Types of Bank Accounts

Types of Bank Accounts

The bank accounts are classified into three categories. These are as follows:

1. Current Account:
  A Current Account or Demand Deposit Account is a running
and active account which may be opened with a bank by a businessman or an
organisation by making an initial deposit of Rs. 300 in rural areas and Rs. 500 in
urban areas. This account may also be operated upon any number of times during
a working day. This account never becomes time barred, because no interest is paid
for credit balance in this account.
Before opening a current account, banks are required to obtain references from
respectable parties, preferably those of a current account-holder. In case, a person or
a party opens an account with the bank without satisfactory references, the banker
would be inviting unpleasant results.
By accepting deposits on a current account, the banker under takes to honour his
customer’s cheques so long as there is enough money to the credit of the customer. In case
of current account, there is no limit on the amount or number of withdrawals. Under
Section 129 of the Negotiable Instruments Act, 1881, the banker may have to suffer loss
if he pays a forged cheque contrary to the instructions given by the customer.

2. Savings Bank Account:
Savings deposit account is meant for small businessmen
and individuals who wish to save a little out of their current incomes to safeguard
their future and also to earn some interest on their savings. A savings account can
be opened with as a small sum of Rs. 500. A minimum balance of Rs. 500 is to be
maintained in the account if cheque book facility is not required. However, if a
cheque book has been issued, a minimum balance of Rs. 1000 is necessary.
There are restrictions on the maximum amount that can be deposited in this
account and also on the withdrawals from this account. The bank may not permit
more than one or two withdrawals during a week and may lay down a limit on the
amount that can be withdrawn at one time.
Savings account holders are allowed to deposit cheques, drafts, dividend warrants,
etc., which stand in their name only. For this facility, it is necessary that account
holder must be introduced by a person having a current or savings account in the
same bank. However, the banks do not accept cheques or instruments payable to
third party for deposit in the savings bank account. Banks allow interest on deposits
maintained in savings accounts according to the rates prescribed by the Reserve
Bank of India.

3. Fixed Deposit Account:
Money in this account is accepted for a fixed period, say
one, two or five years. The money so deposited cannot be withdrawn before the
expiry of the fixed period. The rate of interest on this account is higher than that
on other accounts. The longer the period, the higher is the rate of interest. Fixed
deposits are also called “time deposits” or “time liabilities.” Fixed deposits have
grown its importance and popularity in India during recent years. These deposits
constitute more than half of the total bank deposits.

The following are the special characteristics of fixed deposits:
(a) Suitability: Fixed deposits are usually chosen by people who have surplus money
and do not require it for some time. These deposit accounts are also favoured by
the bankers because fixed deposit funds can be utilised by them freely till the due
date of the repayment.
(b) Rate of Interest: The rate of interest and other terms and conditions on which
the banks accept fixed deposits are regulated by the Reserve Bank of India. The
Reserve Bank of India revised the rates of interest on fixed deposits several times.
Banks can use fixed deposits for the purpose of lending or investments. So they
pay higher rate of interest on fixed deposits. Though interest is payable at the
stipulated rate, at the maturity of the fixed deposit, banks usually pay interest
quarterly or half-yearly also at the request of the depositor.
(c) Restrictions on Withdrawals: Withdrawal of interest or the principal amount
through cheques is not permitted. The depositor is not given a cheque book. At
the request of the customer, the banker may credit the amount of interest or the
principal to his saving or current account from which he may withdraw the same
through cheques.
(d) Payment before Due Date: Banks also permit encashment of a fixed deposit even
before the due date, if the depositor so desires. But the interest agreed upon on
such deposit shall be reduced.
(e) Advances Against Fixed Deposits: The banker may also grant a loan to the depositor
on the security of the fixed deposit receipt. Banks are now free to determine the
interest rate chargeable on loan advances of over Rs. 2 lakhs.

4. Recurring Deposit Account:
The Recurring Deposit Account has gained wide
popularity these days. Under this, the depositor is required to deposit a fixed amount
of money every month for specific period of time. Each instalment may vary from
Rs. 50 to Rs. 500 or more per month and the total period of account varies from 12
months to 10 years. After the completion of the specified period, the customer gets
back all his deposits along with the cumulative interest accured on them.

