BANKING
Banking plays an important role in the economic development of a nation. The Banking egulation Act, 1949 defines the term banking as "The accepting for the purpose of lending or vestment of deposits of money from the public, repayable on demand or otherwise and withdrawable by cheque, draft, order or otherwise.
It means, the essential elements of banking are:
There should be acceptance of deposits.
The deposits should be received from the public.
The deposits should be repayable on demand or on the expiry of a term or after a specified period.h
The purpose of deposits should be lending or investment.
In simple words, we can say that 'Bank is a financial institution which accepts money on deposit, repayable on demand and also earns a margin of profit by lending money'
Banks stimulate economic activity by mobilising savings of people and making funds available to business to finance their capital and revenue expenditure. Banks also deal in financi instruments and provide financial services.
TYPES OF BANK ACCOUNTS
A bank account is a record of the financial transactions between the customer and the banking institution
• Banks offer several types of accounts to cater to the needs of all sorts of individuals.
• These bank accounts serve an important purpose by mobilizing savings in order to utilize them in profitable investments.
Though the types of accounts offered can vary from bank to bank, some of the common bank accounts offered by banks are as follows:
1. Savings Account
2. Current Account
3. Fixed Deposit Account
4. Recurring Deposit Account
5. Multiple Option Deposit Account
1. Savings Account
It is an important account which is operated by commercial banks to promote the habit of savings among the people.
By opening a savings account, they can keep their surplus money gafe in the banks and also earn interest on their deposits Savings account is the account meant for people who wish to save a part of their income to safeguard the future and earn interest on the savings.
- The main objective of savings account is to promote savings
- Savings account can be opened with a minimum initial deposit that varies from bank to bank.
- There is no restriction on number and amount of deposits .
- Withdrawals from the account can be made either by signing a withdrawal form or by issuing a cheque or by using ATM card
However, banks generally put certain restrictions on number of withdrawals from this account.
- The rate of interest payable is very nominal on savings account. Interest rate varies from bank to bank and also changes from time to time.
- Savings account is of continuing nature. There is no maximum period.
Benefits or Advantages of Savings Account
(i) Savings account encourages savings habit among people.
(ii) It enables the depositor to earn income by way of interest.
(iii) It helps the depositor to make payment by way of cheques.
(iv) The bank offers number of services to the savings account holders.
2. Current Account
Current Account is opened by businessmen who have a number of regular transactions with the bank, both deposits and withdrawals.
The main objective of current bank account is to enable he businessmen to conduct their business transactions smoothly.
- In current account, amount can be deposited and withdrawn at any time without giving any notice.
- There is no restriction on the number and amount of deposits and withdrawals.
- Banks do not pay any interest on these accounts. Rather, it imposes service charges for running these accounts
- It is of continuing nature and as such there is no fixed period.
- Current account is also known as 'Demand Deposit'.
Benefits or Advantages of Current Account
(i) It enables businessmen to conduct their business transactions smoothly as there are no restrictions on amount to be deposited and number of withdrawals.
(ii) The businessmen can make direct payment to their creditors with the help of cheques.
(iii) The bank collects money on behalf of its customers and credits the same to their account
(iv) Current account enables the account holder to obtain overdraft facility.
(v) Current account reveals the information about the credit-worthiness of account holder to the creditors and lenders.
3. Fixed Deposit Account
Fixed Deposit Account is an account in which the amount is deposited with the bank for a fixed period of time.
The main purpose of this account is to enable the individuals to earn a higher rate of interest on their surplus funds.
- The amount can be deposited only once in a fixed deposit account. For further such deposits ,separate accounts need to be opened
- The period of fixed deposits range between 15 days to 10 years.
- These deposits carry a high rate of interest. The rate of interest may vary as per amount,period and from bank to bank.
- The money deposited in the fixed deposit account is repayable after a specified period
However, in case of emergency, premature withdrawal is allowed.
- If the money is withdrawn before the due date, then the depositor forgoes much of interest accrued on such deposit
- The depositor is given a fixed deposit receipt, which depositor has to produce at the time of maturity. The deposit can be renewed for a further period.
- It is also known as "Term Deposit Account' or Time Deposit Account".
Benefits or Advantages of Fixed Deposit Account
(i) Fixed deposit encourages savings habit for a longer period of time and enables the depositor to earn a high interest rate.
(ii) The depositor can get loan facility from the bank.
(iii) On maturity, the amount can be used to make purchase of assets.
(iv) The banks get the funds for a longer period and can use such funds for granting shor term loans to businessmen.
4. Recurring Deposit Account
Recurring deposit account is opened by those who want to save regularly for a certain period of time and earn a higher interest rate. In this account, certain fixed amount is accepted eve month for a specified period and the total amount is repaid with interest at the end of particular fixed period.
Its main objective is to develop regular savings habit among the public.
- The minimum period of deposit is six months and maximum is ten years.
- These deposits carry a high rate of interest. The interest rate varies as per period and am of monthly deposit.
- A pass book is given to the depositor and entry is done every month for the amount deposited into account.
Depositor cannot withdraw the amount before maturity, but he can take a loan against the amount deposited or can close the account.
Advantage of Recurring Deposit Account
(i) Recurring deposit encourages regular savings habit among the people.
(ii) Recurring deposit account holder can get a loan facility.
(iii) The banks can utilise such funds for granting short-term loans to businessmen.
(iv) Banks may also invest such funds in profitable arees.
5. Multiple Option Deposit Account
Multiple Option Deposit (MOD) account is a combination of Savings Bank account and Fixed Deposits.
MOD account interlinks the savings bank account with a deposit account and any amount in excess of a pre-determined amount sautomatically transferred to a fixed deposit (FD).
- It enables the account holder to earn better interest on the money. This is termed as 'Auto-Sweep facility.
- The account holder has to predefine a "threshold limit" and money up to that limit is kept in the form of cash in the savings account and any amount above this "limit" is automatically converted into a Fixed Deposit (FD) and the account holder will start earning normal FD returns on that part of the money.
- If the account holder wants to withdraw money (through an ATM, cheque, etc.) more than the amount lying as cash in the bank account, then the fixed deposit is broken immediately (this happens automatically) and account holder gets the money, (This is called Sweep-out or reverse-sweep)
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