Download - MBFS Module 1 Banking Revised
-
8/4/2019 MBFS Module 1 Banking Revised
1/58
Merchant Banking &Financial Services
Module- 1 Bank & Banking
BY: VIKAS JAIN(MBA)
-
8/4/2019 MBFS Module 1 Banking Revised
2/58
Definition of Bank & Banker
As per Sec.5 (b) of the Banking Regulation Act
Banking' means accepting, for the purpose of lending orinvestment, of deposits of money from the public
repayable on demand or otherwise and withdrawable by
cheque, draft, order or otherwise."
According to Sec. 2 of the Bill of Exchange Act, 1882,
banker includes a body of persons, whether
incorporated or not who carry on the business ofbanking.
-
8/4/2019 MBFS Module 1 Banking Revised
3/58
Role of Banking
Banks provide funds for business as well as personal needs
of individuals. They play a significant role in the economyof a nation. Let us know about the role of banking.
It encourages savings habit amongst people and therebymakes funds available for productive use.
It acts as an intermediary between people having surplusmoney and those requiring money for various businessactivities.
It facilitates business transactions through receipts and
payments by cheques instead of currency. It provides loans and advances to businessmen for short
term and long-term purposes.
-
8/4/2019 MBFS Module 1 Banking Revised
4/58
CONTINUED
It also facilitates import export transactions.
It helps in national development by providing credit to
farmers, small-scale industries and self-employed people
as well as to large business houses which lead tobalanced economic development in the country.
It helps in raising the standard of living of people in
general by providing loans for purchase of consumer
durable goods, houses, automobiles, etc.
There are various types of banks which operate in our
country to meet the financial requirements
http://upload.wikimedia.org/wikipedia/commons/b/bd/Scheduled_banking_structure_in_India.png -
8/4/2019 MBFS Module 1 Banking Revised
5/58
http://upload.wikimedia.org/wikipedia/commons/b/bd/Scheduled_banking_structure_in_India.png -
8/4/2019 MBFS Module 1 Banking Revised
6/58
Central Bank
The Reserve Bank of India is the central Bank that is fully ownedby the Government. It is governed by a central board (headed by a
Governor) appointed by the Central Government. It issues
guidelines for the functioning of all banks operating within the
country.The Bank was constituted for the need of following:
To regulate the issue of banknotes
To maintain reserves with a view to securing monetary stability
and To operate the credit and currency system of the country to its
advantage
http://www.rbi.org.in/home.aspxhttp://www.rbi.org.in/home.aspx -
8/4/2019 MBFS Module 1 Banking Revised
7/58
Commercial Banks
Commercial Banks are banking institutions thataccept deposits and grant short-term loans andadvances to their customers.
In addition to giving short-term loans, commercial
banks also give medium-term and long-term loan tobusiness enterprises.
Now-a-days some of the commercial banks are alsoproviding housing loan on a long-term basis toindividuals.
There are also many other functions of commercialbanks, which are discussed later in this lesson.
-
8/4/2019 MBFS Module 1 Banking Revised
8/58
SCHEDULE COMMERCIAL BANK
All banks which are included in the Second Schedule to
the Reserve Bank of India Act, 1934 are scheduled
banks. These banks comprise
a) Scheduled Commercial Banks
b) Scheduled Cooperative Banks.
-
8/4/2019 MBFS Module 1 Banking Revised
9/58
SCHEDULE COMMERCIAL BANK
Scheduled Commercial Banks in India are categorizedinto five different groups according to their ownershipand / or nature of operation. These bank groups are
(i) State Bank of India and its associates,
(ii) Nationalized Banks
(iii) Regional Rural Banks
(iv) Foreign Banks
(v) Other Indian Scheduled Commercial Banks
(in the private sector).
-
8/4/2019 MBFS Module 1 Banking Revised
10/58
Types of Commercial banks
Commercial banks are of three types i.e.,
Public sector banks,
Private sector banks and
Foreign banks.
