The term bank is either derived from old Italian word banca or from a French word banque both mean a Bench or money exchange table. In olden days, European money lenders or money changers used to display (show) coins of different countries in big heaps (quantity) on benches or tables for the purpose of lending or exchanging.
SAVING BANK ACCOUNT
The 'saving account' is generally opened in bank by salaried persons or by the persons who have a fixed regular income. This facility is also given to students, senior citizens, pensioners, and so on. Saving accounts are opened to encourage the people to save money and collect their savings.
In India, saving account can be opened by depositing र100 (approx. US $2) to र5000 (approx. US $100). The saving account holder is allowed to withdraw money from the account as and when required. The interest which is given on saving accounts is sometime attractive, but often nominal. The interest rates vary as per the amount of money deposited (lying) in the saving bank account, scheme opted, and its maturity range. It is also subject to current trend of banking policies in a country.
Features of Saving Account
The main features of saving account in bank are as follows:
- The main objective of saving account is to promote savings.
- There is no restriction on the number and amount of deposits. However, in India, mandatory PAN (Permanent Account Number) details are required to be furnished for doing cash transactions exceeding र50,000.
- Withdrawals are allowed subject to certain restrictions.
- The money can be withdrawn either by cheque or withdrawal slip of the respective bank.
- The rate of interest payable is very nominal on saving accounts. At present it is between 4% to 6% p.a in India.
- Saving account is of continuing nature. There is no maximum period of holding.
- A minimum amount has to be kept on saving account to keep it functioning.
- No loan facility is provided against saving account.
- Electronic clearing System (ECS) or E-Banking are available to pay electricity bill, telephone bill and other routine household expenses.
- Generally, equated monthly installments (EMI) for housing loan, personal loan, car loan, etc., are paid (routed) through saving bank account.
Advantages of Saving Account
The advantages of saving account are as follows:
- Saving account encourages savings habit among salary earners and others who have fixed income.
- It enables the depositor to earn income by way of saving bank interest.
- Saving account helps the depositor to make payment by way of issuing cheques.
- It shows income of a salaried and other person earned during the year.
- Saving account passbook acts as an identity and residential proof of the account holder.
- It provides a facility such as Electronic fund transfer (EFT) to other people's accounts.
- It helps to do online shopping via facility like internet banking.
- It aids to keep records of all online transactions carried on by the account holder.
- It provides immediate funds as and when required through ATM.
- The bank offers number of services to the saving account holders.
CURRENT BANK ACCOUNT
Current bank account is opened by businessmen who have a higher number of regular transactions with the bank. It includes deposits, withdrawals, and contra transactions. It is also known as Demand Deposit Account. Current account can be opened in co-operative bank and commercial bank. Incurrent account, amount can be deposited and withdrawn at any time without giving any notice. It is also suitable for making payments to creditors by using cheques. Cheques received from customers can be deposited in this account for collection.
In India, current account can be opened by depositing Rs.5000 (approx. US $ 100) to Rs. 25,000 (approx. US $ 500). The customers are allowed to withdraw the amount with cheques, and they usually do not get any interest. Generally, current account holders do not get any interest on their balance lying in current account with the bank. Current account holder get one important advantage of overdraft facility.
Features of Current Bank Account
The main features of current account are as follows:-
- Current bank accounts are operated to run a business.
- It is a non-interest bearing bank account.
- It needs a higher minimum balance to be maintained as compared to the savings account.
- Penalty is charged if minimum balance is not maintained in the current account.
- It charges interest on the short-term funds borrowed from the bank.
- It is of a continuing nature as there is no fixed period to hold a current account.It does not promote saving habits with its account holders.
- Banker requires KYC (Know your Customers) norms to be completed before opening a current account.
- The main objective of current bank account is to enable the businessmen to conduct their business transactions smoothly.
- There is no restriction on the number and amount of deposits.
- There is also no restriction on the number and amount of withdrawals made, as long as the current account holder has funds in his bank account.
- Generally, bank does not pay any interest on current account. Nowadays, some banks do pay interest on current accounts.
