What is banking and what is the role of banking in an economy? DEFINATION OF BANK: Bank is an organisation which accepts deposits from public repayable on demand or otherwise for the purpose of lending and investment. The banking services these days include issuance of debit and credit cards, providing safe custody of valuable items, lockers, ATM services and online transfer of funds across the country / world. It is well said that banking plays a silent, yet crucial part in our day-to-day lives. The banks perform financial inter mediation by pooling savings and channelizing them into investments through maturity and risk transformations, thereby keeping the economy’s growth engine revving. Banking business has done wonders for the world economy. The simple looking method of accepting money deposits from savers and then lending the same money to borrowers, banking activity encourages the flow of money to productive use and investments. This in turn allows the economy to grow. In the absence of banking business, savings would sit idle in our homes, the entrepreneurs would not be in a position to raise the money, ordinary people dreaming for a new car or house would not be able to purchase cars or houses. What is a bank ? Define a Bank ? An organisation which accepts deposits from public repayable on demand or otherwise for the purpose of lending and investment. What is a Banking Company ? Any company, which transacts the business of banking defined above is termed as Banking company and in INDIA these are regulated by BANKING REGULATION ACT AND RBI ACT. A customer is a person who maintains a regular account with the bank without taking into consideration the duration and frequency of operation of his account. To be a customer for any bank the individual should have an account with the bank. The individual should deal with the bank in its nature of regular banking business. He should deal with the bank without consideration of the duration and frequency of operation of his account. The relationship between banker and customer is of utmost importance. BANKER CUSTOMER RELATIONSHIP: The relationship between a banker and a customer arises from a contract. Fundamentally speaking, it is the relationship of debtor and creditor, the respective positions being determined by the state of the account. However, in relation to other services rendered by banker, he is sometimes an agent of the customer, for example, collection of cheques, sale of securities, etc., bailee in relation to the safe custody of valuables; and trustee when he is entrusted with property to be administered for the benefit of a named beneficiary. This article will deal with the legal aspects of the banker and customer relationship in respect of loans and advances, in short, debtor-creditor relationship and vice-versa.The relationships between the banker and the customer. It has already been stated that the relationship between the banker and the customer depends on the nature of services provided by the banker. For example, when an account is opened in a bank, the relationship created is that of debtor (banker) and creditor (customer). When some valuables are deposited in the safe custody of the banker, the relationship created is that of trustee (banker) and beneficiary (customer). Let us discuss the different relationships between the banker and the customer in detail. Relationship of Debtor and Creditor You are aware that as a primary function, banks accept deposits from the public. The deposits may be fixed, current or savings deposits. Bank accepts the deposits for lending money to others or to invest in some profitable avenues. Whenever customer deposits money in a bank, the banker takes a responsibility to return the money as and when demanded by the customer along with interest. Of course, the customer must fulfill the necessary conditions in demanding the money. When a customer deposit money, in a way he lends it to the banker and the banker can use it according to his discretion to earn profit as much as he can. Moreover, at the time of returning the money, the banker can return the money in any denominations, not the same coins and notes as deposited by the customer. In this case, the relationship that is created between the banker and the customer is that of debtor and creditor. The banker is the debtor and the customer is the creditor. Features of debtor- creditor relationship Though the relationship between the banker and the customer is that of debtor and creditor, it is not the general debtor and creditor relationship. This relationship has certain special features, which we are going to discuss now- The demand for repayment of money must be made by the customer (creditor). The customer must make the demand in proper form i.e. the customer must make the demand for repayment through withdrawable forms, cheques, drafts, order or otherwise and not verbally or through telephone. The customer must make the demand for repayment at a particular branch i.e. the branch where the customer has the account. However, in case of bank drafts, travellers’ cheques, ATM Cards etc., the bank can pay the money to the customer at some other branch. The customer must make the demand for repayment only during the working days and working hours of the bank. However, with the advent of technology, this feature is not applicable in all the time. Relationship of Creditor and Debtor The relationship between the banker and the customer as debtor and creditor reverses when- the customer overdrawn the account; and the banker lends money to the customer. Overdrawing the account: In Unit 9, you have come across that that the current accountholders get overdraft