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Chapter IV

Deposit ProductsAfter 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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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 mobilizedeposits heavily from the marketplace. Equity capital serves very little purpose inmeeting these fund requirements. Deposits are the foundation upon which banks

thrive and grow. The ability of a banks management and staff to attract moneyfrom customers and businesses is an important measure to gauge a banksacceptance by the public. Deposits are the basis for bank loans and thus representthe ultimate source of bank profits and growth. These generate cash reservesthrough which new loans are created. The management effectiveness of a bank canbe gauged by finding whether the deposits are raised at the lowest possible costand whether enough deposits are available to fund those loans the bank proposes tomake.

In todays intensely competitive and increasingly deregulated market place, boththe cost and amount of deposits of the banks are heavily influenced by the pricingschedules and competitive maneuverings of scores of bank and non-bankinstitutions offering similar services. The globalization of the financial markets haswidened the avenues of funds for banks in the capital market. Banks are now ableto raise capital both in national and international markets. Nevertheless, deposits

gathered from the local markets are considered the primary support for assets inmost of the banks. Deposits have typically lower interest costs than the othertypes of funds. Another important feature of these deposits is their relativestability compared to hot money i.e. the money raised from the money marketetc. 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 withpoor deposit base.

In India, traditionally banks have been offering only mass banking products. Someof the most common deposit products are savings bank, current account, and termdeposit account. The common lending products are cash credit and term loans. Inthe past, banks had little choice in the matter and had to accept deposits at ratesand amounts fixed by Reserve Bank of India. Bank rate, which is dictated by theRBI, is the benchmark for interest on the lending products. Further, remittance

products were limited to issuance of drafts, telegraphic transfers, bankers chequeand internal transfer of funds.

With several developments ushered in by the liberalization and financial sectorreforms, in the 1990s the entire banking product structure has undergone a majorchange. The banking sector has been deregulated and made more competitive.New private and foreign participants have been allowed entry into the sector. ITinitiatives have made the banking operations easy and flexible to customers. Rapidstrides in technology have, in fact, redefined the role and structure of banking.Further, due to exposure to global trends led by Internet, customers bothindividuals and corporate are now demanding better services with more productsfrom their banks. Financial markets have turned into buyers markets. Banks arealso changing with time and are trying to become one-stop financialsupermarkets. Market focus is shifting from mass banking products to classbanking with introduction of value added and customized products.

A few new generation banks have already introduced customized bankingproducts like Investment Advisory Services, SGL II accounts, Photo-credit cards,Cash Management services, Investment products and Tax Advisory services. Veryfew banks have also gone into money market mutual fund schemes. Eventually,the banks are planning to market bonds and debentures also. Banks sellinginsurance has already become a reality, which was considered a distant dreamsome time back. For eg. Aviva Life Insurance has tied up with ABN-Amro Bankto market its insurance products. Banks also offer advisory services termed asprivate banking to high relationship-value clients.


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New distribution channels have transformed the way banking is conducted. Moreand more banks are outsourcing services like disbursement and servicing ofconsumer loans, credit card business, etc. Most of the new generation banks havebeen aggressively selling their products through Direct Selling Agents (DSAs).Home banking, telephone banking and Internet banking have already becomecommon. 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 informationover a secure line, request chequebooks and stop payment, and even transfer fundsbetween ICICI Bank accounts. Citibank has been offering net banking through itsSuvidha program to customers. Products like debit cards, credit cards, flexideposits, ATM cards, personal loans including consumer loans, housing loans andvehicle loans have been introduced by a number of banks.

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

growing day by day.Box 1: Whats Happening to Bank Deposits?

Focus on commercial banks reliance on non-deposit funding sources seems tohave overshadowed a fundamental area of liability management bank deposits.It has almost become a clich that bank deposits are dwindling, but that is not thecase. In fact, total domestic deposits of FDIC-insured commercial banks haveincreased 6 percent (annualized) over the past five years (1995-2000). In thedeposit mix, savings and time deposits increased incrementally in 1999, whiledemand deposits declined less than 1 percent (annualized).

Deposit growth since 1994 has been dampened by competition, customerattraction to equity markets, low interest rates on deposits, poor service, and ahost of other reasons. However, some concerns remain: While bank depositshave 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 loangrowth exceeding deposit growth over the past five years, the funding shortfallhas necessitated increased use of noncore funding, a trend that shows no signs ofreversal.