Advantage of Current Bank Account
The advantages of current account are as follows:-
- Current account is mainly opened for businessmen such as proprietors, partnership firms, public and private companies, trust, association of persons, etc. that has a large number of daily banking transactions, i.e. receipts and/or payments.
- It enables businessmen to carry out their business transactions properly and promptly.
- The businessmen can withdraw from their current accounts without any limit, subject to banking cash transaction tax, if any levied by the government.
- Home branch is that location where one opens his bank account. There are no restrictions on deposits made in the current account opened in a home branch of a bank. However, the current account holder can deposit the cash from any other branch of a bank other than the home branch by paying a nominal charge as applicable.
- It helps businessmen to make a direct payment to their creditors by issuing cheques, demand-drafts or pay-orders, etc.
- It enables a bank to collect money on behalf of its customers and credits the same in their customers' current accounts.
- It enables the current account holder to obtain overdraft (short-term borrowing) facility.
- The creditors of the account holder can get credit-worthiness information of the account holder through inter-bank connection.
- It facilitates the industrial progress of the country. Without its help, businessmen would face difficulties in running their businesses.
- It has the facilities of Internet-banking and mobile-banking to carry out important business transactions with ease and quickly.
- It also provides various other advantages (benefits) such as:
- Deposit and withdrawal of money (cash) at any location.
- Multi-location funds transfer,
- Electronic funds transfer,
- Periodical (monthly, quarterly or yearly) e-mail or download of bank statements in various formats like '.XLS', '.TXT', '.PDF', etc.
- Support from customer care executives.
- FIXED DEPOSIT ACCOUNT
The account which is opened for a particular fixed period (time) by depositing particular amount (money) is known as Fixed (Term) Deposit Account. The term 'fixed deposit' means that the deposit is fixed and is repayable only after a specific period is over.
Under fixed deposit account, money is deposited for a fixed period say six months, one year, five years or even ten years. The money deposited in this account cannot be withdrawn before the expiry of period. The rate of interest paid for fixed deposit vary (changes) according to amount, period and from bank to bank.
Features of Fixed Deposit Account
The main features of fixed deposit account are as follows:-
- The main purpose of fixed deposit account is to enable the individuals to earn a higher rate of interest on their surplus funds (extra money).
- The amount can be deposited only once. For further such deposits, separate accounts need to be opened.
- The period of fixed deposits range between 15 days to 10 years.
- A high interest rate is paid on fixed deposits. The rate of interest may vary as per amount, period and from bank to bank.
- Withdrawals are not allowed. However, in case of emergency, banks allow to close the fixed account prior to maturity date. In such cases, the bank deducts 1% (deduction percentage many vary) from the interest payable as on that date.
- The depositor is given a fixed deposit receipt, which depositor has to produce at the time of maturity. The deposit can be renewed for a further period.
Advantages of Fixed Deposit Account
The advantages of fixed deposit account are as follows:-
- Fixed deposit encourages savings habit for a longer period of time..
- Fixed deposit account enables the depositor to earn a high interest rate.
- The depositor can get loan facility from the bank.
- On maturity the amount can be used to make purchases of assets.
- The bank can get the funds for a longer period of time.
- The bank can lend such funds for short term loans to businessmen.
- Fixed deposits indirectly boost economic development of the country.
- The bank can also invest such funds in profitable areas.
- RECURRING DEPOSIT ACCOUNT
Recurring deposit account is generally opened for a purpose to be served at a future date. Generally opened to finance pre-planned future purposes like, wedding expenses of daughter, purchase of costly items like land, luxury car, refrigerator or air conditioner, etc. Recurring deposit account is opened by those who want to save regularly for a certain period of time and earn a higher interest rate.
In recurring deposit account certain fixed amount is accepted every month for a specified period and the total amount is repaid with interest at the end of the particular fixed period.
Features of Recurring Deposit Account
The main features of recurring deposit account are as follows:-
- The main objective of recurring deposit account is to develop regular savings habit among the public.