facility from the bank. Under this facility the accountholder can overdraw his account i.e. withdraw more money than the balance available in the account. In case the accountholder overdraws the account, the relationship between the banker and the customer gets the shape of creditor and debtor relationship- the banker is the creditor and the accountholder (customer) is the debtor. Till the overdrawn amount is returned by the customer, the relationship between the two continues to be of creditor and debtor. As soon as the overdrawn amount is returned by the customer, the relationship gets its original shape i.e. banker becomes the debtor and the accountholder becomes the creditor. Lending money to the customer: When a bank sanctions a loan to a customer, the relationship between the two is that of the creditor and the debtor. The creditor (banker) charges interest on the loan till it is paid back by the customer. When the loan is paid back fully, the relationship reverses and gets the original shape of debtor (banker) and creditor (customer). Relationship of Trustee and Beneficiary Besides the debtor- creditor relationship between the banker and the customer, some other types of relationships also exist between the two, depending on the services provided by the bank. One of such relationships is that of trustee and beneficiary. Perhaps you are aware that banks provide some services under which the customers can keep their valuables like jewellery, share certificate etc. in safe custody of the bank. The customer remains the owner of such valuables though they are in the custody of the banker. In this case the banker acts as trustee and the customer is the beneficiary. Relationship of Bailee and Bailor When the customer keeps his valuable in the safe custody of the banker, the banker besides acting as trustee also acts as bailee. In that case the customer becomes the bailor. If the customer (bailor) suffers any loss due to the negligence of duty on the part of the banker (bailee), the customer can file a case in the court of law for the recovery of such loss. Relationship of Agent and Principal IN the agency functions of banks , you have come to know that banks as agents collect cheques, bills, drafts etc. on behalf of the customer. The bank also makes payments of regular nature like, insurance premium, rent etc. on behalf of the customer. While performing theses functions the bank acts as the agent of the customer and the customer is the principal. The banker (agent) performs the functions according to the instructions of the customer (principal) and for this the banker is entitled to get commission from his principal. TYPE OF DEPOSIT ACCOUNTS IN BANKS: Traditionally banks in India have four types of deposit accounts, namely Current Accounts, Saving Banking Accounts, Recurring Deposits and, Fixed Deposits. However, in recent years, due to ever increasing competition, some banks have introduced new products, which combine the features of above two or more types of deposit accounts. These are known by different names in different banks, e.g 2-in-1 deposits, Smart Deposits, Power Saving Deposits, Automatic Sweep Deposits etc. However, these have not been very popular among the public. What is a Current Account ? Who uses current accounts? Current Accounts in Banks Current Accounts are basically meant for businessmen and are never used for the purpose of investment or savings. These deposits are the most liquid deposits and there are no limits for number of transactions or the amount of transactions in a day. Most of the current account are opened in the names of firm / company accounts. Cheque book facility is provided and the account holder can deposit all types of the cheques and drafts in their name or endorsed in their favour by third parties. No interest is paid by banks on these accounts. On the other hand, banks charges certain service charges, on such accounts. Features of Current Accounts : (a) The main objective of Current Account holders in opening these account is to enable them (mostly businessmen) to conduct their business transactions smoothly. (b) There are no restrictions on the number of times deposit in cash / cheque can be made or the amount of such deposits; (c) Usually banks do not have any interest on such current accounts. However, in recent times some banks have introduced special current accounts where interest (as per banks own guidelines) is paid (d) The current accounts do not have any fixed maturity as these are on continuous basis accounts What is a Savings Bank Account ? Who uses Saving Bank Accounts ? These deposits accounts are one of the most popular deposits for individual accounts. These accounts not only provide cheque facility but also have lot of flexibility for deposits and withdrawal of funds from the account. Most of the banks have rules for the maximum number of withdrawals in a period and the maximum amount of withdrawal, but hardly any bank enforces these. However, banks have every right to enforce such restrictions if it is felt that the account is being misused as a current account. Till 24/10/2011, the interest on Saving Bank Accounts was regulared by RBI and it was fixed at 4.00% on daily balance basis. However, wef 25th October, 2011, RBI has deregulated Saving Fund account interest rates and now banks are free to decide the same within certain conditions imposed by RBI. Under directions of RBI, now banks are also required to open no frill accounts (this term is used for accounts which do not have any minimum balance requirements). Although Public Sector Banks still pay only 4% rate of interest, some private banks like Kotak Bank and Yes Bank pay between 6% and 