The industrys inability to increase demand-deposit growth, which has partially

contributed to margin compression, is also cause for concern. If the bankingindustry cannot establish itself as a dominant and trusted choice in the emergingelectronic bill payment and presentment area, significant bank-deposit migrationcould occur.

A Federal Reserve Bank of New York study shows the internal growth rates ofthe 50 largest banking companies lagging the industry, with growth in thesecompanies primarily attributed to mergers and acquisitions. With a lack of recentmerger and acquisition activity, larger companies may need to focus more oninternal 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 significantimpact of deposit disintermediation, analysts and examiners may increase theirfocus in this area.

Further compounding liquidity risk is evidence to suggest that somecorrespondent banks have been reducing or eliminating funding to their

community bank correspondents. In addition, some community banks may beapproaching their limit for Federal Home Loan Bank borrowing. As such, aneffective strategy for the retention and growth of bank deposits becomes morecritical in this environment.

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

TYPES OF DEPOSITS OFFERED BY BANKS

Deposits are accepted in different ways. Differentiation in deposit types may arisefrom the type of customer who holds the deposit, tenure of the deposit, its natureand the interest factor. Based on these parameters, the deposits can be broadlyclassified into transaction and non-transaction deposits.

Transaction (Payments) DepositsA deposit which facilitates the account holder to transact through a negotiable ortransferable instrument, cheque, a written order of withdrawal, a telephone order totransfer funds, or other similar means of making payments and transferring moniesto third parties is known as a transaction account. These are one of the oldestdeposit services offered by banks where banks make payments on behalf of itscustomers. This transaction or demand deposit service requires the bank to honorcheques and withdrawals. Transaction deposits include regular non-interestbearing demand deposits, which do not earn an explicit interest payment butprovide the customer with payment services, safe keeping of funds and recordkeeping for any transactions carried out through cheques. They also includeinterest bearing demand deposits that provide all of the foregoing services and payinterest to the depositor. Current account and Savings account are the most widelyused transaction accounts.

Non-interest bearing demand deposits

There are no interest payments on the current accounts. Payment of interest onchecking accounts has been prohibited with the passage of the Glass-Steagall Actin the US. These demand deposits are among the most volatile and leastpredictable of a banks sources of funds, with the shortest potential maturity asthey can be withdrawn without notice. Most non deposit bearing liabilities are heldby business firms. Many of the individual account holders have moved towardsother types of deposits that pay interest.

Interest bearing demand deposits

In the early 1970s in New England, hybrid checking-savings accounts wereintroduced in the form of Negotiable Order of Withdrawal (NOW accounts).NOWs are interest bearing saving deposits that give the bank the right to insist onprior notice before the customer withdraws funds. As the notice requirement israrely exercised, the NOW can be used like checking account. In US with thepassage of the Depository Institutions Deregulation Act, 1980, NOWs became a

nationwide phenomenon.

In US, two other important interest bearing transaction accounts were created in1982 with the passage of the Garn-St Germain Depository Institutions Act. Banksand non-bank thrift institutions could offer deposits competitive with the shareaccounts offered by money market funds that carried higher, unregulated interestrates and were backed by a pool of high quality securities. The result was theappearance of Money Market Deposit Accounts (MMDAs) and Super NOWs(SNOWs), offering flexible money market interest rates but accessible via chequeor preauthorized draft to pay for goods and services. MMDAs are interest-earning


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short maturity savings accounts with limited transaction privileges. Banks payinterest rates enough to attract and hold the customers deposit. The customer isusually restricted to limitedtransfers or withdrawals per month, with no more thanthree transactions as cheques written against the account. The interest rate paid ona money market account is usually higher than that of a regular passbook savingsrate. Money market accounts also have a minimumbalance requirement.

Box 2: Non-deposit Investment Products in Banking

In the beginning of 1990s, many of the customers of the banks have beenmoving out their funds from out of deposits at banks and thrift institutions intoso called non-deposit investment products that promise better returns than areavailable on many conventional bank deposits. The shift of preferences from theconservative investments in bank deposits into uninsured stocks, mutual funds,annuities, and other investment products has forced the banks to relook at theirbusiness strategies to win back their customers. The potential advantages tobanks include generating considerable fee income that may be less sensitive tointerest rate movements than traditional bank services such as loans anddeposits. In addition, it is possible that it might add prestige to a banks nameand may help position the bank well for the future as more and moreindividuals start planning for retirement. Of late even in India, many of thenew 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 theseproducts is market driven and customers may blame the bank when they do notreach their earnings goals. Because of their reputation, customers may holdbanks to a higher standard than securities brokers. As a result, banks may endup involved in costly litigation with customers who are disappointed or whoclaim that the risks involved were not adequately explained. In addition, banksmay have compliance problems if they do not properly register their investmentproducts or fail to follow the rules for the sale of these products.

