D E P O S I T M AN AG E M E N T

D E P O S I T M AN AG E M E N T
Presenter
Dr .S.C.Bi har i Dr .S.C.Bi har i
I B S, HYDERABAD I B S, HYDERABAD
IMPORTANCE OF DEPOSITS
1. 1.Deposits are the foundation upon which Deposits are the foundation upon which
banks thri ve and grow. banks thri ve and grow.
2. 2. The ability of a bank to attract deposit is The ability of a bank to attract deposit is
important to gauge a bank important to gauge a bank s acceptance by the s acceptance by the
public. public.
3. Deposits are the basis for bank loans and thus Deposits are the basis for bank loans and thus
represent the ultimate source of bank profits represent the ultimate source of bank profits
and growth . and growth .
Types of deposits
Types of deposits
Differentiation in deposit types may Differentiation in deposit types may
arise from arise from
the type of customer who holds the type of customer who holds
the deposit, the deposit,
tenure of the deposit, tenure of the deposit,
its nature and the interest factor. its nature and the interest factor.
Based on these parameters, Based on these parameters,
deposits are broadly classified into deposits are broadly classified into
transaction and non transaction and non- -transaction transaction
deposits. deposits.
TRANSACTI ON DEPOSI T
TRANSACTI ON DEPOSI T
A deposit which facilitates the
A deposit which facilitates the
account holder to transact
account holder to transact
through a negotiable or
through a negotiable or
transferable instrument,cheque, a
transferable instrument,cheque, a
written order of withdrawal,to
written order of withdrawal,to
transfer funds, or other similar
transfer funds, or other similar
means of making payments and
means of making payments and
transferring monies to third
transferring monies to third
parties
parties
is known as a transaction account.
is known as a transaction account.
Nature of Transaction Deposits
Nature of Transaction Deposits
These are one of the oldest deposit
services offered by banks where
Banks make payments on behalf of
its customers.
This transaction or demand deposit This transaction or demand deposit
service requires the bank to honour service requires the bank to honour
cheques and withdrawals. cheques and withdrawals.
Current account and Savings account Current account and Savings account
are the most widely used are the most widely used
transaction accounts transaction accounts. .
6
NON-INTEREST BEARING DEMAND
DEPOSITS
There are no interest payments on the There are no interest payments on the
current accounts. current accounts.
These are among the most volatile and least These are among the most volatile and least
predictable of a bank predictable of a bank s sources of funds. s sources of funds.
Most non interest bearing liabilities are held Most non interest bearing liabilities are held
by business firms. by business firms.
A Current a/c is defined by the Reserve A Current a/c is defined by the Reserve
Bank of India as Bank of India as a form of demand deposit a form of demand deposit
wherefrom withdrawals are allowed any wherefrom withdrawals are allowed any
number of times depending upon the balance number of times depending upon the balance
in the account. in the account.
7
Banks pay interest on
these accounts-deregulated
by RBI since October,2011
Banks may also charge
fees for savings accounts,
waived if higher balances
are maintained.