-
8/4/2019 MBFS Module 1 Banking Revised
11/58
Public Sector Banks
State Bank of India and its associatebanks called the State Bank Group
20 nationalized banks
Regional rural banks mainly sponsoredby public sector banks
-
8/4/2019 MBFS Module 1 Banking Revised
12/58
Private Sector Banks
In case of private sector banks majority of share capitalof the bank is held by private individuals. Thesebanks are registered as companies with limitedliability. For example: The Jammu and KashmirBank Ltd., Bank of Rajasthan Ltd., Development
Credit Bank Ltd, Lord Krishna Bank Ltd., BharatOverseas Bank Ltd., Global Trust Bank, VysyaBank, etc.
Old generation private banks
New generation private banks Foreign banks operating in India
Scheduled co-operative banks
Non-scheduled banks
-
8/4/2019 MBFS Module 1 Banking Revised
13/58
Foreign Banks
These banks are registered and have theirheadquarters in a foreign country but operatetheir branches in our country. Some of the
foreign banks operating in our country are HongKong and Shanghai Banking Corporation(HSBC), Citibank, American Express Bank,Standard & Chartered Bank, Grindlays Bank,
etc. The number of foreign banks operating inour country has increased since the financialsector reforms of 1991.s
-
8/4/2019 MBFS Module 1 Banking Revised
14/58
Development Banks
Business often requires medium and long-termcapital for purchase of machinery and equipment,for using latest technology, or for expansion andmodernization. Such financial assistance isprovided by Development Banks. They alsoundertake other development measures likesubscribing to the shares and debentures issued bycompanies, in case of under subscription of the
issue by the public. Industrial Finance Corporationof India (IFCI) and State Financial Corporations(SFCs) are examples of development banks inIndia.
-
8/4/2019 MBFS Module 1 Banking Revised
15/58
Development Banks/FinancialInstitutions
IFCI IDBI ICICI
IIBI SCICI Ltd.NABARD Export-Import Bank of India
National Housing Bank Small Industries Development Bank of IndiaNorth Eastern Development Finance
Corporation
http://www.ifciltd.com/http://www.idbibank.com/http://www.idbibank.com/http://www.nabard.org/http://www.eximbankindia.com/http://www.nhb.org.in/http://www.sidbi.in/http://www.nedfi.com/http://www.nedfi.com/http://www.nedfi.com/http://www.nedfi.com/http://www.sidbi.in/http://www.nhb.org.in/http://www.eximbankindia.com/http://www.eximbankindia.com/http://www.eximbankindia.com/http://www.nabard.org/http://www.idbibank.com/http://www.idbibank.com/http://www.ifciltd.com/ -
8/4/2019 MBFS Module 1 Banking Revised
16/58
Co-operative Sector - Definition
People who come together to jointly serve theircommon interest often form a co-operative societyunder the Co-operative Societies Act. When a co-operative society engages itself in banking business it
is called a Co-operative Bank. The society has toobtain a license from the Reserve Bank of India beforestarting banking business. Any co-operative bank as asociety is to function under the overall supervision of
the Registrar, Co-operative Societies of the State. As regards banking business, the society must follow
the guidelines set and issued by the Reserve Bank of
India.
CONTINUED
-
8/4/2019 MBFS Module 1 Banking Revised
17/58
CONTINUED
The co-operative sector is very much useful for rural people. The co-
operative banking sector is divided into the following categories.
State co-operative Banks: These are the apex (highest level) co-
operative banks in all the states of the country. They mobilize funds
and help in its proper channelization among various sectors. The
money reaches the individual borrowers from the state co-operative
banks through the central co-operative banks and the primary creditsocieties.
Central co-operative banks :These banks operate at the district
level having some of the primary credit societies belonging to the
same district as their members. These banks provide loans to theirmembers (i.e., primary credit societies) and function as a link
between the primary credit societies and state co-operative
banks.