Regulators already require banks to sell these products in a separate area fromwhere deposits are taken and banks are required to prominently display thatthese products are not covered by deposit insurance. In addition, customers alsomust be informed that these products are subject to risks including potential lossof principal. In addition, banks must make sure that the names of these productscannot be confused with their regular banking products. Finally, banks mustdemonstrate that they are regularly monitoring themselves to ensure that theirsales personnel are complying with the regulatory requirements and banks arealso supposed to be sure that the products they sell meet the needs of eachparticular customer and situation. Compliance with these regulations wouldhelp 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 fundsfor other transaction purposes, it is a non-transaction account. These deposits aredesigned to attract funds from customers who wish to set aside certain amount inanticipation of future expenditures or financial emergencies. These deposits payhigher interest rates compared to transaction deposits. While their interest cost ishigher, thrift deposits are generally less costly for a bank to process and tomanage. Most familiar examples of such accounts are the term deposit accounts.

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


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

Current Account

The depositor can withdraw the money at any time (as long as the money isavailable in the account) and also can order the bank to use the money to pay thirdparties, generally through a cheque. Banks may or may not pay interest on theseaccounts. If they pay interest, the account is called a NOW(negotiable order ofwithdrawal) account. It is possible that banks may charge fees for demand depositaccounts, but in many cases these fees can be reduced or avoided by maintaining aminimum balance or by satisfying other criteria established by the bank.

As mentioned earlier, current accounts are transaction accounts and hence areoffered to business firms. Due to the ease the business firms have in depositing andwithdrawing funds from this account, it actually facilitates cash management forthe firms. No advance notice is required to withdraw the amount. It being anoperating account, the customer can easily withdraw funds from the currentaccount using a cheque facility. However, banks do require the account holder tomaintain 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 easyliquidity, the deposit in this account does not earn any interest. Although theseaccounts are non-interest bearing liabilities of the bank, they are not expense freeas they generate processing costs. To cover these costs, the banks usually collectservice charges related to account activity or account balances or both.

Savings Bank Account

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

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 theirfunctions.

Water and Sewerage/Drainage Boards.

State Text Book Publishing Corporations.

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

Any political party.

Similar to the current account, the banks do not generally require any advancenotice for withdrawals for the SB account. While the SB account also has chequefacility, only a limited number of cheques can be written. Again, banks require thedeposit holder to maintain a minimum balance. While the required minimumbalance may vary from bank to bank, most banks require the depositor to maintain


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this amount on a continuous basis. Some other banks require the depositor tomaintain the minimum balance on an average basis over a period of time, say threemonths. The bank may charge for any shortfall in this minimum balance. Some ofthe new private banks are however offering zero balance facility i.e. deposit holderneed not maintain a minimum balance.

INTEREST RATES OFFERED ON DIFFERENT TYPES OF DEPOSITSDifferent deposit products generally carry different rate of interest. In general thelonger the maturity the greater is the yield the depositors earn due to the time valueof money and the frequent upward slope of the yield curve. For example, acustomer 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 highestdeposit interest rates that a bank can offer. The size and the perceived riskexposure of the offering banks also play an important role in shaping the depositinterest rates. Other key factors are the marketing philosophy and goals of theoffering bank. Banks that choose to compete for deposits aggressively usually posthigher offer rates to bid deposits away from their competitors. In contrast when abank wants to discourage a type of deposit, it allows its posted rate to fall relativeto 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 interestrates are prescribed by the RBI and the prevailing rate is 3.5% per annum. Thisinterest will be paid on the minimum balance that is maintained in the accountfrom the 10th to the end of the month. This minimum amount is expected to bemaintained throughout the month and a monthly product is arrived at aftermultiplying this amount with the number of days in the month. On this monthlyproduct, the interest will be calculated (rounded to a rupee). Having computed theinterest amount, the bank will pay the same at quarterly or longer periods.