Recurring deposit account offers the following benefits to the public:
(a) It provides a good way to save in small amounts for use in the future, e.g.,
education of children, marriage of children, etc.
(b) People having low income may open a recurring deposit account with a
commitment to deposit as low as Rs. 100 every month.
(c) The recurring deposit account can be opened for any period ranging from 12
months to 120 months.
(d) Standing instructions to transfer monthly instalments from the savings account
of the depositor are carried out without any charge.
(e) Loan can be taken up to 90% of the deposits if the depositor needs money.

RESERVE BANK OF INDIA INTRODUCTION

RESERVE BANK OF INDIA INTRODUCTION

Several attempts were made from time to time to set up a Central Bank in India prior to 1934.
But unfortunately these attempts failed to bear any fruit. In 1921, the Government of India
established the Imperial Bank of India to serve as the Central Bank of the country. But the
Imperial Bank did not achieve any appreciable success in its functioning as the Central Bank of
the country. In 1925, the Hilton Young Commission was asked by the Government to express its
views on the subject. The commission made out a forceful case for the establishment of a brand
new Central Bank in the country.

 According to the Commission, it was not desirable to keep the control of currency and credit in the hands of two separate agencies. The Government of India controlled currency while the Imperial Bank regulated credit prior to the establishment of the Reserve Bank of India in April 1st, 1935. The Hilton Young Commission did not consider this double control on currency and credit as a desirable feature of the Indian monetary system. It was on this account that the Commission recommended the transfer of the control of currency and credit to a new Central Bank to be set up in the country. It was on this account that the Commission recommended the establishment of the Reserve Bank of India as the Central Bank of the country. The Government of India while accepting the recommendations of the Commission brought forward a Bill before the Central Legislature. But the Bill could not be passed on account of differences amongst the members of the legislature. The Government of India, therefore, postponed the idea of a new Central Bank for sometime. In 1929, the Central Banking Enquiry Committee again made a forceful plea for the establishment of the Reserve Bank. Consequently, the Reserve Bank of India Act was passed in 1934, and the Reserve Bank started functioning from 1st April, 1935.

The Reserve Bank of India is the kingpin of the Indian money market. It issues notes,
buys and sells government securities, regulates the volume, direction and cost of credit,
manages foreign exchange and acts as banker to the government and banking institutions.

The Reserve Bank is playing an active role in the development activities by helping the
establishment and working of specialised institutions, providing term finance to agriculture,
industry, housing and foreign trade. In spite of many criticisms, it has successfully controlled
commercial banks in India and has helped in evolving a strong banking system. A study of the
Reserve Bank of India will be useful, not only for the examination, but also for understanding
the working of the supreme monetary and banking authority in the country.

SOURCES OF BANK’S INCOME

SOURCES OF BANK’S INCOME

A bank is a business organisation engaged in the business of borrowing and lending money.
A bank can earn income only if it borrows at a lower rate and lends at a higher rate. The
difference between the two rates will represent the costs incurred by the bank and the profit.
Bank also provides a number of services to its customers for which it charges commission.
This is also an important source of income. The followings are the various sources of a
bank’s profit:

• 1. Interest on Loans: The main function of a commercial bank is to borrow money for the purpose of lending at a higher rate of interest. Bank grants various types of loans to the industrialists and traders. The yields from loans constitute the major portion of the income of a bank. The banks grant loans generally for short periods. But now the banks also advance call loans which can be called at a very short notice. Such loans are granted to share brokers and other banks. These assets are highly liquid because they can be called at any time. Moreover, they are source of income to the bank.

• 2. Interest on Investments: Banks also invest an important portion of their resources in government and other first class industrial securities. The interest and dividend received from time to time on these investments is a source of income for the banks. Bank also earn some income when the market prices of these securities rise.

• 3. Discounts: Commercial banks invest a part of their funds in bills of exchange by discounting them. Banks discount both foreign and inland bills of exchange, or in other words, they purchase the bills at discount and receive the full amount at the date of maturity. For instance, if a bill of Rs. 1000 is discounted for Rs. 975, the bank earns a discount of Rs. 25 because bank pays Rs. 975 today, but will get Rs. 1000 on the due date. Discount, as a matter of fact, is the interest on the amount paid for the remaining period of the bill. The rate of discount on bills of exchange is slightly lower than the interest rate charged on loans and advances because bills are considered to be highly liquid assets.

