent upward slope of the yield curve. For example, a customer can withdraw NOW accounts and savings deposits immediately; accordingly the bank offers a rate that is lowest of all deposits. In contrast, negotiable CDs and term deposits with longer maturity often carry the highest deposit interest rates that a bank can offer. The size and the perceived risk exposure of the offering banks also play an important role in shaping the deposit interest rates. Other key factors are the marketing philosophy and goals of the offering bank. Banks that choose to compete for deposits aggressively usually post higher offer rates to bid deposits away from their competitors. In contrast when a bank wants to discourage a type of deposit, it allows its posted rate to fall relative to interest rates offered by its competitors. As discussed earlier the current account does not have to pay any interest; however, the SB account will earn interest for the deposit holder. The SB interest rates are prescribed by the RBI and the prevailing rate is 3.5% per annum. This interest will be paid on the minimum balance that is maintained in the account from the 10th to the end of the month. This minimum amount is expected to be maintained throughout the month and a monthly product is arrived at after multiplying this amount with the number of days in the month. On this monthly product, the interest will be calculated (rounded to a rupee). Having computed the interest amount, the bank will pay the same at quarterly or longer periods. Normally the periodicity is half-yearly.

Illustration 1The following are the balances maintained by a depositor in the SB account as shown in the SB passbook. Compute the interest that the bank will have to credit into the account in the following two cases (1) quarterly payment (2) half-yearly payment. Assume that the rate of interest is 4% p.a.

Date Balance (Rs.)08/04/02 1050017/04/02 1800022/04/02 650030/04/02 450005/05/02 1500019/05/02 750025/05/02 400002/06/02 1450015/06/02 900029/06/02 5500

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08/07/02 1600022/07/02 600030/07/02 200011/08/02 1250021/08/02 700031/08/02 400009/09/02 1450019/09/02 900029/09/02 4500

SolutionThe interest that will be paid by the bank will be 4 percent as per the prevailing rates. This will be earned on the monthly product of the minimum balance maintained in the account.

Date Balance (Rs.)

Monthly Product (Rs.)

Interest (rounded to a rupee)

08/04/02 10500

17/04/02 18000

22/04/02 6500

30/04/02 4500 4500 15

05/05/02 15000

19/05/02 7500

25/05/02 4000 4000 13

02/06/02 14500

15/06/02 9000

29/06/02 5500 5500 18

08/07/02 16000

22/07/02 6000

30/07/02 2000 2000 7

11/08/02 12500

21/08/02 7000

31/08/02 4000 4000 13

09/09/02 14500

19/09/02 9000

29/09/02 4500 4500 15

81

Note: The current savings bank rates have been reduced to 3.5%

The interest that the account will earn on a quarterly basis will be Rs.46 and Rs.35. If the payment is half-yearly the amount would be Rs.81. Some banks credit the interest during February and August; others during March and December. There are banks, which credit the interest once in a year in December. A few banks credit during calendar quarters.

Illustration 2SFM Banking Ltd. requires a minimum balance of Rs.5,000 on a monthly average for a quarter. Consider the following balances of a savings bank account and suggest if the bank should levy any service charges on the customer.

Date Balance (Rs.)

01-05 July 14500

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06-20 July 6000

21-31 July 1000

01-03 Aug 15000

04-12 Aug 2000

13-31 Aug 0

01-10 Sept 7500

11-21 Sept 1500

22-30 Sept 500

SolutionThe average daily balances for a quarter can be computed as follows:

Date Balance (Rs.)

No of days Daily balances (Rs.)

01-05 July 14500 5 72500

06-20 July 6000 15 90000

21-31 July 1000 11 11000

01-03 Aug 15000 3 45000

04-12 Aug 2000 9 18000

13-31 Aug 0 19 0

01-10 Sept 7500 10 75000

11-21 Sept 1500 11 16500

22-30 Sept 500 9 4500

Total 92 332500

The daily balances for the quarter = Rs.3,32,500

The monthly average for the quarter = 3,32,500/92

= Rs.3,614.13

As the account did not meet the average of Rs.5, 000 per month for the quarter, the bank may charge a service fee on this SB account.

Term DepositsTerm deposits are a form of “debt investments” a customer lends, which in essence, means that he is lending a sum of money to a bank or financial institution for a specified period of time and the bank in turn pays him a “rental stream” (interest) for the privilege. These accounts pay a higher interest rate than any other deposit accounts. This type of account is sometimes called a certificate of deposit (or CD). These are the accounts of funds to which depositors have no access for a fixed period of time and penalties apply for early withdrawals. Cheques cannot be written on term deposits or CDs. Other than liquidity, which the SB accounts and the current accounts ensure, depositors would also prefer to earn interest on their surplus balances. Banks facilitate this through term deposits. This account enables savings plans for funds that can be kept as a deposit for a period of more than 15 days. It is 7 days in case of bulk deposits. While the maximum tenure of the term deposits is 10 years, banks generally would not favor deposits with tenures beyond three to five years. For tenures beyond three years, there will be a flat interest rate structure and this in fact acts as a disincentive for the depositor. This statement is substantiated by the FD rates of various banks given in Table 4.1. (Prevalent in 2001)

The other feature of the term deposit is the de-regulated interest rates. Banks are free to set their own rates depending on the size of the deposit and the tenure. This interest will be paid on a quarterly compounded basis. Apart from the annual

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compounding, if the interest is compounded monthly/quarterly/half-yearly, the effective rate of interest for such periods will be different from the nominal rate. Given the nominal rate, the effective rate can be computed as follows:

r =

....Eq (1)

Where,

r = Effective Rate

k = Nominal Rate

m = Frequency of compounding per year

For instance, if the nominal rate of interest on a 2 year term deposit is 9.5 percent and if the interest amount is compounded on a quarterly basis then the effective rate can be assessed as follows:

r = = 9.84%

Unlike the current and the savings accounts, the term deposits do not facilitate transactions. This non-transactional type of deposit can, however, be classified into various categories depending on whether the entire amount is deposited at one time or over a period of time, whether the interest is compounded or withdrawn at regular intervals etc. Thus term deposits can be in any one of the following forms: Fixed Deposit Scheme Reinvestment Scheme Cash Certificate Recurring Deposit Scheme.