-
8/4/2019 MBFS Module 1 Banking Revised
18/58
Primary Agriculture Credit Societies: These are
formed at the village or town level with borrower and
non-borrower members residing in one locality. The
operations of each society are restricted to a small areaso that the members know each other and are able to
watch over the activities of all members to prevent
frauds.
-
8/4/2019 MBFS Module 1 Banking Revised
19/58
Specialized Banks
There are some banks, which cater to the requirements and
provide overall support for setting up business in specificareas of activity. EXIM Bank, SIDBI and NABARD areexamples of such banks. They engage themselves in somespecific area or activity and thus, are called specialized
banks. Let us know about them i. Export Import Bank of India (EXIM Bank): If you want to set
up a business for exporting products abroad or importing productsfrom foreign countries for sale in our country, EXIM bank can
provide you the required support and assistance. The bank grantsloans to exporters and importers and also provides information aboutthe international market. It gives guidance about the opportunities forexport or import, the risks involved in it and the competition to befaced, etc.
-
8/4/2019 MBFS Module 1 Banking Revised
20/58
(ii). Small Industries Development Bank ofIndia (SIDBI): If you want to establish a small-scale business unit or industry, loan on easyterms can be available through SIDBI. It alsofinances modernization of small-scale industrialunits, use of new technology and marketactivities. The aim and focus of SIDBI is to
promote, finance and develop small-scaleindustries s
-
8/4/2019 MBFS Module 1 Banking Revised
21/58
iii. National Bank for Agricultural and Rural Development
(NABARD): It is a central or apex institution for financing
agricultural and rural sectors. If a person is engaged in agriculture or
other activities like handloom weaving, fishing, etc. NABARD can
provide credit, both short-term and long-term, through regional rural
banks. It provides financial assistance, especially, to co-operative credit, in
the field of agriculture, small-scale industries, cottage and village
industries handicrafts and allied economic activities in ruralareas.
-
8/4/2019 MBFS Module 1 Banking Revised
22/58
Functions of Commercial Banks
The functions of commercial banks are of
two types.
(A) Primary functions; and
(B) Secondary functions.
Let us discuss details about these functions.
Primary functions
-
8/4/2019 MBFS Module 1 Banking Revised
23/58
Primary functions
The primary functions of a commercial bank include:
a) Accepting Deposits: The most important activity of acommercial bank is to mobilize deposits from the public.People who have surplus income and savings find itconvenient to deposit the amounts with banks.
Depending upon the nature of deposits, funds deposited
with bank also earn interest. Thus, deposits with the bankgrow along with the interest earned. If the rate of interest ishigher, public are motivated to deposit more funds with thebank. There is also safety of funds deposited with the bank
Generally the following three types of deposits are accepted:Current deposit or demand deposits
Savings deposits
Fixed or time deposits
-
8/4/2019 MBFS Module 1 Banking Revised
24/58
Current Deposits or Demand Deposits
These deposits are repayable on demand. They are
known as demand deposits in USA and current
deposits in England. These deposits are usually
opened with a minimum balance prescribed by thebank and any amount can be deposited in the account.
These deposits can be withdrawn by the issue of
cheque. Generally no interest is allowed on current
account. These accounts are normally opened bybussiness houses
-
8/4/2019 MBFS Module 1 Banking Revised
25/58
Savings Deposits
Savings deposit accounts are maintained by the
commercial banks to pool the small savings of low and
middle income groups. This is a device to encourage
thrift among the persons who earn only fixed incomeevery month.
Certain restrictions may vary from bank to bank.
Usually, all banks restrict the maximum amount that can
be deposited in or withdrawn from savings accounts.
The number of cheques that can be drawn against the
account within a specified period is also restricted.
-
8/4/2019 MBFS Module 1 Banking Revised
26/58
Fixed Deposits or Time Deposits
These are deposits for a fixed period. These deposits areknown as fixed deposits in England and time deposits in
the United States.