Normally the periodicity is half-yearly.

Illustration 1

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

Date Balance (Rs.)

08/04/02 10500

17/04/02 18000

22/04/02 6500

30/04/02 4500

05/05/02 15000

19/05/02 7500

25/05/02 4000

02/06/02 14500

15/06/02 9000

29/06/02 5500

08/07/02 1600022/07/02 6000

30/07/02 2000

11/08/02 12500

21/08/02 7000

31/08/02 4000

09/09/02 14500

19/09/02 9000

29/09/02 4500


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Solution

The interest that will be paid by the bank will be 4 percent as per the prevailingrates. This will be earned on the monthly product of the minimum balancemaintained 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 theinterest during February and August; others during March and December. Thereare banks, which credit the interest once in a year in December. A few banks creditduring calendar quarters.

Illustration 2

SFM Banking Ltd. requires a minimum balance of Rs.5,000 on a monthly averagefor a quarter. Consider the following balances of a savings bank account andsuggest if the bank should levy any service charges on the customer.

Date Balance (Rs.)

01-05 July 14500

06-20 July 6000

21-31 July 100001-03 Aug 15000

04-12 Aug 2000

13-31 Aug 0

01-10 Sept 7500

11-21 Sept 1500

22-30 Sept 500


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Solution

The 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, thebank may charge a service fee on this SB account.

Term Deposits

T erm deposits are a form of debt investments a customer lends, which inessence, means that he is lending a sum of money to a bank or financial institutionfor 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 otherdeposit 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 afixed period of time and penalties apply for early withdrawals. Cheques cannot bewritten 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 theirsurplus balances. Banks facilitate this through term deposits. This account enablessavings plans for funds that can be kept as a deposit for a period of more than 15days. It is 7 days in case of bulk deposits. While the maximum tenure of the termdeposits is 10 years, banks generally would not favor deposits with tenures beyondthree to five years. For tenures beyond three years, there will be a flat interest ratestructure and this in fact acts as a disincentive for the depositor. This statement issubstantiated by the FD rates of various banks given in Table 4.1. (Prevalent in2001)

The other feature of the term deposit is the de-regulated interest rates. Banks arefree to set their own rates depending on the size of the deposit and the tenure. Thisinterest will be paid on a quarterly compounded basis. Apart from the annualcompounding, if the interest is compounded monthly/quarterly/half-yearly, theeffective 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 = 1m

k1

m

....Eq (1)

Where,

r = Effective Rate

k = Nominal Rate

m = Frequency of compounding per year


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

r =

m0.095

1 14

= 9.84%

Unlike the current and the savings accounts, the term deposits do not facilitatetransactions. This non-transactional type of deposit can, however, be classified intovarious categories depending on whether the entire amount is deposited at onetime or over a period of time, whether the interest is compounded or withdrawn atregular 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 15-29days

30-45days

46-60days

61-90days

91-120days

120-179days

180-270days

271-364days

1yr - 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- 7.00

c) > 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- 7.25

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

Source: RBI

All other things remaining the same, a banker would prefer to raise funds byselling those deposits that are least costly for the bank. The banker would alsoprefer to sell those loans that generate the greatest net revenue after all theexpenses. If a bank can raise all its capital from sales of cheapest deposits and thenturn around and purchase the highest yielding assets it will maximize its spreadand the shareholder value.


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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 issuedby 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 banks 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 years 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 ofthese 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

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 publics 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.


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SUMMARY

The transaction and the non-transaction accounts have been among the mostimportant of all financial services provided by banks, principally because oftheir safety, convenience, flexibility and explicit or implicit returns to thecustomer.

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

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

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

The composition of these deposits becomes essential for the bank firstly, toknow its liquidity requirements. The greater the proportion of demanddeposits relative to time deposits of a bank, the larger will be the banks

liquidity needs as the demand for cash withdrawals may arise any time. Onthe other hand, the liquidity needs for time deposits will not be unexpectedand 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 thelow cost funds for the banks.

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


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Appendix

Deposit products of various banks across the globe

INDIA

ICICI Bank

ICICI banks Roaming Current Accountenables business while traveling. Withadvanced technological features such as Multi-City Cheques and Local ChequesCollection, customers banking needs are well taken care of. He can access hisaccount at over 250 networked branches across the country. Besides, there isround-the-clock phone banking. He can also log on to www.icicibank.com oreven get Mobile Banking Alerts.