Table 1: Movement in Deposit Interest Rates

Bank 15-29 days

30-45 days

46-60 days

61-90 days

91-120 days

120-179 days

180-270 days

271-364 days

1yr - < 2 yrs

2 yrs - < 3 yrs

3 yrs - < 5 yrs

5 yrs & above

With effect from

Citibank 4.25 6.50 6.50 7.50 7.25 7.25 7.50 7.75 7.75 7.75 7.75 8.00 01-06-01

Canara Bank 5.25 5.25 6.25 6.25 6.75 6.75 7.25 7.25 8.50 9.00 10.00 10.00 18-02-01

Corporation Bank

6.25 6.25 6.50 6.50 7.25 7.25 8.00 8.00 9.25 9.25 10.25 10.25 01-03-01

Dena Bank 5.50 6.00 7.00 7.00 7.75 7.75 8.00 8.00 8.50 9.00 10.25 10.50 25-02-01

State Bank of India

5.25 5.25 6.50 6.50 6.50 6.50 7.00 7.00 8.50 9.00 9.50 9.50 05-03-01

HDFC Bank 5.00 7.75 7.75 7.75 8.50 8.50 9.50 9.50 10.25 10.25 10.25 - 19-02-01

ICICI Bank 5.00 5.00 6.00 6.00 7.00 7.00 8.50 8.50 9.25 9.25 9.25 9.25 05-03-01

IDBI Bank 5.25 7.50 7.75 7.75 8.25 8.25 8.75 9.00 !!! !!! 9.25 - 20-04-01

!!! IDBI Bank offers 10.25% for 12 - 36 months

The current interest rates average at 6% (September 2003)

Source: www.rbi.org/trends in Banking

FIXED DEPOSIT SCHEMEIn this scheme, a lump sum amount is deposited for a fixed term during which the amount cannot be withdrawn. However, the interest is paid on a monthly/quarterly/half-yearly/annual basis. This scheme provides liquidity to the depositor as it can be withdrawn during these periods. By withdrawing the amounts, the depositor can actually earn a return (interest) on this interest amount.

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However, if the monthly interest is withdrawn for reinvestment, the returns earned will be more than that earned for a quarterly repayment. To avoid this, the interest rate that is paid for a monthly withdrawal scheme should be such that on reinvestment it shall not yield more than the quarterly returns. Consider the following mathematical expression:

X(1 + r/6) + X(1 + r/12) + X = Y

Where,

X = Monthly interest amount

Y = Quarterly interest amount

r = Reinvestment rate for the monthly interest.

Simplify the above equation by multiplying by 4.

4X

12X + 4X = 4Y

12X + 4X = 4Y

X (12 + r) = 4Y

X =

Thus,

Discounted Monthly Interest = ...Eq(2)

Where,

P = Principal/Fixed Deposit Amount

R = Interest Rate

r = Reinvestment Rate for the monthly interest

In the above expression, it can be observed that the first month’s interest amount is reinvested for 2 months, the second month’s interest for one month. To these amounts, when the third month’s interest is added, it should give interest that equals the quarterly interest amount.

Illustration 3For a 2 year FD deposit of Rs.50,000 with GNN Bank Ltd. (GBL), the interest rate is 10.5 percent.

a. Ascertain the interest amounts if the payment is made on a quarterly, half-yearly and annual basis.

b. What should be the interest rate if the interest is withdrawn every month and transferred to the savings bank account?

Solutiona. Quarterly interest amount = 50,000 x 0.105/4 = Rs.1,312.50

Half-yearly interest amount = 50,000 x 0.105/2 = Rs.2,625

Annual interest amount = 50,000 x 0.105 = Rs.5,250

b. Discounted Monthly Interest = = Rs.436.04

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 Overview of Banking 

This can be verified by adding the monthly interest of 3 months; and the interest earned during that period is as follows:

(436.04 x 3) + (436.04 x 0.04 x 3/12) = 1,312.50

Thus, the interest rate that GBL can pay on the Rs.50,000 FD, if the interest amounts are withdrawn every month will be 10.46 percent (i.e. 436.04 x 12/50,000).

It can be observed from the above illustration that the interest that can be paid for a monthly withdrawal FD scheme will be slightly lower to the rate paid for the other interest payment periods.

As mentioned above the minimum and the maximum tenures for a FD are 15 days / 7 days and 10 years respectively. Due to the tenure and the liquidity, this deposit scheme suits retired people, pensioners etc.

REINVESTMENT SCHEMEIn a reinvestment scheme, a lump sum amount is accepted for a fixed period and repaid with interest on maturity. Interest on deposit is reinvested at the end of each quarter, and hence there will be interest on interest. The minimum and maximum durations for such schemes are 6 and 120 months respectively. The (minimum) period accepted differs from bank to bank. The depositor can withdraw the interest plus the principal at the end of the tenure. To ascertain the maturity amount in a re-investment scheme, the following expression can be used:

RIm = RI (1 + r)n ....Eq(3)

Where,

RIm = Deposit amount at the end of re-investment period

RI = Initial deposit amount

r = Effective rate =

n = Number of years

Illustration 4If a depositor opens a re-investment account at BNB Bank Ltd. the interest rate offered will be 9 percent for one year scheme, 10 percent for two years scheme and 11 percent for three years scheme. Ascertain the maturity amount for a quarterly re-investment of Rs.10,000 for a period of 2 years.