Fixed deposits are advantageous to both the banker and
the depositor. The depositors prefer this type of deposits
as they earn a higher rate of interest. The banker is
interested in such deposits because they get the money
for a fixed period. As the repayment is certain, thedepositors are able to invest the money for long periods
and thus, earn a higher return on the investment. Cheque
system is not allowed against fixed deposits.
CONTINUED
-
8/4/2019 MBFS Module 1 Banking Revised
27/58
CONTINUED
b) Grant of loans and advances: The second importantfunction of a commercial bank is to grant loans and
advances. Such loans and advances are given to members ofthe public and to the business community at a higher rate ofinterest than allowed by banks on various deposit accounts.The rate of interest charged on loans and advances varies
according to the purpose and period of loan and also themode of repayment
i) Loans: A loan is granted for a specific time period.Generally commercial banks provide short-term loans. But
term loans, i.e., loans for more than a year may also begranted. The borrower may be given the entire amount inlump sum or in installments. Loans are generally grantedagainst the security of certain assets. A loan is normally
repaid in installments. However, it may also be repaid inlum sum.
-
8/4/2019 MBFS Module 1 Banking Revised
28/58
ii) Advances
An advance is a credit facility provided by the bankto its customers. It differs from loan in the sensethat loans may be granted for longer period, butadvances are normally granted for a short period oftime.
Further the purpose of granting advances is to meetthe day-to-day requirements of business.
The rate of interest charged on advances variesfrom bank to bank.
Interest is charged only on the amount withdrawnand not on the sanctioned amount.
Types of Advances
-
8/4/2019 MBFS Module 1 Banking Revised
29/58
Types of Advances
Banks grant short-term financial assistance by way of cashcredit, overdraft and bill discounting.
a) Cash Credit: Cash credit is an arrangement whereby thebank allows the borrower to draw amount up to a specifiedlimit. The amount is credited to the account of the customer.The customer can withdraw this amount as and when he
requires. Interest is charged on the amount actuallywithdrawn. Cash Credit is granted as per terms andconditions agreed with the customers.
b) Overdraft: Overdraft is also a credit facility granted bybank. A customer who has a current account with the bankis allowed to withdraw more than the amount of creditbalance in his account. It is a temporary arrangement.Overdraft facility with a specified limit may be allowedeither on the security of assets, or on personal security, or
both.
-
8/4/2019 MBFS Module 1 Banking Revised
30/58
c) Discounting of Bills: Banks provide short-term
finance by discounting bills, that is, making payment
of the amount before the due date of the bills after
deducting a certain rate of discount. The party gets
the funds without waiting for the date of maturity of
the bills. In case any bill is dishonoured on the due
date, the bank can recover the amount from the
customer.
-
8/4/2019 MBFS Module 1 Banking Revised
31/58
Secondary functions
In addition to the primary functions of accepting deposits
and lending money, banks perform a number of otherfunctions, which are called secondary functions. These areas follows
Issuing letters of credit, travellers cheque, etc
Undertaking safe custody of valuables, importantdocument and securities by providing safe deposit vaults orlockers.
Providing customers with facilities of foreign exchangedealings.
Transferring money from one account to another; andfrom one branch to another branch of the bank throughcheque, pay order, demand draft.
-
8/4/2019 MBFS Module 1 Banking Revised
32/58
CONTINUED
Standing guarantee on behalf of its customers, for makingpayment for purchase of goods, machinery, vehicles etc.
Collecting and supplying business information.
Providing reports on the credit worthiness of customers.
Providing consumer finance for individuals by way of loanson easy terms for purchase of consumer durables like
televisions, refrigerators, etc. Educational loans to students at reasonable rate of interest
for higher studies, especially for professional courses.
-
8/4/2019 MBFS Module 1 Banking Revised
33/58
Banker & Customer Relationship
Banking is a trust-based relationship. There arenumerous kinds of relationship between the bank and
the customer. The relationship between a banker and a
customer depends on the type of transaction. Thus the
relationship is based on contract, and on certain termsand conditions.
