BANKING ACCOUNTS

BANKING ACCOUNTS

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

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

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

TYPES OF BANK ACCOUNTS
DEPOSIT ACCOUNTS		LOAN ACCOUNTS
Demand Deposits	Time Deposits	Demand Loans	Terms Loans
Savings Accounts	Recurring Deposit Account	Cash Credit Account	Housing Loan, Vehicle Loan, Loan for Machinery
Currents   Accounts	Fixed       Deposits	Over Draft Account

DEPOSIT ACCOUNTS

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

Demand Deposits and Time Deposits.

DEMAND DEPOSITS

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

SAVINGS ACCOUNTS

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

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

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

SAVING BANK ACCOUNT FOR MINORS

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

BASIC SAVINGS ACCOUNTS

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

SMALL ACCOUNTS

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

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

INTEREST ON SB ACCOUNTS

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

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

CURRENT ACCOUNTS

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

INTEREST ON CURRENT ACCOUNTS

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

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

CASA DEPOSITS

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

COMPARISON OF SAVINGS AND CURRENT ACCOUNTS

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

TIME DEPOSITS

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

RATE OF INTEREST ON TIME DEPOSITS

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

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

RECURRING DEPOSITS

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

FIXED DEPOSITS

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

COMPARISON OF DEMAND AND TIME DEPOSITS

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

MODE OF OPERATIONS

Whenever, more than one person open a bank account, they have to advise the bank in writing the ‘manner’ in which account holders will be allowed to operate the account, withdraw the money. This is called ‘ mode of operations’ and the instructions are called ‘mandate’. Account holders are free to decide their mode of operations. Some popular modes of operations are as under:

E OR S: EITHER OR SURVIVOR

When two persons open an account, mode of operation could be E or S – either or survivor, meaning that any one of the account holder can operate the account. This mode of operation is most common among close relatives/married couples. In case of death of anyone of the two, the survivor becomes the owner of the account and can operate the account singly.

JOINT OPERATION

If both of them decide to operate the account jointly. Usually, business firms, offices etc. use this type. The bank will not allow operation in the account to any of the two ‘Singly’.

F OR S: FORMER OR SURVIVOR

When two persons open an account jointly, but rights of operation are restricted to the first person only. The second person gets the operations rights only after the death of the first person. Usually, this mode of operation is used by elderly persons while opening joint account with their siblings.

A OR S: ANYONE OR SURVIVOR

This mode is used when there are more than two account holders. This means that anyone of the account holders can operate the account singly.

STANDING INSTRUCTIONS

It is a facility offered by banks where they undertake to carry out the various transactions on behalf of their customers on recurring regular basis. For example, transferring school fee amount from customer’s account to school’s account on due dates, payment of loan installment on due dates, payment of insurance premium etc.

DORMANT / INOPERATIVE ACCOUNTS

In the running accounts such as current account and savings account, account the holder is expected to regularly operate the account. In case he fails to do so, say for a period of more than one year or so, the account may be termed as dormant or inoperative account. Exact period may vary from bank to bank. RBI has directed banks nor to recover any penalty for non maintenance of minimum balance in inoperative accounts.

UNCLAIMED ACCOUNTS

This is a legally defined concept. If there is no transactions in an account for 10 years or more, the account is classified as an ‘unclaimed account’ as per the provisions of Banking Regulation Act, 1949. Every bank is supposed to send a list of such accounts to RBI as on December 31^st every year. Balance held in these accounts is transferred to Depositor Education and Awareness Fund of RBI.

If some account holder comes back to operate the account, the funds are released to him after proper verification.

DEPOSITOR EDUCATION AND AWARENESS FUND

To utilize the funds lying in the deposit accounts with banks, which have not been operated upon for a period of more than 10 years (unclaimed accounts as defined in Banking Regulation Act), govt. has decided to create a ‘Depositor Education and Awareness Fund’ with RBI and has amended the Banking Law accordingly. The amount will be credited to this fund within 3 months from the expiry of the said period of 10 years.

NOMINATION

OBJECTIVE: The facility was started to facilitate easy transfer of funds in the account of deceased account holders to their legal heirs.