SolutionThe amount at the end of the re-investment period can be assessed as follows:

RIm = RI (1 + r)n

= 10,000 (1 + r)2

Since it is a quarterly re-investment,

r = = 10.38

Thus, RIm = 10,000 (1 + 0.1038)2 = Rs.12,184

CASH CERTIFICATESUnder this type of reinvestment deposit scheme, odd sums are accepted for a fixed period to pay whole sums at the time of maturity. The interest on deposits is re-invested quarterly and hence there will be interest on interest. A deposit receipt which gives the details of deposits will be issued to the depositor. The minimum and maximum durations are the same as for the reinvestment scheme. The amount that is deposited initially will be the issue price of the cash certificate and this will be arrived at based on the maturity amount i.e. the face value of the cash certificate and the tenure of the deposit. The later two are decided by the depositor. Based on

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the tenure, the bank decides on the interest rate. The issue price can be arrived at using the present value principle.

Issue Price = PV = Face Value (PVIFAn,k) ....Eq(4)

Where,

n = Tenure

k = Interest rate

Illustration 5Given the interest rate of 12 percent p.a. on a certificate having a value of Rs.100 after one year, calculate the issue price of the cash certificate.

Solution

Effective rate (r) =

= = 12.55%

Issue Price (PV) = Face Value (PVIFn,k)

=

= = Rs. 88.85

RECURRING DEPOSIT SCHEMEIn a Recurring Deposit (RD) Scheme, a fixed sum will be deposited every month for a fixed period. At the end of the period, the depositor will be paid the total amount of deposit installments with interest. A passbook will be issued that will be updated to show the details of deposits. Minimum and maximum deposit periods are 6 and 120 months respectively. To arrive at the amount on maturity, the future value of annuity should be computed as follows:

RDm = RD(FVIFAn,k) ….Eq.(5)

Where,

RDm = Maturity value of deposit

RD = Installment amount

Illustration 6Compute the maturity value of a monthly Recurring Deposit of Rs.500 for 12 months, if the interest applied is 9 percent p.a. and is compounded quarterly.

Solution

Effective Rate (r) = = 9.31%

Rate of interest per month = = 0.78%

Maturity value = FVAn = A[FVIFAn,k]

= A

= 500

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 Overview of Banking 

= 500 x 12.53 = Rs.6,265

The above discussed term deposits are non-transactional and cannot be withdrawn during the tenure of the deposit. However, if the depositor plans to withdraw a part/full amount of the deposit before the maturity date, then the bank may impose a penalty for the same. Penalties will be imposed at the discretion of the bank. Apart from the penalty, banks would also cut the interest rate on the deposit if there is a big difference between the withdrawal date and the maturity date (called in banking terminology as closure before maturity). For instance, if a two year deposit which has a deposit rate of 9 percent was withdrawn at the end of one year, then the applicable deposit rate for this deposit will be one year deposit rate less penalty for foreclosure or withdrawal. However, with product innovations taking place, banks are introducing the flexi deposit schemes for the fixed deposits wherein the entire FD will be broken into smaller denominations. Due to this, if the borrower would like to withdraw funds from the FD, the entire deposit need not be foreclosed. The flexi deposit scheme enables withdrawal of funds that are required without breaking the FD completely. For instance, if a depositor has an FD for Rs.5,000, then the flexi deposit scheme will issue 5 deposits of Rs.1,000 each. Thus, when the depositor needs funds up to Rs.2,000, then only 2 deposits will have to be withdrawn prematurely.

Table 2: Cost of deposits of various banks

BanksTerm Deposits

(%)C&S Deposits

(%)Cost of Deposits*

(%)SBI 65 35 7.1HDFC 59 41 6.2UTI Bank 83 17 8.0Bank of Baroda 67 33 6.6Corporation Bank 74 26 7.2IDBI Bank 54 46 6.2Bank of India 67 33 5.9J&K Bank 66 34 7.3

*Average cost of deposits

October 08, 2002

Source: www. Indiainfoline.com

Box 3: Structure of bank liabilities – The US SceneDemand deposits have dominated the liabilities side of the balance sheets of commercial banks and while savings and time deposits have played a secondary role in the acquisition of deposit funds, non-deposit funds were almost insignificant. However, from the early 1960s the liability structure of commercial banks started changing substantially. For example, in US by mid 1960s, time and savings deposits surpassed demand deposits as the primary sources of bank funds. In the 1970s, non-deposit borrowings grew rapidly and emerged as a major source of funds for larger banking institutions. In addition, the variety of deposit and non-deposit accounts and securities offered to the public by commercial banks greatly expanded. Deregulation of deposit rates of interest in the 1980s further expanded the variety of deposit accounts offered by the banks. And finally the lower interest rates in the 1990s have prompted the banks to offer deposit customers alternative money market and investment accounts.

Deposit sources of funds: Bank deposits may be categorized as either core deposits or purchased deposits. Core deposits are typical deposits of regular bank customers including business firms, government units and households. Whereas purchased deposits are acquired on an impersonal basis from the financial market by offering competitive interest rates. Core deposits provide a stable and long-term source of funds whereas purchased deposits serve as a liquidity reserve that may be tapped when the need arises. Extensive use of expensive purchased deposits may expose the bank to liquidity problems. In contrast to core deposits a

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large percentage of purchased deposits may not be insured by the Federal Deposit Insurance Corporation (FDIC)1. Unlike core deposits that normally provide both explicit interest returns and implicit service returns, purchased deposits provide only explicit interest earnings. These differences cause purchased deposits to be much more sensitive to both changes in bank risk and interest rates than core deposits. If the financial market perceives a decline in a bank’s safety and soundness, its purchased deposits would have to be rolled over at higher interest rates and may even cease to be available as depositors shy away from placing liquid assets in institutions that may become insolvent. Thus the risks and returns of core deposits and purchased deposits differ considerably from one another.Deposit accounts can be categorized as demand deposits, small time and savings deposits and large time deposits. – Chequeable deposits including demand deposits are transaction balances

requiring relatively higher reserve requirements than other type of deposits. They may be classified into a) consumer deposits b) corporate deposits and c) government deposits.Consumer deposit accounts may or may not be interest bearing. Interest bearing demand deposits known as NOW (or negotiable order of withdrawal) accounts were authorized in 1981.