However, S.B. A/C holders

However, S.B. A/C holders
have fewer transactions
have fewer transactions
when compared to
when compared to
business firms.
business firms.
SAVINGS BANK ACCOUNT
SAVINGS BANK ACCOUNT
INTEREST PAYMENT
INTEREST PAYMENT
Having computed the interest Having computed the interest
amount, the bank will pay the amount, the bank will pay the
same at quarterly or longer same at quarterly or longer
periods. periods.
Normally the periodicity is Normally the periodicity is
half half - -yearly. yearly.
In the Credit Policy In the Credit Policy
announced by RBI in announced by RBI in
April April 2 0 0 9 , it has advised 2 0 0 9 , it has advised
banks to pay interest on daily banks to pay interest on daily
balance from 0 1 balance from 0 1 - -0 4 0 4 - -2 0 1 0 . 2 0 1 0 .
Differences between SB & Current a/ c:
Differences between SB & Current a/ c:
SB A/ c
SB A/ c
Current A/ c
Current A/ c
Object to promote the habit of Object to promote the habit of
savings savings
Provide convenience to Provide convenience to
customers customers
Suitable for individual depositors Suitable for individual depositors
needing safety, liquidity needing safety, liquidity
Suitable for business Suitable for business
and big organizations and big organizations
OD not available OD not available Available Available
Reasonable rate of interest Reasonable rate of interest No interest No interest
Withdrawals are restricted Withdrawals are restricted No restriction No restriction
Comparatively lesser cash reserve Comparatively lesser cash reserve More CR required More CR required
10
Term deposits are a form of Term deposits are a form of
debt investments debt investments
A customer lends, A customer lends,
Which Which Means that he is Means that he is
lending a sum of money lending a sum of money
To a bank or financial To a bank or financial
institution institution
For a specified period of For a specified period of
time time
The bank in turn pays a The bank in turn pays a
rental stream rental stream (interest) for (interest) for
the privilege the privilege. .
Term Deposits
Term Deposits
Term Deposits
Term Deposits
These accounts pay a higher These accounts pay a higher
interest rate than any other interest rate than any other
deposit accounts. deposit accounts.
This type of account is This type of account is
sometimes called a certificate sometimes called a certificate
of deposit (or CD). of deposit (or CD).
These are the funds to which These are the funds to which
depositors have normally no depositors have normally no
access for a fixed period. access for a fixed period.
Penalties apply for early Penalties apply for early
withdrawals. withdrawals.
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The maximum tenure for The maximum tenure for
term deposits is 10 years term deposits is 10 years
as per present as per present
guidelines. guidelines.
The other feature of the The other feature of the
term deposit is the de term deposit is the de- -
regulated interest rates. regulated interest rates.
Banks are free to set Banks are free to set
their own rates their own rates
depending on the size of depending on the size of
the deposit and the the deposit and the
tenure. tenure.
Term Deposits
Term Deposits
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CLASSIFICATION OF TERM DEPOSITS
Interest is paid on a quarterl y compounding Interest is paid on a quarterl y compounding
basis. basis.
If interest is compounded monthly, effecti ve If interest is compounded monthly, effecti ve
rate will be discounted accordingly rate will be discounted accordingly
TERM TERM
DEPOSITS DEPOSITS
Fixed Fixed
Deposit Deposit
Scheme Scheme
Reinvestment Reinvestment
Scheme Scheme
Cash Cash
Certificate Certificate
Recurring Recurring
Deposit Deposit
Scheme Scheme
14
Gi ven the nominal rate, the effective rate can Gi ven the nominal rate, the effective rate can
be computed as follows: be computed as follows:
r =
1
m
k
1
m

|
.
|

\
|
+
Where, Where,
r r = Effecti ve Rate = Effecti ve Rate
k k = Nominal Rate = Nominal Rate
m m = Frequency of compounding = Frequency of compounding
per year per year
....Eq (1)
15
For instance, if the nominal rate of
For instance, if the nominal rate of
interest on a 2 year term deposit is 9.5
interest on a 2 year term deposit is 9.5
percent and if the interest amount is
percent and if the interest amount is
compounded on a quarterly basis then
compounded on a quarterly basis then
the effective rate can be assessed as
the effective rate can be assessed as
follows:
follows:
r =
| |
+
|
\ .
m
0 . 0 9 5
1 1
4
= 9.84%
An Example
FIXED DEPOSIT SCHEME
In this scheme, a lump sum In this scheme, a lump sum
amount is deposited for a fixed amount is deposited for a fixed
term during which the amount term during which the amount
cannot be withdrawn. cannot be withdrawn.
However, the interest is paid on However, the interest is paid on
a monthly/ quarterly/ half a monthly/ quarterly/ half - -
yearly/ annual basis. yearly/ annual basis.
This scheme provides liquidity This scheme provides liquidity
to the depositor as interest can to the depositor as interest can
be withdrawn during these be withdrawn during these
periods. periods.
By withdrawing the interest, the By withdrawing the interest, the
depositor can actually earn a depositor can actually earn a
return on this amount. return on this amount.
17
REINVESTMENT SCHEME
REINVESTMENT SCHEME
In a reinvestment scheme, a In a reinvestment scheme, a
lump sum amount is accepted lump sum amount is accepted
for a fixed period and repaid for a fixed period and repaid
with interest on maturity. with interest on maturity.
Interest on deposit is Interest on deposit is
reinvested at the end of each reinvested at the end of each
quarter, and hence there will quarter, and hence there will
be interest on interest. be interest on interest.
REINVESTMENT SCHEME
REINVESTMENT SCHEME
The minimum and The minimum and
maximum durations for maximum durations for
such schemes are 6 and such schemes are 6 and
1 2 0 months respectively. 1 2 0 months respectively.
The (minimum) period The (minimum) period
accepted differs from bank accepted differs from bank
to bank. to bank.
The depositor can withdraw The depositor can withdraw
the interest plus the the interest plus the
principal at the end of the principal at the end of the
tenure tenure
19
. RI
m
= RI (1 + r)
n
....Eq(2)
Where,
RI
m
= Deposit amount at the end of re-investment period
RI = Initial deposit amount
r = Effective rate =
1
m
k
1
m

|
.
|

\
|
+
n = Number of years
To ascertain the maturity amount in a re To ascertain the maturity amount in a re- -investment investment
scheme, the following expression can be used: scheme, the following expression can be used:
( m being Frequency of compounding per year)
20
An Example
An Example
If a depositor opens a re-investment account at A Bank Ltd.
the interest rate offered will be 9 percent for one year
scheme, 10 percent for two years scheme and 11 percent for
three years scheme. Ascertain the maturity amount for a
quarterl y re-investment of Rs.10,000 for a period of 2 years.
Solution
The amount at the end of the re-investment period can be
assessed as follows:
RI
m
= RI (1 + r)
n
= 10,000 (1 + r)
2
Since it is a quarterl y re-investment,
r =
1
4
0.10
1
4