The banker customer relationship is fiducial
relationship. The terms and conditions governing the
relationship is not be leaked by the banker to a third
party
-
8/4/2019 MBFS Module 1 Banking Revised
34/58
Classification of Relationship
The relationship between a bank and itscustomers can be broadly categorized into -
General Relationship and
Special Relationship
-
8/4/2019 MBFS Module 1 Banking Revised
35/58
General Relationship
If we look at Sec 5(b) of BankingRegulation Act, we would notice thatbanks business hovers around accepting
of deposits for the purposes of lending.Thus the relationship arising out of thesetwo main activities are known as General
Relationship.
D b C di
-
8/4/2019 MBFS Module 1 Banking Revised
36/58
Debtor-Creditor:
When a 'customer' opens an account with a bank, he fills inand signs the account opening form. By signing the form heenters into an agreement/contract with the bank.
When customer deposits money in his account the bankbecomes a debtor of the customer and customer a creditor.The money so deposited by customer becomes banksproperty and bank has a right to use the money as it likes.The bank is not bound to inform the depositor the manner ofutilization of funds deposited by him.
-
8/4/2019 MBFS Module 1 Banking Revised
37/58
Continued
Bank does not give any security to the depositor i.e.debtor. The bank has borrowed money and it is onlywhen the depositor demands, banker pays.
Banks position is quite different from normal
debtors.Banker does not pay money on its own, as banker isnot required to repay the debt voluntarily. Thedemand is to be made at the branch where the accountexists and in a proper manner and during working
days and working hours.
Creditor Debtor:
-
8/4/2019 MBFS Module 1 Banking Revised
38/58
CreditorDebtor:Lending money is the most important activities of a bank.The resources mobilized by banks are utilized for lending
operations. Customer who borrows money from bank ownsmoney to the bank. In the case of any loan/advancesaccount, the banker is the creditor and the customer is thedebtor.
when he borrows money from the bank. Borrower executesdocuments and offer security to the bank before utilizing thecredit facility.
In addition to opening of a deposit/loan account banks
provide variety of services, which makes the relationshipmore wide and complex. Depending upon the type ofservices rendered and the nature of transaction, the bankeracts as a bailee, trustee, principal, agent, lessor, custodian
etc.
-
8/4/2019 MBFS Module 1 Banking Revised
39/58
Special Relationship
In addition to these two activities banksalso undertake other activities mentionedin Sec.6 of Banking Regulation Act.
Relationship arising out of the activitiesmentioned in Sec.6 of the act is termed asspecial relationship.
-
8/4/2019 MBFS Module 1 Banking Revised
40/58
1. Bank as a Trustee
In case of trust banker customer relationship is a
special contract. When a person entrusts valuableitems with another person with an intention thatsuch items would be returned on demand to thekeeper the relationship becomes of a trustee and
trustier. Customers keep certain valuables orsecurities with the bank for safekeeping or depositscertain money for a specific purpose (Escrowaccounts) the banker in such cases acts as atrustee. Banks charge fee for safekeepingvaluables .
2 Bailee Bailor:
-
8/4/2019 MBFS Module 1 Banking Revised
41/58
2. Bailee
Bailor:
Sec.148 of Indian Contract Act, 1872, defines "Bailment""bailor" and "bailee".
A "bailment" is the delivery of goods by one person toanother for some purpose, upon a contract that they shall,when the purpose is accomplished, be returned or otherwisedisposed of according to the directions of the persondelivering them.
The person delivering the goods is called the "bailor". Theperson to whom they are delivered is called, the "bailee".
Banks secure their advances by obtaining tangiblesecurities. In some cases physical possession of securities
goods (Pledge), valuables, bonds etc., are taken. Whiletaking physical possession of securities the bank becomesbailee and the customer becomes bailor.
Banks also keeps articles, valuables, securities etc., of itscustomers in Safe Custody and acts as a Bailee. As a baileethe bank is required to take care of the goods bailed.