– Small time and savings deposits: Savings deposits are interest bearing deposits that do not have fixed maturities and can be set up periodically to cover overwithdrawals of transaction accounts (called Automatic Transfer Service ATS) or to provide transaction funds by means of limited cheque writing facilities. A good example of the matter type of savings account is the Money Market Deposit Account (MMDA). MMDAs have no restrictions and allow consumers to make up to six transfers (three by cheque) per month. MMDAs are designed to compete with money market mutual funds. Small banks rely upon retail CDs as a major source of funds. Even though larger banks place less emphasis than small banks on retail CDs, they can be a valuable source of liquidity for larger banks especially in the event of liquidity crises.

– Large time deposits: Large or jumbo CDs are marketable securities with maturity ranging from 14 days to 18 months. They are also known as Negotiable Certificates of Deposit. Originally large CDs were introduced by New York banks in an attempt to retain corporate demand deposits that paid no interest. Later on large CDs became a primary source of funds for liability management.

– Brokered deposits occur when large deposits are split into $100,000 pieces and placed with different banks to obtain 100% insurance. Depository Institutions Deregulation and Monetary Control Act (DIDMCA) of 1980 raised deposit insurance limits from $40,000 to $100,000 per account, which encompassed large NCDs. FDIC Improvement Act of 1991 prohibits depository institutions from using brokered deposits unless well or adequately capitalized. Brokered deposits were used by failing savings and loan associations in the 1980s to cover earnings losses.

– IRA and Keogh plans are personal pension plans that individuals may use to defer federal income taxes on contributions and subsequent investment earnings. Roth IRAs allowed under the Taxpayer Relief Act of 1997. Banks act as custodians and gain a stable, long-term source of deposit funds. Other financial service firms are very competitive.

– Non-deposit sources of funds: Non-deposit funds are money market liabilities that are purchased for relatively short periods of time to adjust liquidity demands. The use of these purchased funds came into existence due to tight money periods in which deposit rate ceilings caused banks to

1 Deposit products in India are insured by the Deposit Insurance and Credit Guarantee Corporation (DICGC).

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 Overview of Banking 

develop alternative sources of funds. Unlike deposit funds, these deposits are exempt from Federal Reserve requirements, interest rate ceilings and FDIC insurance assessments.

– Federal funds: Federal funds are short-term, unsecured transfers of immediately available funds between depository institutions for on business day (i.e., overnight loans). These loans are in general oral agreements between corresponding officers of depository institutions.

– Repurchase agreements: Non-bank firms supply funds to banks through repurchase agreements. An over night repo is a secured, one-day loans in which claim to the collateral is transferred. For example, a bank sells securities to a corporate client and promises to repurchase the next day. A repo is created by the sale of securities in exchange for immediately available money with the simultaneous promise to buy back the securities at a specific date at a set price.

– Discount window advances: Banks can borrow from the 12 regional Federal Reserve banks by this means (subject to Regulation A rules).

– Federal Home Loan Bank borrowings: Under FIRREA of 1989, the FHLB can provide discount window services not only to savings and loans (as in the past) but also to banking institutions.

– Bankers’ acceptances: Time drafts drawn on a bank by either an exporter or importer to finance international business transactions. The bank may discount the acceptance in the money market to (in effect) finance the transaction.

– Commercial paper: Short-term, unsecured promissory note sold by large companies with strong credit ratings. Banks can use their holding companies to issue this short-term debt instrument.

– Capital notes and debentures: Senior debt capital that is not federally insured and considered subordinate to bank deposits. These are introduced recently to encourage bank issuance and improve market discipline of banks.

Source: “Commercial Banking: The Management of Risk” Benton E. Gup, Donald R. Fraser, James W. Kolari.

COMPOSITION OF BANK DEPOSITSThe different type of deposits that banks hold at any moment of time depends most significantly on the public’s demand for deposit services. The next important factor is the bank’s fund raising policies, including the services fee charged and the interest rates offered by the various deposit plans, the aggressiveness with which different deposit plans are advertised and the time and resources devoted to attract and retain the customers. Over the years the most successful and readily saleable deposits that banks have offered are the demand and time deposits. Table 3 below shows the composition of demand and time liabilities of the scheduled commercial banks

Table 3: Important Banking Indicators-Scheduled Commercial Banks(Amount in Rupees crore)

Outstanding as on Variations

Financial year First QuarterItem March 22, 02 2001- 02 2000- 01 2002- 03 P 2001- 02

Absolute Percent Absolute Percent Absolute Percent Absolute Percent1 2 3 4 5 6 7 8 9 10

Gross Demand and Time Liabilities (2+3+4+6)

12,72,174 1,38,694 12.2 1,85,122 19.5 1,03,356 8.1 54,569 4.8

Aggregate Deposits (a +b) 11,03,360 1,40,742 14.6 1,49,274 18.4 1,00,606 9.1 54,171 5.6(58,014) (5.3)

a. Demand Deposits 048 10,496 7.4 15,186 11.9 3,677 2.4 5,392 3.8b. Time Deposits 9,50,312 1,30,246 15.9 1,34,088 19.5 96,928 10.2 48,780 5.9