ICICI banks Value Added Savings Accountgives the depositor the liquidity of aSavings Account coupled with high earnings of Fixed deposit. This is achievedby linking his Savings Account to Fixed Deposit Account providing the customerthe following unique facilities. The Auto Sweep Facility ensures higher rate ofinterest on his Savings Bank Deposits. A customer can withdraw the funds in hisValue Added Savings Account from any channel such as the ICICI Bank ATM,ICICI Bank Phone Banking, and ICICI Banks Internet Banking facility. Nopenalty is levied on premature withdrawal for fixed deposits of less than Rs.15lakh. In case of withdrawal, ICICIs Reverse Sweep Facility breaks the last FixedDeposit 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 continueto earn higher interest at the original rate applicable to the fixed deposit. Underthis facility, when the deposits fall due, the bank will automatically renew theprincipal and accrued interest for a similar period as the original deposit.

State Bank of India

SBIs Multi-Option Deposits (MODS) are term deposits permitting partialpremature withdrawal in small tranches or a loan when required. The loan limit isset up automatically when a customer places his deposits in SBIMOD. They areavailable at computerized branches for maturities of 1, 2 and 3 years. A customercan enjoy, a) Unmatchable safety and security of his funds, b) A secured highrate of return, c) An auto renewal facility which ensures that the customercontinues 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 automaticallyrenew his deposit for a similar term. The amount can be withdrawn at any timeand 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 SBIs savings plus, depositors have the option of a special savings account,Savings Plus, where he can earn interest at term deposit rates on balancesexceeding a predetermined limit. The limit is set by the depositor (minimumrequirement is Rs.10,000) and the period of the term deposits is also selected byhim (over a wide range of 6 - 36 months). The bank makes the investmentsautomatically. As all term deposits are created under SBIMODS he can enjoyhigh liquidity with high interest. Savings Plus accounts can be opened in singleor joint names. Unlimited credit is permitted in all accounts.

Citi Bank India

The CitibankSuvidha Junior Account Package, Indias first and only package is

aimed at securing a childs future and also does much more. The customer shouldstart early and invest regularly through his childs Investment Services Account.This Account will be funded from his Childs Savings Account which in turnwill be funded through the customers Citibank Suvidha Savings Account.Citibanks Investment Counselors will help achieve his goals by selecting theright mix of investments. The customer just needs to set up a Regular InvestmentScheme 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 peryear 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 childcan access the funds in his or her Savings Account with his or her CitibankJunior ATM / Debit Card, with a monthly limit as preset by the customer.

Family ATM/Debit card: With this, the Citibank Account of the customer getsmore powerful. The spouse, parents, etc., of the customer can readily access

Citibank Family ATM/Debit Card that is linked to Citibank Account. In thisaccount the family member need not be a joint account holder. The customer caneven preset the monthly spend limit. The family member can use the FamilyATM/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 spreadacross 13 cities in India. And at over 2,200 Cirrus & Swadhan ATMs at over150 locations in the country.

International Deposit Products

Bank of America

A Master Relationship Account: A Master Relationship Account offerspotentially higher returns on idle checking account funds while investing to meetcustomers financial goals. The scheme features include Automatic Daily

Investing. Money in excess of $1,000 is invested automatically each day in amoney market mutual fund through Bank of America Investment Services, Inc.

Bank of America Prima Account: Customersenjoy the rewards of a premiumpackage of services with interest checking and many free or discounted services.

Prima Checking features are:

Free cheques with unlimited cheque-writing privileges: Premier Banking clientsreceive special Premier Banking cheques, a leather chequebook cover and oneschoice of regular or duplicate cheques at no charge. Other privileges are onlineBanking with Bill Payment Service via the Internet with no monthly fee, and nofee for most banking services, such as travelers cheques, cashiers cheques, stoppayments on cheques and more.

Overdraft protection from a Regular Savings account or credit card: Customersget aGold 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 noadditional charge. Platinum Priority Cheque Card can be used for everydaypurchases and at ATMs. Premier Banking clients can receive a Platinum PriorityCheque Card at no additional charge that offers higher daily ATM withdrawalsof up to $1,000, based on customers available balance.