As per section 45-Z of the Banking Regulation Act, all bank deposits can have the facility of nomination as per which the deposit account holders can nominate any person of any age (even a minor) as their nominee to receive the amount outstanding in the account, after their death. The nominee comes into picture only after the death of the depositor and he is only authorized to receive the amount but he is not the right full owner of the amount. The amount belongs to the legal heirs and the nominee is trustee of legal heirs.

Facility of nomination is available in only 3 types of accounts: – i) All deposit accounts (ii) safe custody accounts and (iii) safe deposit locker accounts. The facility is no available in any of loan accounts.

LOAN ACCOUNTS

Granting loans is a major income earning activity for the banks. Roughly, over two third of total income of the banks is by way of interest earned on loans. Banks are free to charge any rate of interest on loan accounts. Bank loans can be classified in two broad types – Demand Loans and Term Loans.

DEMAND LOANS

These accounts are also called as limit accounts as bank sanctions a limit to the borrower up to which he can draw the cheques. These accounts are operated like Current Accounts through cheques and allow for frequent withdrawals and deposits. These accounts are of two types: Cash Credit (CC) and Over Draft (OD) account.

Cash Credit Account: These are most popular loan accounts, meant for the business community only. These limits are sanctioned against security of stocks and are meant for financing the day to day requirements of the business i.e. the working capital requirements. Also known as ‘Limit Account’, these are sanctioned for 12 months only and have to be renewed every year. As they are renewed after every 12 months, they are also called ‘Evergreen Loan Account’.

Over Draft Account: These are limited period temporary loan facilities sanctioned by banks, usually, against some securities. Over Draft can be granted for both business as well as general purposes.

TERM LOANS

In these loan accounts, the sanctioned loan amount is disbursed in one or more installments and there after the borrower has to start the repayment in installments. Use of cheque books is not allowed in these accounts. There are two main types of term loans:-

Retail Loans or Personal Loans: Housing Loans, Car Loans, Education Loans, Consumer Loans etc.

Commercial Loans or Business Loans: Machinery Loans, Factory Loans, Loans for equipments etc.

CAPITAL ADEQUACY NORMS

These norms refer to the minimum capital that has to be maintained by the banks all over the world. The norms have been formulated by Bank for International Settlements (BIS). This bank coordinates and regulates the banking business all over the world. Its headquarters are located at Basel, Switzerland and that is why their recommendations are popularly known as ‘Basel norms’. The bank has formed a committee by the name Basel Committee on Banking Supervision (BCBS) which prescribes various recommendations for banks. One of the major recommendations of BCBS is minimum capital requirement for banks. As per this, minimum capital of a bank cannot be less than 8% of its Risk Weighted Assets (RWA). Here assets refer to loans & investments. RBI has prescribed CAR at 9% for Indian Banks. This ration is called Capital Adequacy Ratio (CAR). Another name of this ratio is Capital to Risk Weighted Assets Ratio (CRAR).

BASEL- II RECOMMENDATIONS

Released in June 2004, these recommendations are known as 3 pillars of Basel – II norms.

• Minimum capital requirement: It revises the 1988 Accord’s by aligning the minimum capital requirements more closely to each bank’s actual risk of economic loss.
• Supervisory review process: Supervisors will evaluate the activities and risk profile of individual banks to determine whether those organizations should hold higher levels of capital and see whether there is any need for remedial actions.
• Market discipline: It refers to certain mandatory disclosures that banks have to make to ensure transparency.

BASEL- III RECOMMENDATIONS

The Base Committee issued the Basel – III guidelines in December 2010. The Framework sets out higher and better- quality capital, better risk coverage, the introduction of a leverage ratio as a backup to the risk-based requirement, measures to promote the buildup of capital that can be drawn down in periods of stress. It recommends formation of Capital Conservation Buffer equivalent to 2.5% of risk weighted assets of the bank, over and above the prescribed minimum capital requirements. These norms shall be implemented w.e.f. 01.04.2013 to 31.03.2019, in a phased manner. It is estimated that Indian banks will require additional capital to the tune of around Rs. 5,00,000 Crore to comply with Basel – III norms.

KYC NORMS

Banking operations are susceptible to the risks of money laundering and terrorist financing. In order to arrest money laundering and to stop the entry of ‘undesirable persons’ it is imperative that banks know their customers well. To achieve this international body Financial Action Task Force (FATF), Paris introduced certain standard systems and procedures for proper document based identification of customers and verification of their address, known as “Know Your Customer” (KYC) norms. In India, these norms in banking have been introduced by RBI and their compliance is mandatory for opening all types of bank accounts. Suitable provisions have been enacted in the Prevention of Money Laundering Act 2002 for the purpose.