(54,336) (5.7)Other Borrowings # 3,029 462 18.0 -168 -6.1 -423 -14.0 -341 -13.3Other Demand and Time Liabilities

1,11,883 20,676 22.7 12,766 16.3 -1,671 -1.5 2,205 2.4

Borrowings from the RBI 3,616 -280 -7.2 -2,595 -40.0 -3,280 -90.7 -280 -7.2Inter-bank Liabilities 53,902 -23,186 -30.1 23,250 43.2 4,844 9.0 -1,467 -1.9

# Other than from RBI/IDBI/NABARD/EXIM Bank* Data pertaining to June 2002.

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** Data pertaining to May 2002.@ Inclusive of borrowings by Primary Dealers.Figures in brackets exclude the impact of mergers since May 3, 2002.Note : Revised in line with the new accounting standards and consistent with the methodology suggested by the Working Group on Money

Supply : Analytics and Methodology of Compilation (June 1998). The revision is in respect of pension and provident funds with commercial banks, which are classified as other demand and time liabilities, and includes those banks, which have reported such changes so far.

The best mix of deposits for the bankers would be a high proportion of low yielding time and savings deposits. These accounts are among the least expensive sources of funds compared to others for a bank and often include substantial percentage of core deposits – a stable base of deposited funds that are not highly sensitive to movements in market interest rates (i.e. bears a low interest rate elasticity) and tends to remain with the bank. While many core deposits (such as small savings accounts) could be withdrawn immediately, core deposits have an effective maturity often spanning several years. Thus, the availability of a large block of core deposits increases the duration of a bank’s liabilities and makes the institution less vulnerable to swings in interest rates. The presence of substantial amounts of core deposits in smaller banks help explain why large banks and bank holding companies in recent years have acquired so many smaller banking firms to gain access to a more stable and less expensive deposit base. However the combination of inflation, deregulation, stiff competition and better-educated bank customers has resulted in a dramatic shift in the mix of deposits that banks are able to sell.Bank operating costs have soared over the recent years in offering deposit services. The interest payments on deposits for all the insured US commercial banks that stood at $10.5 billion in 1970, or 38 percent of total operating expenses, had jumped to over $100 billion or more than half of total operating expenses by the 1990s. At the same time the new higher yielding deposits proved to be more interest sensitive than the older, less expensive deposits, thus putting pressure on the bank managers to pay competitive rates on their deposit offerings. Banks that offer lower than the market interest rates will have to meet for extra liquidity demands that arise due to substantial withdrawals and fluctuating deposit levels. Faced with substantial interest cost pressures, many bankers have pushed hard to reduce their non-interest expenses like expenses on automating their operations and reducing the number of employees on the payroll; and to increase operating efficiency.

Table 4: Interest Rate Structure of Scheduled Commercial Banks(Per cent per annum)

July 11, 2003 March 28, 2003 Feb. 21 , 2003 Jan 29, 2003 Jan 17, 2003 Jan 03, 2003

1 2 3 4 5 6 7A. Lending Rates

Size of Credit Limit1. Up to Rs.2 lakh PLR PLR PLR PLR PLR PLR

2. Over Rs.2 lakh: (Prime Lending Rate)* 10.75 – 11.50 10.75 – 11.50 10.75 – 11.50 10.75 – 11.50 11.00- 12.00 11.00-

12.00a. Maximum Spread

over PLR 2.5- 4.00 2.5-4.00 2.5- 4.00 2.5- 4.00 2.5- 4.00 3.35- 4.00B. Deposit Rates

Category of Account1. Current Nil Nil Nil Nil Nil Nil2. Savings 4.00 4.00 4.00 4.00 4.00 4.003. Term Deposits @

a) Upto andincluding one year 4.25- 6.00 4.25- 6.00 4.25- 6.00 4.25- 6.00 4.25- 6.00 4.25- 6.00

b) > 1-2 years 6.00- 6.50 6.00- 6.50 6.25- 6.50 6.25- 6.50 6.50- 7.00 6.50- 7.00c) > 2-3 years 6.25- 6.50 6.25- 6.50 6.25- 6.50 6.25- 6.75 6.75- 7.25 6.75- 7.25d) > 3 years 6.25- 6.75 6.50- 6.75 6.50- 6.75 6.50- 7.00 7.00- 7.50 7.00-7.50

Memo Item: Bank Rate ## 6.25 6.25 6.25 6.25 6.25 6.25

not exceeding

* Data relate to major public sector banks@ The minimum maturity period of term deposits I 15 days effective April 29, 1998

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 Overview of Banking 

## The change in the Bank rate was made effective from the close of business of respective dates indicated in the bracket.

Source: RBIAll other things remaining the same, a banker would prefer to raise funds by selling those deposits that are least costly for the bank. The banker would also prefer to sell those loans that generate the greatest net revenue after all the expenses. If a bank can raise all its capital from sales of cheapest deposits and then turn around and purchase the highest yielding assets it will maximize its spread and the shareholder value.

Time deposits, CDs and money market accounts generally display low amount of activity in terms of deposit withdrawals compared to the savings accounts and current accounts. However the higher interest costs on most time deposits tend to offset the cost advantage over the savings accounts. Smaller banks incur higher interest costs on savings accounts than the larger banks but offset this by issuing time deposits at a lower average cost than the average cost of time deposits issued by larger banks. Nevertheless larger banks generate more revenue from chequeable and thrift deposits because of the greater average size of these deposits at the biggest banks.