- In India, minimum amount that can be deposited is Rs.10 at regular intervals.
- The period of deposit is minimum six months and maximum ten years.
- The rate of interest is higher.
- No withdrawals are allowed. However, the bank may allow to close the account before the maturity period.
- The bank provides the loan facility. The loan can be given up to 75% of the amount standing to the credit of the account holder.
Advantage of Recurring Deposit Account
The advantages of recurring deposit account are as follows:-
- Recurring deposit encourages regular savings habit among the people.
- Recurring deposit account holder can get a loan facility.
- The bank can utilize such funds for lending to businessmen.
- The bank may also invest such funds in profitable areas.
- ATM (Automated Teller Machine)
ATMs are electronic machines, which are operated by a customer himself to deposit or to withdraw cash from bank. For using an ATM, a customer has to obtain an ATM card from his bank. The ATM card is a plastic card, which is magnetically coded. It can be easily read by the machine. To operate an ATM card, the customer has to inset the card in the machine. He has to enter the pass word (number). If the authentication or pass word (number) is correct, the ATM permits a customer to make entries for withdrawal or for deposit. On completion of the transaction, the customer's card is ejected from the ATM.
E-banking refers to electronic banking. It is like e-business in banking industry. E-banking is also called as "Virtual Banking" or "Online Banking". E-banking is a result of the growing expectations of bank's customers. E-banking involves information technology based banking. Under this I.T system, the banking services are delivered by way of a Computer-Controlled System. This system does involve direct interface with the customers. The customers do not have to visit the bank's premises.
Popular services covered under E-Banking
The popular services covered under E-banking include:-
- Automated Teller Machines,
- Credit Cards,
- Debit Cards,
- Smart Cards,
- Electronic Funds Transfer (EFT) System,
- Cheques Truncation Payment System,
- Mobile Banking,
- Internet Banking,
- Telephone Banking, etc.
- Advantages of E-Banking
The main advantages of E-banking are :-
- The operating cost per unit services is lower for the banks.
- It offers convenience to customers as they are not required to go to the bank's premises.
- There is very low incidence of errors.
- The customer can obtain funds at any time from ATM machines.
- The credit cards and debit cards enables the Customers to obtain discounts from retail outlets.
- The customer can easily transfer the funds from one place to another place electronically.
Cheque is an important document that an individual, companies, governments and many others use to transact their business. By definition, cheque can be termed as negotiable documents to transfer money either in physical form or to effect inter account transfer.
Unless or otherwise stated, a cheque is a signed unconditional order addressing the bank to credit it by the issuer. The issuer of the cheque will have an account with the bank to which it is connected. The account can be either savings type or a current account. A cheque transaction is one of the safest ways of conducting the business because it leaves an entry against the cheque honored by the bank in the banking transactions conducted by you which can be traced back in case of necessity.
Different types of cheques based on methods of issuing
Open cheque or bearer cheque
The issuer of the cheque would just fill the name of the person to whom the cheque is issued, writes the amount and attaches his signature and nothing else. This type of issuing a cheque is also called bearer type cheque also known as open cheque or uncrossed cheque. The cheque is negotiable from the date of issue to three months. The issued cheque turns stale after the completion of three months. It has to be revalidated before presenting to the bank.
A crossed cheque or an account payee cheque
It is written in the same as that of bearer cheque but issuer specifically specifies it as account payee on the left hand top corner or simply crosses it twice with two parallel lines on the right hand top corner. The bearer of the cheque presenting it to the bank should have an account in the branch to which the written sum is deposited. It is safest type of cheques.
A self cheque
A self cheque is written by the account holder as pay self to receive the money in the physical form from the branch where he holds his account.
Pay yourself cheque
The account holder issues this type of crossed cheque to the bank asking the bank deduct money from his account into bank’s own account for the purpose buying banking products like drafts, pay orders, fixed deposit receipts or for depositing money into other accounts held by him like recurring deposits and loan accounts.