7% on such deposits. From the FY 2012-13, interest earned upto Rs 10,000 in a financial year on Saving Bank accounts is exempted from tax. What are Recurring Deposit Accounts ? Who use Recurring Deposit Accounts ? or RD accounts These are popularly known as RD accounts and are special kind of Term Deposits and are suitable for people who do not have lump sum amount of savings, but are ready to save a small amount every month. Normally, such deposits earn interest on the amount already deposited (through monthly installments) at the same rates as are applicable for Fixed Deposits / Term Deposits. These are best if you wish to create a fund for your childs education or marriage of your daughter or buy a car without loans or save for the future. Under these type of deposits, the person has to usually deposit a fixed amount of money every month (usually a minimum of Rs,100/- p.m.). Any default in payment within the month attracts a small penalty. However, some Banks besides offering a fixed installment RD, have also introduced a flexible / variable RD. Under these flexible RDs the person is allowed to deposit even higher amount of installments, with an upper limit fixed for the same e.g. 10 times of the minimum amount agreed upon. These accounts can be funded by giving Standing Instructions by which bank withdraws a fixed amount on a fixed date of the month from the saving bank of the customer (as per his mandate), and the same is credited to RD account. Recurring Deposit accounts are normally allowed for maturities ranging from 6 months to 120 months. A Pass book is usually issued wherein the person can get the entries for all the deposits made by him / her and the interest earned. Banks also indicate the maturity value of the RD assuming that the monthly instalents will be paid regularly on due dates. In case instalment is delayed, the interest payable in the account will be reduced and some nominal penalty charged for default in regular payments. Premature withdrawal of accumulated amount permitted is usually allowed (however, penalty may be imposed for early withdrawals). These accounts can be opened in single or joint names. Nomination facility is also available. The RD interest rates paid by banks in India are usually the same as payable on Fixed Deposits, except when specific rates on FDs are paid for particular number of days e.g. 500 days, 555 days, 1111 days etc i.e. these are not ending in a quarter. What are Fixed Deposit Accounts in India or Term Deposits All Banks in India (including SBI, PNB, BoB, BoI, Canara Bank, ICICI Bank, Yes Bank etc.) offer fixed deposits schemes with a wide range of tenures for periods from 7 days to 10 years. These are also popularly known as FD accounts. However, in some other countries these are known as Term Deposits or even called Bond. The term fixed in Fixed Deposits (FD) denotes the period of maturity or tenor. Therefore, the depositors are supposed to continue such Fixed Deposits for the length of time for which the depositor decides to keep the money with the bank. However, in case of need, the depositor can ask for closing (or breaking) the fixed deposit prematurely by paying paying a penalty (usually of 1%, but some banks either charge less or no penalty). (Some banks introduced variable interest fixed deposits. The rate of interest on such deposits keeps on varying with the prevalent market rates i.e. it will go up if market interest rates goes and it will come down if the market rates fall. However, such type of fixed deposits have not been popular till date). The rate of interest for Fixed Deposits differs from bank to bank (unlike earlier when the same were regulated by RBI and all banks used to have the same interest rate structure. The present trends indicate that private sector and foreign banks offer higher rate of interest. The earlier trend that private sector and foreign banks offer higher rate of interest is no more valid these days. However, now a days small banks are forced to offer higher rate of interest to attract more deposits. Usually a bank FD is paid in lump sum on the date of maturity. However, most of the banks have also facility to pay/ credit interest in saving account at the end of every quarter. If one desires to get interest paid every month, then the interest paid will be at a marginal discounted rate. In the changed computerized environment, now the Interest payable on Fixed Deposit can also be easily transferred on due dates to Savings Bank or Current Account of the customer. Deposit Accounts As per Banking Regulations Act, Banking is accepting of money for the purposes of lending , investment and the money so accepted is payable on demand or otherwise.Thus Bank deposits can be broadly classified in to: (1) Demand deposits (2) Time /Term deposits Demand deposits: - Demand deposits are those deposits, which can be withdrawn on demand. Saving bank, current account and overdue deposits fall under this category. Customers having these accounts can withdraw their deposit s from the account at any time they desire. Time/Term Deposits: - Deposits, which are not payable on demand, are known as term or time deposits. Term Deposits or “Fixed Deposits” are deposits, where the depositor makes a lump sum deposit at one time for a fixed term and receives payment in future after the period for which the deposits have been kept. Rate of interest is contracted at the time of opening the account. Such deposits generally carry comparatively higher rate of interest depending on the time span In case a depositor wants prepayment i.e. payment before the due date, the amount is paid after leaving penalty. Salient features of term deposits: These deposits have a due date It carries higher rate of interest Interest is payable quarterly or compounded ever quarter as per the choice of the depositor. Every deposit transaction is a separate contract A time deposit receipt is not a negotiable instrument and, therefore, cannot be transferred by endorsement by a depositor in favour of another. Banks accept term deposits for a minimum period of 7 days and maximum period of 120 months. Deposits held under the following scheme are called time deposits. 