Deposits form an integral part of a bank’s portfolio as they are the main source of funds. Today most of the banks are able to sustain themselves on deposits and fee based income given the background that the fund income is on a decline due to lack of credit offtake. While in the global scenario several banks have experienced a decline in their core deposits due to declining interest rates, the Indian scenario depicts a different picture. The inflows into bank term deposits continue to be surprisingly large despite the fall in interest rates. Yet, bank term deposits attracted substantial inflows in the last three years (2001-03). Investors in these instruments may need a change in strategy. Without a change in strategy, the post-tax yield on their portfolio may well plummet below 4 percent. In the case of selected public sector banks, the growth in inflows of term deposits has crossed 10% in the last three years. When investors are being coaxed to invest in equities to enhance portfolio returns, the preference for bank term deposits is puzzling. In addition, the bulk of the deposit inflows are into savings deposits and other shorter-term instruments. For a public sector bank, savings bank deposits range between 12 - 20% of their deposit base. Deposits of less than a year’s maturity would constitute another 12-20%. This shows that retail-bank customers for deposit products such as checking accounts and certificates of deposit are much less price sensitive than actually perceived. Checking account customers, for instance, are surprisingly “sticky,” citing convenience, the quality of service, and their relationships with bank personnel as reasons for not switching to other banks after price increases. More than one-third of these customers do not even recall the last price change to their checking accounts, and only 13% of those who do remember troubled themselves to shop around for a better deal. In the end, just 2% of all customers moved their accounts. In a 2001 market research study of more than 500 banking customers in the US Southeast and Midwest, by McKinsey & Company, Inc., a consultancy firm also revealed this phenomenon. This is good news for banks: if they had more flexibility to price retail products without sparking widespread customer defections, they could boost their bottom-line retail earnings by as much as 5 – 7%.

A bank that can fund most of its funds with deposits will have an interest cost-advantage over competitors with lower proportions of deposits, all other things being equal. The bank also has to keep the public preference in mind while offering deposit products. In the recent past, public has demanded both high

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yielding thrift accounts and chequeable deposits that pay interest rates comparable to returns in the open market. At this juncture, the deregulation of financial markets has made it possible for more kinds of financial service firms to respond to the public’s deposit preferences. This combination of greater competition and higher costs helps to explain why bank profits have become more volatile and uncertain in the recent years.

SUMMARY The transaction and the non-transaction accounts have been among the most

important of all financial services provided by banks, principally because of their safety, convenience, flexibility and explicit or implicit returns to the customer.

The combined total of transaction and non-transaction deposits is one of the most important financial assets for most of the households.

More than being a service, deposits are an important source of funds for the banks. It is not just essential for the banks to have a good deposit base, equally important is the composition of these deposits. Composition of deposits refers to the demand deposit and the time deposit composition.

Savings and the current account deposits can be withdrawn any time; these deposits are generally known as the demand deposits. However, the withdrawal of term deposits is time bound and hence they are known as time deposits.

The composition of these deposits becomes essential for the bank firstly, to know its liquidity requirements. The greater the proportion of demand deposits relative to time deposits of a bank, the larger will be the bank’s liquidity needs as the demand for cash withdrawals may arise any time. On the other hand, the liquidity needs for time deposits will not be unexpected and the bank can identify in advance the cash outflows due to these deposits. However, comparing them on the basis of costs, the demand deposits are the low cost funds for the banks.

As the liquidity and the cost of funds are affected by the composition of the demand and the time deposits, these deposits have a direct impact on the growth and the earnings of the bank.

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Appendix

Deposit products of various banks across the globeINDIA

ICICI BankICICI bank’s Roaming Current Account enables business while traveling. With advanced technological features such as Multi-City Cheques and Local Cheques Collection, customers’ banking needs are well taken care of. He can access his account at over 250 networked branches across the country. Besides, there is round-the-clock phone banking. He can also log on to www.icicibank.com or even get Mobile Banking Alerts. ICICI bank’s Value Added Savings Account gives the depositor the liquidity of a Savings Account coupled with high earnings of Fixed deposit. This is achieved by linking his Savings Account to Fixed Deposit Account providing the customer the following unique facilities. The Auto Sweep Facility ensures higher rate of interest on his Savings Bank Deposits. A customer can withdraw the funds in his Value Added Savings Account from any channel such as the ICICI Bank ATM, ICICI Bank Phone Banking, and ICICI Bank’s Internet Banking facility. No penalty is levied on premature withdrawal for fixed deposits of less than Rs.15 lakh. In case of withdrawal, ICICI’s Reverse Sweep Facility breaks the last Fixed Deposit in units of Rs. 1000. The Fixed Deposits are broken on Last-In-First-Out (LIFO) Basis. The remaining balance in your fixed deposit account will continue to earn higher interest at the original rate applicable to the fixed deposit. Under this facility, when the deposits fall due, the bank will automatically renew the principal and accrued interest for a similar period as the original deposit. State Bank of IndiaSBI’s Multi-Option Deposits (MODS) are term deposits permitting partial premature withdrawal in small tranches or a loan when required. The loan limit is set up automatically when a customer places his deposits in SBIMOD. They are available at computerized branches for maturities of 1, 2 and 3 years. A customer can enjoy, a) Unmatchable safety and security of his funds, b) A secured high rate of return, c) An auto renewal facility which ensures that the customer continues to earn interest even after the deposit matures and if he had overlooked to give renewal instructions to the bank. On maturity the bank will automatically renew his deposit for a similar term. The amount can be withdrawn at any time and there is no notice required. The facility of taking a loan at a very nominal net cost (just 2% p.a.) is also there.With SBI’s savings plus, depositors have the option of a special savings account, Savings Plus, where he can earn interest at term deposit rates on balances exceeding a predetermined limit. The limit is set by the depositor (minimum requirement is Rs.10,000) and the period of the term deposits is also selected by him (over a wide range of 6 - 36 months). The bank makes the investments automatically. As all term deposits are created under SBIMODS he can enjoy high liquidity with high interest. Savings Plus accounts can be opened in single or joint names. Unlimited credit is permitted in all accounts.Citi Bank IndiaThe Citibank Suvidha Junior Account Package, India’s first and only package is aimed at securing a child’s future and also does much more. The customer should start early and invest regularly through his child’s Investment Services Account. This Account will be funded from his Child’s Savings Account which in turn will be funded through the customer’s Citibank Suvidha Savings Account. Citibank’s Investment Counselors will help achieve his goals by selecting the right mix of investments. The customer just needs to set up a Regular Investment Scheme in any of the portfolios he selects. The features of the scheme are: Free insurance cover for education support for the child up to Rs. 25,000 per

year for 5 years in case of untoward death of the guardian in an accident.