Post dated cheque (PDC)
A PDC is a form of a crossed or account payee bearer cheque but post dated to meet the said financial obligation at a future date.
Various types of cheques based on their functionality
A local cheque is a type of cheque which is valid in the given city and a given branch in which the issuer has an account and to which it is connected. The producer of the cheque in whose name it is issued can directly go to the designated bank and receive the money in the physical form. If a given city’s local cheque is presented elsewhere shall attract some fixed banking charges. Although these type of cheques are still prevalent, especially with nationalized banks, it is slowly slated to be removed with at par cheque type.
At par cheque
With the computerization and networking of bank branches with its headquarters, a variation to the local cheque has become common place in the name of at par cheque. At par cheque is a cheque which is accepted at par at all its branches across the country. Unlike local cheque it can be present across the country without attracting additional banking charges.
It is a kind of cheque issued by the bank itself connected to its own funds. It is a kind of assurance given by the issuer to the client to alley your fears. The personal account connected cheques may bounce for want of funds in his account. To avoid such hurdles, sometimes, the receiver seeks banker’s cheque.
They are a kind of an open type bearer cheque issued by the bank which can be used by the user for withdrawal of money while touring. It is equivalent to carrying cash but in a safe form without fear of losing it.
This is another banking instrument introduced for gifting money to the loved ones instead of hard cash.
Difference between Cheque and Draft
- A cheque is an unconditional order directing the banker to pay a certain sum of money only to or to the order of a certain person. A draft is an order to pay money drawn by one office of a bank upon another office of the same bank for a sum of money payable to order on demand.
- The current account and saving account holders get a cheque facility. Draft is issued to anyone even to non-account holders.
- Cheques are used to make payments or to settle transactions. There is no certainty of payment in the case of cheques as they can be dishonored or payment can be stopped.
- The main purpose of a draft is to transfer money from one place to another or to guarantee the certainty of payment to the payee.
- In case of cheque, the drawer is the customer of the bank. In case of draft, the drawer is the bank itself.
- The bank may not charge for issuing the cheque book. The bank charges a nominal fee or commission to issue a draft.
- Cheques can be dishonored for various reasons. There is no question of dishonoring of draft.
- In case of cheque, the drawer can ask the bank to stop payment of the cheque even if it is delivered to the payee. In case of draft, the purchaser of the draft can ask the bank to stop payment before the draft is delivered to the payee.
- Cheques are very common and popular mode of payment. Drafts do not enjoy much popularity as compared to cheques.
- In case of cheque, there is a need for clearance. In case of a draft, there is no need for clearance, if DD is drawn on the same bank.
- Three parties are involved in cheque transaction viz., (a) Drawer, (b) Drawee, and (c) Payee. Two parties are involved in draft transaction viz., (a) Drawer, and (b) Payee.
Different forms of advances by commercial bank(Loans)
Advances by commercial Banks are made in different forms such as demand loan, term loan, cash credit, overdraft etc. These forms of advances are as follows-
In a demand loan account, the entire amount is paid to the debtor at one time, either in cash or by transfer to his savings bank or current account. No subsequent debit is ordinarily allowed except by way of interest, incidental charges, insurance premiums, expenses incurred for the protection of the security etc. Repayment is provided for by installment without allowing the demand character of the loan to be affected in any way.
There is usually a stipulation that in the event of any installment, remaining unpaid, the entire amount of the loan will become due. Interest is charged on the debit balance, usually with monthly rests unless there is an arrangement to the contrary. No cheque book is issued. The security may be personal or in the form of shares, Govt. paper, fixed deposit receipt, life insurance policies, goods, etc.
2. Term Loan
When a loan is granted for a fixed period exceeding three years and is repayable according to the schedule of repayment, it is known as a term loan. The period of term loan may extend up to 10 years and in some cases up to 20 years. A term loan is generally granted for fixed capital requirements, e.g. investment in plant and equipment, land and building etc. These may be required for setting up new projects or expansion or modernization of the plant and equipment. Advances granted for purchasing land / building / flat (Apartment house) are term loans.