3 Lessor and Lessee:
-
8/4/2019 MBFS Module 1 Banking Revised
42/58
3 Lessor and Lessee:
Providing safe deposit lockers is as an ancillary serviceprovided by banks to customers. While providing Safe
Deposit Vault/locker facility to their customers bankenters into an agreement with the customer. Theagreement is known as Memorandum of letting andattracts stamp duty.
The relationship between the bank and the customer is thatof lessor and lessee.
Banks lease (hire lockers to their customers) theirimmovable property to the customer and give them the
right to enjoy such property during the specified period i.e.during the office/ banking hours and charge rentals.
4 Agent and Principal:
-
8/4/2019 MBFS Module 1 Banking Revised
43/58
4 Agent and Principal:
Sec.182 of The Indian Contract Act, 1872 defines an
agent as a person employed to do any act for another orto represent another in dealings with third persons. Theperson for whom such act is done or who is sorepresented is called the Principal.
Thus an agent is a person, who acts for and on behalf ofthe principal and under the latters express or impliedauthority and the acts done within such authority arebinding on his principal and, the principal is liable to theparty for the acts of the agent.
C ti d
-
8/4/2019 MBFS Module 1 Banking Revised
44/58
Continued
Banks collect cheques, bills, and makes payment to
various authorities viz., rent, telephone bills,insurance premium etc., on behalf of customers. .Banks also abides by the standing instructions givenby its customers. In all such cases bank acts as an
agent of its customer, and charges for theses services.As per Indian contract Act agent is entitled tocharges. No charges are levied in collection of localcheques through clearing house. Charges are levied in
only when the cheque is returned in theclearinghouse.
-
8/4/2019 MBFS Module 1 Banking Revised
45/58
5 As a Custodian
A custodian is a person who acts as a caretaker of some
thing. Banks take legal responsibility for a customers
securities. While opening a de-mat account bank
becomes a custodian.
Bank has the right to break-open the locker in case the
locker holder defaults in payment of rent.
Banks do not assume any liability or responsibility in
case of any damage to the contents kept in the locker.Banks do not insure the contents kept in the lockers by
customers
-
8/4/2019 MBFS Module 1 Banking Revised
46/58
6 As a Guarantor
Banks give guarantee on behalf of their customers
and enter in to their shoes. Guarantee is acontingent contract.
As per sec 31,of Indian contract Act guarantee is a
" contingent contract ". Contingent contract is acontract to do or not to do something, if some
event, collateral to such contract, does or does not
happen. It would thus be observed that bankercustomer relationship is transactional relationship.
-
8/4/2019 MBFS Module 1 Banking Revised
47/58
IT Products & Services
E-banking (Electronic Banking)
With advancement in information andcommunication technology, banking services arealso made available through computer. Now, inmost of the branches you see computers being
used to record banking transactions. Informationabout the balance in your deposit account can beknown through computers.
In most banks now a days human or manual tellercounter is being replaced by the Automated Teller
Machine (ATM). Banking activity carried on through computers and
other electronic means of communication is calledelectronic banking or e-banking.
-
8/4/2019 MBFS Module 1 Banking Revised
48/58
Debit Card
Banks are now providing Debit Cards to theircustomers having saving or current account in thebanks.
The customers can use this card for purchasing goodsand services at different places in lieu of cash.
The amount paid through debit card is automaticallydebited (deducted) from the customers account.
C C
-
8/4/2019 MBFS Module 1 Banking Revised
49/58
Credit Card
Credit cards are issued by the bank to persons who may
or may not have an account in the bank. Just like debit cards, credit cards are used to make
payments for purchase, so that the individual does nothave to carry cash.
Banks allow certain credit period to the creditcardholder to make payment of the credit amount.Interest is charged if a cardholder is not able to payback the credit extended to him within a stipulated
period. This interest rate is generally quite high.
Net Banking
-
8/4/2019 MBFS Module 1 Banking Revised
50/58
Net BankingWith the extensive use of computer and Internet, banks
have now started transactions over Internet.