|
.
|

\
|
+
= 10.38
Thus, RI
m
= 10,000 (1 + 0.1038)
2
= Rs.12,184
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CASH CERTIFICATES
CASH CERTIFICATES
It is like a reverse reinvestment It is like a reverse reinvestment
scheme, where odd sums are scheme, where odd sums are
accepted for a fixed period to pay accepted for a fixed period to pay
whole sums at the time of whole sums at the time of
maturity. maturity.
The amount that is deposited The amount that is deposited
initiall y will be the issue price of initiall y will be the issue price of
the cash certificate ,based on the the cash certificate ,based on the
maturity amount . maturity amount .
The issue price can be arrived at The issue price can be arrived at
using the present value principle. using the present value principle.
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RECURRING DEPOSIT SCHEME
RECURRING DEPOSIT SCHEME
A fixed sum is deposited A fixed sum is deposited
every month for a fixed every month for a fixed
period. period.
At the end of the period, total At the end of the period, total
amount of installments with amount of installments with
interest is paid. interest is paid.
A passbook is issued to A passbook is issued to
show details of deposits. show details of deposits.
Minimum and maximum Minimum and maximum
periods are 6 and 120 months periods are 6 and 120 months
respectivel y. respectivel y.
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COST OF DEPOSITS AND ITS IMPACT ON COST OF DEPOSITS AND ITS IMPACT ON
PROFITABILITY PROFITABILITY
All other things remaining the All other things remaining the
same, a banker would prefer to same, a banker would prefer to
secure those deposits that are secure those deposits that are
least costl y for the bank. least costl y for the bank.
If a bank can raise all its funds If a bank can raise all its funds
from cheapest deposits and from cheapest deposits and
then create the highest yielding then create the highest yielding
assets it will maximize its assets it will maximize its
spread and the shareholder spread and the shareholder
value. value.
24
Greater the Demand Deposits relative Greater the Demand Deposits relative
to Time Deposits, larger will be the to Time Deposits, larger will be the
bank bank s liquidity needs. s liquidity needs.
On the basis of costs, Demand On the basis of costs, Demand
Deposits are Low Cost Funds for Deposits are Low Cost Funds for
Banks. Banks.
As the liquidity and the cost of funds As the liquidity and the cost of funds
are affected by the composition of are affected by the composition of
deposits, it has a direct impact on the deposits, it has a direct impact on the
earnings of the bank. earnings of the bank.
Composition of deposits is Crucial
Composition of deposits is Crucial
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The CASA Emphasis
- -Let us assume that the cost of term deposits is 7.5% Let us assume that the cost of term deposits is 7.5%
per annum and the real cost of savings account is per annum and the real cost of savings account is
3% per annum. The weighted average 3% per annum. The weighted average
Deposit Scenario 1 Scenario 2 Scenario 3 Scenario 4
Fixed 80% 60% 50% 40%
Saving 10% 25% 30% 20%
Current 10% 15% 20% 40%
TOTAL 100% 100% 100% 100%
Cost 6.30%p.a 5.25%p.a 4.65%p.a 3.60%p.a
It is clear from the above that increase in current and
savings account percentage in the total deposits decreases
the cost of funds .
Differences between FD & SB a/ c
Differences between FD & SB a/ c
FD A/ c
FD A/ c
SB A/ c
SB A/ c
Repayment on certain date Repayment on certain date On demand On demand
No need of cash reserve No need of cash reserve CR is needed CR is needed
Introduction not mandatory Introduction not mandatory It is mandatory It is mandatory
High rate of interest High rate of interest Low rate of interest Low rate of interest
Suitable for investors Suitable for investors Suitable for small savers Suitable for small savers
Loans available on FDR Loans available on FDR No loan facility, ordinarily No loan facility, ordinarily
Practically he is not a customer Practically he is not a customer He is a customer He is a customer
Only deposit receipt is given Only deposit receipt is given Cheque book, passbook & pay Cheque book, passbook & pay
in slip will be given if in slip will be given if
necessary necessary
27
Non
Non
-
-
resident Accounts
resident Accounts
Non-resident bank accounts may be
Rupees accounts
Foreign currency accounts.
Rupees accounts
The different types of rupee accounts a non-
resident may have are:
Non-resident (ordinary) (NRO) account.
Non-resident external (NRE) account.
Non-resident (ordinary) account
The account that an Indian has in India is convertible
to an NRO account when he emigrates or goes
abroad to work except if he goes to Nepal or Bhutan.
28
These can be savi ngs, current, These can be savi ngs, current,
recurring or fixed deposit accounts. recurring or fixed deposit accounts.
NRO accounts may be held by non NRO accounts may be held by non- -