Citi Bank

CitiGold Account: Special checking accounts CitiGold checking allows thecustomers liquid money work harder for them. A customer can choose from:

Interest Checking: Receive a preferred interest rate that is competitive withmoney market funds which comes with the benefit of FDIC insurance.

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

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

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

Fleet Bank

The Small Business Value Package is a full-featured banking package thatincludes a comprehensive set of business banking services, simplified pricing,


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and relationship benefits as well as a free consumer checking account. SmallBusiness customers and prospects can now combine their personal and businessbanking 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 SmallBusiness Money Market Savings Account.

Savings Overdraft Protection with no transfer fee.

Customer can get minute account balances, pay bills online and transferfunds between accounts with Fleet OfficeLink Online Banking. Plus as aSmall Business Value Package customer receives free bill payment services.

With Small Business Payroll Services provided by Paychex, he can savemoney with one free month of payroll processing and one free year of directdeposit processing. And, for every month he processes payroll, he willreceive a $5 monthly relationship credit to his checking account.

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

With Fleets Small Business Total Access Cheque Card, the customer canenjoy 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 ofadding Fleet Savings Overdraft Protection for just $3 per transfer with nomonthly fee. This overdraft protection will automatically transfer any checking

overdrafts from savings account, so the difference is instantly covered. Thisconvenient solution provides a simple way to prevent checking overdrafts whilemaintaining 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 acompetitive interest rate on his balance and the flexibility to have an overdraftfacility tailored to his needs. It offers:

Preferential Rate Overdraft Facility The bank jointly identifies the overdraftneeds of a customer and provides the facility he needs at an attractive andcompetitive interest rate 1% below the Bank of Scotland Base Rate (Gross).Free banking no charges for any transactions (while the account is in credit) thecustomer also enjoys; A Switch debit card that allows guarantee cheques for upto 100 and can draw up to 250 per day from any of the 30,000 LINK cashmachines in the UK at no charge (subject to available funds in the account); FreeInternet banking and 24 hour telephone banking that lets a customer check hisbalance, review recent transactions, pay regular bills, order cheque books andmore.

Gold Visa Card

The Bank of Scotland Private Banking Gold Visa Card not only gives flexibilityand convenience in paying for goods and services, but also provides valuableadditional benefits. These include:


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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 societiesmay charge for this service and may limit the amount one can withdraw atany one time). No annual fee PLUS

Free Travel Accident Insurance upto 250,000

Free 100 Day Purchase Care Insurance insures purchases against loss, theftor accidental damage

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

Treasurers

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

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

Abbey National

Abbey Nationals new Sweep Facility takes the hassle out of saving and offersthe flexibility to suit a customers individual needs. Sweep automaticallytransfers any spare money from the bank account to Abbey National savings

account on a chosen date each month. So, whether its 1 or 1,000 thatsavailable to sweep, a customer can be sure that the account would boost hissavings. Alternatively the bank offers credit interest on the bank account.

The Abbey National Switcher Service is the easy way to transfer an account inanother bank to Abbey National Bank. The bank does all the proceedings rightfrom writing to the existing bank to changing a customers Direct Debits andstanding 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 acustomer currently benefits from a 12 month interest free overdraft as a result ofswitching accounts, and he has opted for the Preferred In-Credit Rate, hiscontinuing eligibility for this offer will be affected. The Abbey National BankAccount gives excellent value for money and a convenient and flexible way tomanage money on a day-to-day basis.

Alliance-Leicester bank

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

This tiered interest rates mean the more one saves the more he can earn. Acustomer can enjoy a 1% gross bonus, payable on anniversary of accountopening, by making not more than 3 withdrawals per year. He can withdraw upto 250 a day in branch, or use a cheque for larger amounts. Interest is creditedannually on 1 April. The minimum opening balance is 10. And a customershould 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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Access Direct: This convenient postal account gives a customer easy access tohis 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 SpecialSaving Account), this tax-free savings account does not restrict the amount onecan 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 sixmonths 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.

Barclays

Variable Rate (Mini Cash) ISA: If a person is looking for tax-free returns on hiscash, 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 savingspots for specific purposes, such as a wedding or new car. The pots balances arecombined to give a potentially higher interest rate on his total savings. One cancombine Open plan Savings with Money Manager to automatically move sparecash from Barclays current account into Open plan Savings. One can also useOpenplan 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 aminimum 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.

ch 4 deposit products

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