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This account gives the child a first hand experience of international banking. At the same time, it makes handling finances easy for the child. The child can access the funds in his or her Savings Account with his or her Citibank Junior ATM / Debit Card, with a monthly limit as preset by the customer.

Family ATM/Debit card: With this, the Citibank Account of the customer gets more powerful. The spouse, parents, etc., of the customer can readily access Citibank “Family” ATM/Debit Card that is linked to Citibank Account. In this account the family member need not be a joint account holder. The customer can even preset the monthly spend limit. The family member can use the “Family” ATM/Debit card as – A Debit card to shop at over 22,000 merchant outlets across India. An ATM card to withdraw cash at over 150 Citibank ATM centers spread

across 13 cities in India. And at over 2,200 Cirrus & Swadhan ATMs at over 150 locations in the country.

International Deposit ProductsBank of AmericaA Master Relationship Account: A Master Relationship Account offers potentially higher returns on idle checking account funds while investing to meet customers’ financial goals. The scheme features include Automatic Daily Investing. Money in excess of $1,000 is invested automatically each day in a money market mutual fund through Bank of America Investment Services, Inc. Bank of America Prima® Account: Customers enjoy the rewards of a premium package of services with interest checking and many free or discounted services.

Prima Checking features are:

Free cheques with unlimited cheque-writing privileges: Premier Banking clients receive special Premier Banking cheques, a leather chequebook cover and one’s choice of regular or duplicate cheques at no charge. Other privileges are online Banking with Bill Payment Service via the Internet with no monthly fee, and no fee for most banking services, such as traveler’s cheques, cashier’s cheques, stop payments on cheques and more.Overdraft protection from a Regular Savings account or credit card: Customers get a Gold Visa card including a low rate and no annual fee. Premier Banking clients can get a Platinum Visa with a minimum credit line of $15,000 at no additional charge. Platinum Priority Cheque Card can be used for everyday purchases and at ATMs. Premier Banking clients can receive a Platinum Priority Cheque Card at no additional charge that offers higher daily ATM withdrawals of up to $1,000, based on customer’s available balance.Citi BankCitiGold Account: Special checking accounts – CitiGold checking allows the customers liquid money work harder for them. A customer can choose from: Interest Checking: Receive a preferred interest rate that is competitive with

money market funds which comes with the benefit of FDIC insurance.

Regular Checking with our Sweep feature: Balances over $500 are automatically swept into one money market mutual fund that a customer selects from the available fund family.

With either account, a customer can enjoy unlimited cheque writing privileges. Plus, a preferred rate on overdraft protection with Checking Plus® (variable rate), and Safety Cheque® with a waived fee.

Waived fees on banking services, include: CitiGold cheques, Incoming wire transfers, Travelers cheques, Stop payment requests and more, Money orders and official cheques.

Fleet BankThe Small Business Value Package is a full-featured banking package that

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 Overview of Banking 

includes a comprehensive set of business banking services, simplified pricing, and relationship benefits as well as a free consumer checking account. Small Business customers and prospects can now combine their personal and business banking at Fleet with no additional cost.Features of this product includes: 200 free transactions per month and free cash handling. Earn interest at a competitive rate and save money with a free Small

Business Money Market Savings Account. Savings Overdraft Protection with no transfer fee. Customer can get minute account balances, pay bills online and transfer

funds between accounts with Fleet OfficeLink® Online Banking. Plus as a Small Business Value Package customer receives free bill payment services.

With Small Business Payroll Services provided by Paychex®, he can save money with one free month of payroll processing and one free year of direct deposit processing. And, for every month he processes payroll, he will receive a $5 monthly relationship credit to his checking account.

Customer can make online payments by credit, debit and ATM cards through Fleets’ Merchant Service products. As a Small Business Value Package customer, the bank waives the $85 set-up fee* and gives a $5 monthly relationship credit to the customer’s checking account.

With Fleet’s Small Business Total Access Cheque Card, the customer can enjoy the flexibility of 24/7 access to more than 300,000 ATMs worldwide, plus the power to make purchases wherever Visa® cards are accepted.

Combine checking, savings, and more on one monthly statement. Business Savings Overdraft Protection offers: A low fee of just $3 per transfer A record of transactions on both monthly statements Protection against checking overdrafts Automatic transfers from savings to checking Every Fleet Small Business Money Market Savings Account offers the option of adding Fleet Savings Overdraft Protection for just $3 per transfer with no monthly fee. This overdraft protection will automatically transfer any checking overdrafts from savings account, so the difference is instantly covered. This convenient solution provides a simple way to prevent checking overdrafts while maintaining control over a customers finances.Bank of Scotland International Flexible Current Account This account will cover all day-to-day banking needs of a customer, offer a competitive interest rate on his balance and the flexibility to have an overdraft facility tailored to his needs. It offers:Preferential Rate Overdraft Facility – The bank jointly identifies the overdraft needs of a customer and provides the facility he needs at an attractive and competitive interest rate – 1% below the Bank of Scotland Base Rate (Gross). Free banking – no charges for any transactions (while the account is in credit) the customer also enjoys; A Switch debit card that allows guarantee cheques for up to £100 and can draw up to £250 per day from any of the 30,000 LINK cash machines in the UK at no charge (subject to available funds in the account); Free Internet banking and 24 hour telephone banking that lets a customer check his balance, review recent transactions, pay regular bills, order cheque books and more.Gold Visa Card The Bank of Scotland Private Banking Gold Visa Card not only gives flexibility and convenience in paying for goods and services, but also provides valuable additional benefits. These include:

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 Deposit Products 

9.9% APR on purchases (11.6% APR on cash advances) Credit limit to suit customers needs, subject to prior agreement Up to 8 weeks’ interest-free credit on purchases Flexible repayment options – by post, direct debit or telephone Withdraw up to £500 a day from over 400,000 cash machines worldwide

(subject to available funds in the account. Some banks and building societies may charge for this service and may limit the amount one can withdraw at any one time). No annual fee PLUS

Free Travel Accident Insurance – upto £250,000 Free 100 Day Purchase Care Insurance – insures purchases against loss, theft

or accidental damage

The customer also gets upto 10% discount on travel and holidays booked through the bank’s Travel Service when he pays with the card. In association with Thomas Cook, the bank’s Travel Service offers convenient phone bookings, seven days a week, with a wide range of quality holidays to choose from. He can also get Travelers cheques and foreign currency ordering with no cash advance fee and low 1% commission (minimum charge £3).

Treasurers

This product is specially designed to overcome the problem that treasurers of organizations face in juggling money between two accounts. This combines an interest-paying savings account with a current cheque book account: free banking – while in credit, no minimum or maximum balance, free cheques, no transaction charges, free Standing Orders and Direct Debits.

The bank offers competitive interest rates which is paid to qualifying organizations. Other privileges include Monthly statements, free Internet banking and 24 hour telephone service that lets reconciliation of balances, review recent transactions, pay regular bills, order cheque books and more.

Abbey National

Abbey National’s new Sweep Facility takes the hassle out of saving and offers the flexibility to suit a customer’s individual needs. Sweep automatically transfers any spare money from the bank account to Abbey National savings account on a chosen date each month. So, whether it’s £1 or £1,000 that’s available to sweep, a customer can be sure that the account would boost his savings. Alternatively the bank offers credit interest on the bank account.

The Abbey National Switcher Service is the easy way to transfer an account in another bank to Abbey National Bank. The bank does all the proceedings right from writing to the existing bank to changing a customer’s Direct Debits and standing orders. Switching to Abbey National not only give a straightforward, easy-to-use bank account but also an interest-free overdraft for a set period. If a customer currently benefits from a 12 month interest free overdraft as a result of switching accounts, and he has opted for the Preferred In-Credit Rate, his continuing eligibility for this offer will be affected. The Abbey National Bank Account gives excellent value for money and a convenient and flexible way to manage money on a day-to-day basis.

Alliance-Leicester bank

Access Plus: This immediate access account gives a yearly bonus for limiting withdrawals.

This tiered interest rates mean the more one saves the more he can earn. A customer can enjoy a 1% gross bonus, payable on anniversary of account opening, by making not more than 3 withdrawals per year. He can withdraw up to £250 a day in branch, or use a cheque for larger amounts. Interest is credited annually on 1 April. The minimum opening balance is £10. And a customer should not exceed more than 3 withdrawals per year to qualify for annual bonus. The maximum investment is £1 million per individual.

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 Overview of Banking 

Access Direct: This convenient postal account gives a customer easy access to his money and high interest benefits. The other benefits include,– Enjoy easy access to money as no withdrawal notice is needed.– An extra bonus of 0.5% (gross per annum) for 2 or less withdrawals a year. – Freepost makes it cheap and convenient to make transactions. – A customer can take the interest on his savings as monthly income. – Tiered interest rates mean the more one saves, the more he earns. – The minimum opening balance is £5000. – Maximum balance:

Single account holder, £1 million.

Joint account holders, £2 million. – Minimum deposits of £100/minimum withdrawals of £100. – This facility is not available to trustees/nominees or businesses. TESSA Maturity ISA: If a customer has a maturing TESSA (Tax Exempt Special Saving Account), this tax-free savings account does not restrict the amount one can invest in an ISA (Individual Savings Account). The benefits include:– Investment upto £9,000 that maximizes return with tax-free interest. – Earn gross interest straight away even in case of withdrawals. – Easy access to savings as no withdrawal notice is needed. – No need to include ISA on a tax return. – This scheme is available to sole accounts only. – This must be opened on maturity of an existing TESSA or within six

months of maturity. – The maximum balance is the amount of the maturing TESSA capital. – The minimum opening balance is £1 (matured TESSA capital only). – No further deposits are allowed.BarclaysVariable Rate (Mini Cash) ISA: If a person is looking for tax-free returns on his cash, this ISA could be ideal for him. Key aspects of this account are:– Savings are kept in cash. – No investment risk to capital. – Interest earned is tax-free. – Save from £10 to £3,000 each tax year. – Easy access to money. Open plan Savings: Open plan Savings enables creating a number of savings ‘pots’ for specific purposes, such as a wedding or new car. The pots’ balances are combined to give a potentially higher interest rate on his total savings. One can combine Open plan Savings with Money Manager to automatically move spare cash from Barclays current account into Open plan Savings. One can also use Openplan Savings to offset an Open plan Mortgage. This could cut years and thousands of pounds off a customers mortgage.To set up Open plan Savings without Open plan Money Manager one will need a minimum initial balance of £5,000.Benefits with Open plan Savings are:– Offset Open plan Savings against mortgage. – Earn more interest on combined balances. – Customers can name savings pots to help organize his finances. – Manage savings accounts online. – Use Money Manager to automatically save spare cash.

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