• 4. Commission, Brokerage, etc.: Banks perform numerous services to their customers and charge commission, etc., for such services. Banks collect cheques, rents, dividends, etc., accepts bills of exchange, issue drafts and letters of credit and collect pensions and salaries on behalf of their customers. They pay insurance premiums, rents, taxes etc., on behalf of their customers. For all these services banks charge their commission. They also earn locker rents for providing safety vaults to their customers. Recently the banks have also started underwriting the shares and debentures issued by the joint stock companies for which they receive underwriting commission.

• Commercial banks also deal in foreign exchange. They sell demand drafts, issue letters of credit and help remittance of funds in foreign countries. They also act as brokers in foreignexchange. Banks earn income out of these operations.

 

Various Types Of Banks

TYPES OF BANKS

Broadly speaking, banks can be classified into commercial banks and central bank.
Commercial banks are those which provide banking services for profit. The central bank has
the function of controlling commercial banks and various other economic activities. There
are many types of commercial banks such as deposit banks, industrial banks, savings banks,
agricultural banks, exchange banks, and miscellaneous banks.

Types of Commercial Banks

1. Deposit Banks:
 The most important type of deposit banks is the commercial banks.
They have connection with the commercial class of people. These banks accept
deposits from the public and lend them to needy parties. Since their deposits are
for short period only, these banks extend loans only for a short period. Ordinarily
these banks lend money for a period between 3 to 6 months. They do not like to lend
money for long periods or to invest their funds in any way in long term securities.

2. Industrial Banks:
 Industries require a huge capital for a long period to buy machinery
and equipment. Industrial banks help such industrialists. They provide long term loans
to industries. Besides, they buy shares and debentures of companies, and enable them
to have fixed capital. Sometimes, they even underwrite the debentures and shares of big
industrial concerns. The important functions of industrial banks are:
2 Banking
1. They accept long term deposits.
2. They meet the credit requirements of industries by extending long term loans.
3. These banks advise the industrial firms regarding the sale and purchase of shares
and debentures.
The industrial banks play a vital role in accelerating industrial development. In
India, after attainment of independence, several industrial banks were started with
large paid up capital. They are, The Industrial Finance Corporation (I.F.C.), The
State Financial Corporations (S.F.C.), Industrial Credit and Investment Corporation
of India (ICICI) and Industrial Development Bank of India (IDBI) etc.

3. Savings Banks: 
These banks were specially established to encourage thrift among
small savers and therefore, they were willing to accept small sums as deposits. They
encourage savings of the poor and middle class people. In India we do not have such
special institutions, but post offices perform such functions. After nationalisation
most of the nationalised banks accept the saving deposits.

4. Agricultural Banks:
Agriculture has its own problems and hence there are separate
banks to finance it. These banks are organised on co-operative lines and therefore
do not work on the principle of maximum profit for the shareholders. These banks
meet the credit requirements of the farmers through term loans, viz., short, medium
and long term loans. There are two types of agricultural banks,
(a) Agricultural Co-operative Banks, and
(b) Land Mortgage Banks. Co-operative Banks are mainly for short periods. For long
periods there are Land Mortgage Banks. Both these types of banks are performing
useful functions in India.

5. Exchange Banks:
 These banks finance mostly for the foreign trade of a country.
Their main function is to discount, accept and collect foreign bills of exchange. They
buy and sell foreign currency and thus help businessmen in their transactions. They
also carry on the ordinary banking business.
In India, there are some commercial banks which are branches of foreign banks.
These banks facilitate for the conversion of Indian currency into foreign currency
to make payments to foreign exporters. They purchase bills from exporters and sell
their proceeds to importers. They purchase and sell “forward exchange” too and
thus minimise the difference in exchange rates between different periods, and also
protect merchants from losses arising out of exchange fluctuations by bearing the
risk. The industrial and commercial development of a country depends these days,
largely upon the efficiency of these institutions.

6. Miscellaneous Banks:
 There are certain kinds of banks which have arisen in due
course to meet the specialised needs of the people. In England and America, there are
investment banks whose object is to control the distribution of capital into several uses.
American Trade Unions have got labour banks, where the savings of the labourers are
pooled together. In London, there are the London Discount House whose business is “to
go about the city seeking for bills to discount.” There are numerous types of different
banks in the world, carrying on one or the other banking business.