An overdraft is a fluctuating account wherein the balance sometimes may be in credit and at other times in debit. Overdraft facilities are allowed in current accounts only. Opening of an overdraft account requires that a current account will have to be formally opened, and the usual account opening form completed. Whereas in a current account cheques are honoured if the balance is in credit, the overdraft arrangement enables a customer to draw over and above his own balance up to the extent of the limit stipulated. For example, if there is a credit balance of Rs.40,000 in a customer's current account and an overdraft limit of Rs. 50,000 is sanctioned to the party, he can draw cheques up to Rs. 90,000. There is no restriction, unlike in the case of loans, on drawing more than once.
In fact, as many drawings and repayments are permitted as the customer would desire, provided the total amount overdrawn, i.e. the debit balance at any time does not exceed the agreed limit. This is a satisfactory arrangement from the customer's point of view. He need not hesitate to pay into the account any moneys for fear that an amount once paid in cannot be drawn out or borrowed again, unlike in a loan account. As in the case of a demand loan account, the security in an overdraft account may be either personal or tangible. The tangible security may be in the form of shares, government paper, life insurance policies, fixed deposit receipts etc. i.e. paper securities. A cheque book is issued in an overdraft account.
4. Cash Credit
A cash credit is essentially a drawing account against credit granted by the bank and is operated in the same way as a current account in which an overdraft limit has been sanctioned. The principal advantages of a cash credit account to a borrower are that, unlike the party borrowing on a fixed loan basis, he may operate the account within the stipulated limit as and when required and can save interest by reducing the debit balance whenever he is in a position to do so. The borrower can also provide alternative securities from time to time in conformity with the terms of the advance and according to his own requirements. Cash credits are normally granted against the security of goods e.g. raw materials, stock in process, finished goods. It is also granted against the security of book-debts. If there is good turnover both in the account and in the goods, and there are no adverse factors, a cash credit limit is allowed to continue for years together. Of course a periodical review would be necessary.
5. Bills Purchased
Bills, clean or documentary, are sometimes purchased from approved customers in whose favour regular limits are sanctioned. In the case of documentary bills, the drafts are accompanied by documents of title to goods such as railway receipts or bills of lading (BOL). Before granting a limit, the creditworthiness of the drawer is to be ascertained. Sometimes the financial standing of the drawees of the bills are verified, particularly when the bills are drawn from time to time on the same drawees and/or the amounts are large.
Although the term "Bills Purchased" seems to imply that the bank becomes the purchaser / owner of such bills, it will be observed that in almost all cases, the bank holds the bills (even if they are indorsed in its favour) only as security for the advance. In addition to any rights the banker may have against the parties liable on the hills, he can also fully exercise a pledgee's right over the goods covered by the documents.
6. Bills Discounted
Usance bills, maturing within 90 days or so after date or sight, are discounted by banks for approved parties. In case a bill, say for Rs. 10,000/- (approx. $223 USD) due 90 days hence, is discounted today at 20% per annum, the borrower is paid Rs. 9,500/- (approx. $211 USD), its present worth. However the full amount is collected from the drawee on maturity. The difference between the present worth and the amount of the bill represents earning of the banker for the period for which the bill is to run. In banking terminology this item of income is called "discount".
RTGS - Real Time Gross Settlement - This is a system where the processing of funds transfer instructions takes place at the time they are received (real time). Also the settlement of funds transfer instructions occurs individually on an instruction by instruction basis (gross settlement). RTGS is the fastest possible interbank money transfer facility available through secure banking channels in India.
NEFT - National Electronic Fund Transfer - This system of fund transfer operates on a Deferred Net Settlement basis. Fund transfer transactions are settled in batches as opposed to the continuous, individual settlement in RTGS. Presently, NEFT operates in hourly batches from 8 am to 7 pm on week days and 8 am to 1 pm on Saturdays.
Type Minimum Maximum
RTGS Rs. 2 Lakhs Rs.5 Lakhs
NEFT No Minimum Rs.5 Lakhs