1-Short deposit- Deposits accepted by banks for a period of less than 12 months are termed as Short deposits 2-Fixed deposit- Deposits accepted foe a period of over twelve months are treated as Fixed deposits. 3-Recurring deposits 4-Cash certificates Recurring Deposits” are like a Fixed Deposit Account. Banks introduce such deposit account to inculcate the habit of saving among people by offering higher rate of interest. Under such bank account, a depositor is required to deposit amount in pre-agreed equal monthly installments for a fixed period and the amount is paid in one lump sum, on maturity. Cash Certificates are deposits, which are accepted in lump sum for a fixed period. On maturity, the principal plus interest compounded at quarterly intervals are repaid to the depositors as a lump sum. These deposits are issued a price less than the face value of the certificate for a certain period. On the date of maturity (which is mentioned on the certificate) the depositor gets the face value of the certificate.e.g if the face value of certificate is Rs.1,000/- and it is being issued say for a period of three years ,the bank may charge less than Rs 1000/- but the depositor gets the face value. The difference between the amount paid and received is the interest earned on the deposit. Savings Bank Deposits: Savings bank deposit account is primarily meant for developing the habit of saving among the public. Nominal interest is paid on the balance in the account. The depositor has the freedom to withdraw the amount deposited as and when he/she desires, however there are restrictions on the number of withdrawals over a period of time. The interest on such deposits is calculated on daily product basis. The present rate of interest on Savings deposit is 4 percet per annum.Banks are now free to quote their own rate as RBI has deregulated interest on Saving deposits. The relationship between the bank and the depositor is essentially that of debtor and creditor respectively. Nomination facility is also available in such accounts. Current Account: Current account is generally opened for Trading and Business purposes. Current account is a form of demand deposit where withdrawals are allowed any number of times depending upon the balance in the account or up to a particular agreed amount. This type of account, can be opened in a bank by any individual, business enterprise, company, government/semi-government organisation, etc. whose transactions happen to be numerous. RBI directives prohibit payment of interest on current accounts. Banks do not pay any interest but levy some incidental charges depending upon the number of transactions. Overdue Deposits:- Are those deposits which are not withdrawn on maturity dates. It is treated as a demand deposit Dormant Account: - These are non- operative accounts. The accounts where no transactions has taken place during the consecutive four half years are termed as ‘Dormant’ account. Banks permit operations only after obtaining request letter from the depositor and ascertaining the reasons for not operating the account. Difference Between Saving and Current Account The difference between saving and current account is discussed as follows: 1. Meaning Saving account is opened by individuals for the purpose of saving a part of their income. Current account is maintained by businessman and others who have to do regular bank transactions. 2. Purpose The main purpose of opening a saving account is to save a part of the income. The main purpose of opening a current account is to facilitate regular transactions. 3. Operated by Saving account is operated by salary earners, small traders and others. Current account is operated by businessmen and other organisations. 4. Interest Rate The saving account earns a nominal rate of interest. At present, it is about 4% p.a. (in India).(VARIES FROM BANK TO BANK) Normally, banks do not pay interest on current account. 5. Minimum Amount The saving account can be operated with lesser amount. To open current account more amount is required. RECURRING DEPOSIT Key features- ü Monthly deposits of Minimum Rs.100/- no maximum. ü Minimum period 12 months maximum 120 months. ü Rate of interest as applicable to Bank’s fixed Deposit for the period of the RD. ü Loan / Overdraft up to 90% available against the balance in RD account. ü TDS is not applicable. Most Important Terms & Conditions 1. Monthly Rs. 100/- no maximum. b) Deposit in Multiple of Rs.10/- 2. Minimum period 12 months maximum 120 months 3. Rate of interest as applicable to Bank’s Fixed deposit for the period of the RD 4. Premature withdrawal allowed at 0.5% below the rate applicable for the period the deposit has remained with the Bank 5. Loan / Overdraft facility available against the balance in RD account 6. Penalty charges for non-Deposit of monthly instalments: a. For a/c of period 5 years and less --Rs. 1.50 per Rs. 100/- per month b. For a/c of period above 5 years- Rs. 2.00 per Rs. 100/- per month 7. No Cheque Book / ATM Card will be issued 8. Passbooks are issued 9. Nomination facility available. #sumit
Posted on: Sun, 25 Jan 2015 08:28:49 +0000
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