The customer having an account in the bank can log intothe banks website and access his bank account. He can
make payments for bills, give instructions for money
transfers, fixed deposits and collection of bill, etc under
internet banking, one can do any transaction simply at in
front of a computer the following type of transaction can
be done online
Pay utility bills, view and print your statements
Transfer funds online between accounts
Stop cheques, request cheque books
Ph B ki
-
8/4/2019 MBFS Module 1 Banking Revised
51/58
Phone Banking
In case of phone banking, a customer of the bank
having an account can get information of hisaccount, make banking transactions like, fixeddeposits, money transfers, demand draft, collectionand payment of bills, etc. by using telephone .
As more and more people are now using mobilephones, phone banking is possible through mobilephones.
In mobile phone a customer can receive and sendmessages (SMS) from and to the bank in additionto all the functions possible through phonebanking.
T f A t
-
8/4/2019 MBFS Module 1 Banking Revised
52/58
Types of Accounts
Saving account: a saving account is a type of account that can be
opened in any commercial bank, the deposits made
-
8/4/2019 MBFS Module 1 Banking Revised
53/58
Savings Account
A Savings bank account is the most common operating
account for individuals and others for non-commercialtransactions.
A Savings account helps people to put through day-to-day banking transactions besides earning some return onthe savings made. Banks generally put some ceilings on
the total number of withdrawals permitted duringspecific time periods.
Banks also stipulate certain minimum balance to bemaintained in savings accounts.
Normally a higher minimum balance is stipulated incheque operated accounts as compared to non-chequeoperated accounts.
Banks as a rule do not give overdraft facility in a saving
account,
Current Account
-
8/4/2019 MBFS Module 1 Banking Revised
54/58
Current Account
Current accounts are cheque operated accounts maintained
for mainly business purposes.Unlike savings bank account no limits are fixed by banks on
the number of transactions permitted in the Account.
Banks generally insist on a higher minimum balance to bemaintained in current account.
Considering the large number of transactions in the accountand volatile nature of balances maintained overnight banksgenerally levy certain service charges for operating aCurrent account.
-
8/4/2019 MBFS Module 1 Banking Revised
55/58
continued
In terms of RBI directive banks are not allowed to
pay any interest on the balances maintained in
Current accounts.
However, legal heirs of a deceased person are paidinterest at the rates applicable to Savings bank deposit
from the date of death of the account holder till the
date of settlement.
-
8/4/2019 MBFS Module 1 Banking Revised
56/58
Fixed deposits
Fixed deposits are saving instruments, in which a specifiedamount is deposited in an account for a specified tenure
and the bank pays the interest accordingly. Generally fixed
deposits carry a high rate of interest as the money is locked
for a longer time period, such as one year, three year orfive to ten year also. A fixed deposit is a very useful
instrument for long-term planning. Some of the important
features of this deposits are as follows-
Interest may be paid monthly, quarterly or yearly.
Interest earned can also be reinvested
Minimum deposit has to be maintained
Recurring Deposit
-
8/4/2019 MBFS Module 1 Banking Revised
57/58
Recurring Deposit
Recurring deposit is another important form
of savings instrument. A recurring depositcan be opened by an individual, wherein aspecified amount is deposited every monthin the account. A recurring deposit provides
the following advantages:Encourages savings
Has a high rate of interest
Loans are available against the depositsNon applicability of tax deducted at source.
D t A t
-
8/4/2019 MBFS Module 1 Banking Revised
58/58
De-mat AccountDemat refers to a dematerialised t account maintained by
the Stock broking agencies, for the purpose of buying andselling of stocks in stock market by the account holder like
maintaining a savings/current account by an individual in a
bank.
Demat account is a safe and convenient means of holdingsecurities just like a bank account is for funds. Today,
practically 99.9% settlement (of shares) takes place on
demat mode only.
The dematerialised account is used to avoid holding
physical shares: the shares are converted in to electronic
form.