1.1 Demand Deposits
These are deposits which the customer can get back on demand or which are placed for very
short time periods. For example:
• Savings account deposits
This is the normal bank account that individuals and Hindu Undivided Families (HUFs)maintain. The account can be opened by individuals who are majors (above 18 years of age), parents / guardians on behalf of minors and Karta of HUFs. Clubs, associations and trusts too can open savings accounts as provided for in their charter.
Banks insist on a minimum balance, which may be higher if the account holder wants
cheque book facility. The minimum balance requirement tends to be lowest in the case of co-operative banks, followed by public sector banks, private sector Indian banks and foreign banks, in that order.
Banks do impose limits on the number of withdrawals every month / quarter. Further,
overdraft facility is not offered on savings account.
Traditionally, banks paid an interest on the lowest balance in the bank account between the 10th and the end of the month. Suppose the balance in the depositer’s account in a particular month was as follows:
1st to 10th Rs. 50,000
11th Rs. 10,000
12th to 31st Rs. 50,000
Although Rs. 50,000 was maintained for all but one day in the month, the depositer
would receive interest as if only Rs. 10,000 (the lowest balance between 10th and the end of the month) was maintained in the account during the month. The bank thus got “free money” of Rs. 50,000 less Rs. 10,000 i.e. Rs. 40,000 for all but one day in the month.
Since April 1, 2010, scheduled commercial banks have been directed to pay interest on the daily balances. Thus, banks have lost on the free money, and their cost of funds has gone up.
Interest is paid on a half-yearly basis, every September and March.
Current account deposits
This is maintained by businesses for their banking needs. It can be opened by anyone,
including sole-proprietorships, partnership firms, private limited companies and public limited companies.
The current account comes with a cheque book facility. Normally, there are no restrictions on the number of withdrawals. Subject to credit-worthiness, the bank may provide an overdraft facility i.e. the account holder can withdraw more than the amount available in the current account.
Current accounts do not earn an interest. Therefore, it is prudent to leave enough funds in current account to meet the day-to-day business needs, and transfer the rest to a term deposit.
CASA is a term that is often used to denote Current Account and Savings Account. Thus, a bank or a branch may have a CASA promotion week. This means that during the week, the bank would take extra efforts to open new Current Accounts and Savings Accounts
Term Deposits
These are deposits that are maintained for a fixed term. The time period can be anything from 7 days to 10 years. This is not like a normal operating bank account. Therefore, cheque book facility is not offered.
Benefit of term deposits is that the interest rate would be higher. Weakness is that if the investor needs the money earlier, he bears a penalty. He will earn 1% less than what the deposit would otherwise have earned, if it had been placed for the time period for which the money was left with the bank.
Suppose the bank offers 6% for deposits of 1 year, and 7% for deposits of 2 years. The
depositer placed money in a 2-year deposit (at 7%), but did a premature withdrawal after 1year. The interest earning would be limited to 6% (the rate applicable for the time period for which the money was placed with the bank) less 1% i.e. 5%.
Banks may also offer the facility of loan against fixed deposit. Under this arrangement, a certain percentage of the fixed deposit amount may be made available as a loan, at an interest rate, which would be higher than the term deposit rate. This is an alternative to premature withdrawal.
Unlike interest rate on savings account, the interest in term deposits is de-regulated. Therefore, every bank decides its own interest rate structure. Further, it is normal to offer 0.50% extra interest to senior citizens.
For large deposits of above Rs. 1 crore, the bank may be prepared to work out special
terms. The term deposits may also be structured as recurring i.e. the depositer would invest a constant amount every month / quarter, for anything from 12 months to 10 years. Benefit of such an account is that the interest rate on the future deposits is frozen at the time the recurring account is opened. Thus, even if interest rates on fixed deposits, in general, were to go down, the recurring deposits would continue to earn the committed rate of interest.
Interest rate in a recurring deposit may be marginally lower than the rate in a non-recurring term deposit for the same time period.
Hybrid Deposits / Flexi Deposits
These are value added facilities offered by some banks. For instance, a sweep facility may be offered in their CASA accounts. Under the facility, at the end of every day, surplus funds beyond the minimum balance required, is automatically swept into an interest earning term deposit account. When more money is required for the regular operations, it is automatically swept from the interest earning term deposit account. Benefit for depositers are:
• Superior interest earnings, as compared to normal CASA
• Less paperwork – no need to sign papers etc. for each sweep in or sweep out.
• Sweep out of money from the interest earning term deposit account does not attract
premature withdrawal charges.
However, unlike in a normal term deposit, interest rate is liable to be changed by the bank at
any time.