residents jointl y with residents. residents jointl y with residents.
These may be opened jointl y with These may be opened jointl y with
Indian residents for other non Indian residents for other non- -
residents. residents.
Credits may be from foreign Credits may be from foreign
remittances, travelers cheques, foreign remittances, travelers cheques, foreign
currency, all legitimate dues in India like currency, all legitimate dues in India like
rents, dividends and the like. rents, dividends and the like.
Non-resident (ordinary) account contd.
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Non
Non
-
-
resident (External) Account
resident (External) Account
This has to be opened with convertible foreign
exchange
Any NRI can open an NRE account with funds
remitted to India through a bank abroad.
Withdrawals are permitted for local payments, and
investments permitted by the RBI.
The intent of these account is to help individual The intent of these account is to help individual
non non- -residents to place their funds in Indian rupees residents to place their funds in Indian rupees
to meet expenses in India or to make investments. to meet expenses in India or to make investments.
The accounts may be current accounts, savings The accounts may be current accounts, savings
accounts or term deposits. accounts or term deposits.
NRE deposits are held jointl y with non-residents
onl y.
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Foreign currency accounts
Foreign Currency (Non Foreign Currency (Non- -resident) resident)
Deposit Accounts (FCNR (B)). Deposit Accounts (FCNR (B)).
Non Non- -resident Indians, persons of resident Indians, persons of
Indian origin /nationality, residing Indian origin /nationality, residing
outside India are eligible to open outside India are eligible to open
FCNR (B) accounts. FCNR (B) accounts.
These are These are fixed deposits fixed deposits
denominated in certain foreign denominated in certain foreign
currencies. currencies.
The currencies in which these The currencies in which these
deposits may be maintained are the deposits may be maintained are the
US dollar, the British pound sterling, US dollar, the British pound sterling,
the Euro, the Japanese yen, the the Euro, the Japanese yen, the
Australian dollar and the Canadian Australian dollar and the Canadian
dollar. dollar.
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Insurance of Deposits
Insurance of Deposits
As per the provisions of Deposit Insurance & Credit As per the provisions of Deposit Insurance & Credit
Guarantee Corporation Act, 1961, DIGCC provides insurance Guarantee Corporation Act, 1961, DIGCC provides insurance
cover on the deposits of banks. cover on the deposits of banks.
Banks Covered: Banks Covered: Deposits of all Commercial Banks, Regional Deposits of all Commercial Banks, Regional
Rural Banks and the Cooperative Banks are insured this Rural Banks and the Cooperative Banks are insured this
scheme. scheme.
Maximum Cover: Maximum Cover: Rupees one lakh per deposit per bank ( Rupees one lakh per deposit per bank (w.e.f w.e.f
01.05.93). This limit includes all deposits (including interest 01.05.93). This limit includes all deposits (including interest
accrued) held by a depositor in the same capacity and right in accrued) held by a depositor in the same capacity and right in
all branches of the bank. all branches of the bank.
Deposits not Eligible for Cover: Deposits not Eligible for Cover: Deposits in the name of Deposits in the name of
Central and State Governments, Banks and foreign Central and State Governments, Banks and foreign
Government are not covered under the scheme. Government are not covered under the scheme.
Rate of Premium: Rate of Premium: The premium rate is 10paise p.a. for Rs.100 The premium rate is 10paise p.a. for Rs.100
of e deposit from the financial year 2005 of e deposit from the financial year 2005- -06. 06.
Fixed & Floating Interest Rate:
Fixed & Floating Interest Rate:
In fixed interest rate, the interest to be paid is In fixed interest rate, the interest to be paid is
fixed in advance . fixed in advance .
In case of floating In case of floating interest rate, it is not interest rate, it is not
determined in advance, but is dependent on determined in advance, but is dependent on
some underl ying situation and variable from some underl ying situation and variable from
time to time. time to time.
But this is usuall y applied in case of Interest But this is usuall y applied in case of Interest
Rates on Borrowing. Rates on Borrowing.
Deposits being a contract with the Customer by Deposits being a contract with the Customer by
the Bank, the conditions usuall y remain the the Bank, the conditions usuall y remain the
same throughout the tenure of the deposit. same throughout the tenure of the deposit.
Thanks for your attention
Thanks for your attention

Dr. S. C. Bihari
Dr. S. C. Bihari

Tell:
Tell:0 8 4 1 7 0 8 4 1 7 - -2 3 6 6 6 0 to 6 5 (Extn: 6 2 1 4 ) 2 3 6 6 6 0 to 6 5 (Extn: 6 2 1 4 )

Mail:scbihari@gmail.com
Mail:scbihari@gmail.com