Violation of KYC norms may attract penalty up to Rs. 5 crore.

MONEY LAUNDERING

It is the process of disguising illegal sources of money so that it looks like it came from legal sources. It refers to money generated through illegal activities like drug trafficking, illegal sale of arms, ransoms realized in kidnappings, extortions, smuggling, etc. Thus it is different from black money which is unaccounted money or the money on which tax has not been paid, but the source of earning is not illegal. Money laundering is one of the major means of funding of terrorism around the world. Adoption of KYC norms is one of the effective methods for checking the menace of money laundering. The process of Money Laundering involves 3 steps:- Placements, Layering and Integration. In India, government has framed Prevention of Money Laundering Act – (PMLA) 2002 to control money laundering. Instances of violations of PMLA in banking business are to be reported to Financial Intelligence Unit- India (FIU- IND) in Ministry of Finance, New Delhi. Banks are also required to report all cash transactions of above Rs. 10 Lac to FIU-IND on monthly basis.

COUNTERFEIT CURRENCY

It refers to the fake currency. Possession or use of counterfeit money is a legal offence. On detection of fake note by banker, it has to be cancelled and surrendered to nearest police station.

FINANCIAL INCLUSION

The term inclusion refers to coverage of common man and all other persons not covered by some particular vital service. Financial inclusion thus means providing basic financial services to the people not yet covered by these services. It is estimated that roughly 60% of Indians do not have any linkage with the banks. The government has taken up a strong initiative to provide basic financial services to these people.

            In 2010-11 budget, it was decided to extend banking services to all the unbanked habitations with a population of 2000 and above by 31^st March 2012. A multimedia campaign- SWABHIMAN was launched to popularize this project. Reserve Bank of India identified about 73000 such habitations and they were allotted to all the public sector banks with a target of opening 5 crore bank accounts. The mission was completed successfully and now it has been extended to cover all unbanked centers to achieve a target of at least one bank account per family.

To facilitate opening of such a large number of accounts, RBI introduced two initiatives:

Business Correspondent (BC): Banks were allowed to recruit agents called BC for transacting their routine day – to – day business. Banks could make anybody, person, NGO, even companies as their BC and they could be assigned any job as BC.

Business Facilitator (BF): Unlike BC, the BF cannot do actual transactions. Their role is to spread awareness about various banking products and government schemes.

ULTRA SMALL BRANCH (USB)

It is an intermediate ‘Brick and Mortar’ branch between the present base branch and Business Correspondent (BC) locations so as to provide support to a cluster of BC units at a reasonable distance. These Branches may provide support to about 8-10 BC Units within a distance of 3-4 Kms.

MICRO FINANCE INSTITUTION (MFI)

These are intermediary financial institutions which are given soft loans by the banks for giving smaller loans to the beneficiaries in backward/interior areas. Of late, MFIs have earned a bad name as most of them started indulging in a variety of financial mal practices, since almost all their customers were illiterate. Taking advantage of their ignorance, MFIs started fleecing their customer. Ultimately, government formed a committee under chairmanship of Y.H. Malegham to look into the functioning of MFIs. A major recommendation of the committee was that RBI should be asked to regulate the functioning of MFIs and government has accepted it.

WHAT IS MICRO FINANCE?

Microfinance is an economic development tool whose objective is to assist the poor to work their way out of poverty. It covers a range of services which include, in addition to the provision of credit, many other services such as savings, insurance, money transfers, counseling, etc. Normally, loans up to Rs. 50,000 are covered under Micro Finance.

SELF HELP GROUP (SHG)

Concept of SHG was developed in Bangladesh by Mr. Mohammad Yunus, founder of Grameen Bank and winner of Nobel peace prize. It refers to a voluntary group of roughly 8 to 10 persons formed for pursuing some economic activity. The group works from its own funds for about 6 months after which the group is sanctioned a bank loan in proportion to savings of the group. In India, the concept has officially been adopted by NABARD and is implemented through banks.

JOINT LIABILITY GROUP: A group of small farmers formed on the lines of Self Help Group is called Joint Liability Group.