DEPOSIT MANAGEMENT

Presenter

Dr.S.C.Bihari

IMPORTANCE OF DEPOSITS
1.Deposits are the foundation upon which banks thrive and grow.
2.The ability of a bank to attract deposit is important to gauge a banks acceptance by the public. 3. Deposits are the basis for bank loans and thus represent the ultimate source of bank profits and growth .

Types of deposits
Differentiation

in deposit types may

arise from the type of customer who holds the deposit, tenure of the deposit, its nature and the interest factor. Based on these parameters, deposits are broadly classified into transaction and non-transaction deposits.

TRANSACTION DEPOSIT
A deposit which facilitates the account holder to transact through a negotiable or transferable instrument,cheque, a written order of withdrawal,to transfer funds, or other similar means of making payments and transferring monies to third parties is known as a transaction account.

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 service requires the bank to honour cheques and withdrawals. Current account and Savings account are the most widely used transaction accounts.

NON-INTEREST BEARING DEMAND DEPOSITS There are no interest payments on the current accounts. These are among the most volatile and least predictable of a banks sources of funds. Most non interest bearing liabilities are held by business firms. A Current a/c is defined by the Reserve Bank of India as a form of demand deposit wherefrom withdrawals are allowed any number of times depending upon the balance in the account.

SAVINGS BANK ACCOUNT

Banks pay interest on these accounts. Banks may also charge fees for savings accounts, waived if higher balances are maintained. However, S.B. A/C holders have fewer transactions when compared to business firms.
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INTEREST PAYMENT The current account does not have to pay any interest. The SB interest is prescribed by RBI and the prevailing rate is 4% per annum. From 0104-2010, interest is paid on SB accounts on the daily balance

SAVINGS BANK LEDGER

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INTEREST PAYMENT
Having computed the interest amount, the bank will pay the same at quarterly or longer periods. Normally the periodicity is half-yearly. In the Credit Policy announced by RBI in April2009, it has advised banks to pay interest on daily balance from 01-04-2010.

Differences between SB & Current a/c:

SB A/c Current A/c
to

Object to promote the habit of Provide convenience savings customers

Suitable for individual depositors needing safety, liquidity

Suitable for business

and big organizations

OD not available
Reasonable rate of interest Withdrawals are restricted Comparatively lesser cash reserve

Available
No interest No restriction More CR required

Term Deposits
Term deposits are a form of debt investments A customer lends, Which Means that he is lending a sum of money To a bank or financial institution For a specified period of time The bank in turn pays a rental stream (interest) for the privilege.

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Term Deposits

These accounts pay a higher interest rate than any other deposit accounts. This type of account is sometimes called a certificate of deposit (or CD). These are the funds to which depositors have normally no access for a fixed period.

Penalties apply for early withdrawals.

Term Deposits
The maximum tenure for term deposits is 10 years as per present guidelines. The other feature of the term deposit is the deregulated interest rates. Banks are free to set their own rates depending on the size of the deposit and the tenure.

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CLASSIFICATION OF TERM DEPOSITS

TERM DEPOSITS

Fixed Deposit Scheme

Reinvestment Scheme

Cash Certificate

Recurring Deposit Scheme

Interest is paid on a quarterly compounding basis. If interest is compounded monthly, effective rate will be discounted accordingly

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Given the nominal rate, the effective rate can be computed as follows:

r=

k m

1
....Eq (1)

Where, r = Effective Rate k = Nominal Rate m = Frequency of compounding per year

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An Example For instance, if the nominal rate of interest on a 2 year term deposit is 9.5 percent and if the interest amount is compounded on a quarterly basis then the effective rate can be assessed as m follows:

r=

0.095 4

= 9.84%
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FIXED DEPOSIT SCHEME

In this scheme, a lump sum amount is deposited for a fixed term during which the amount cannot be withdrawn. However, the interest is paid on a monthly/quarterly/halfyearly/annual basis. This scheme provides liquidity to the depositor as interest can be withdrawn during these periods. By withdrawing the interest, the depositor can actually earn a return on this amount.

REINVESTMENT SCHEME
In a reinvestment scheme, a lump sum amount is accepted for a fixed period and repaid with interest on maturity. Interest on deposit is reinvested at the end of each quarter, and hence there will be interest on interest.
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REINVESTMENT SCHEME
The minimum and maximum durations for such schemes are 6 and 120 months respectively. The (minimum) period accepted differs from bank to bank. The depositor can withdraw the interest plus the principal at the end of the tenure

To ascertain the maturity amount in a re-investment scheme, the following expression can be used:

RIm = RI (1 + r)n
....Eq(2)

Where, RIm = Deposit amount at the end of re-investment period RI = Initial deposit amount r = Effective rate = m

k 1 m

( m being Frequency of compounding per year) n = Number of years

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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 quarterly 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: RIm = RI (1 + r)n = 10,000 (1 + r)2 Since it is a quarterly re-investment, 4 0.10 r= 1 1
4

= 10.38 Thus, RIm = 10,000 (1 + 0.1038)2 = Rs.12,184

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CASH CERTIFICATES
It is like a reverse reinvestment scheme, where odd sums are accepted for a fixed period to pay whole sums at the time of maturity. The amount that is deposited initially will be the issue price of the cash certificate ,based on the maturity amount . The issue price can be arrived at using the present value principle.
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RECURRING DEPOSIT SCHEME

A fixed sum is deposited every month for a fixed period. At the end of the period, total amount of installments with interest is paid. A passbook is issued to show details of deposits. Minimum and maximum periods are 6 and 120 months respectively.

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COST OF DEPOSITS AND ITS IMPACT ON PROFITABILITY

All other things remaining the same, a banker would prefer to secure those deposits that are least costly for the bank. If a bank can raise all its funds from cheapest deposits and then create the highest yielding assets it will maximize its spread and the shareholder value.
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Composition of deposits is Crucial

Greater the Demand Deposits relative to Time Deposits, larger will be the banks liquidity needs. On the basis of costs, Demand Deposits are Low Cost Funds for Banks. As the liquidity and the cost of funds are affected by the composition of deposits, it has a direct impact on the earnings of the bank.
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The CASA Emphasis

Let us assume that the cost of term deposits is 7.5% per annum and the real cost of savings account is 3% per annum. The weighted average
Deposit
Fixed

Scenario 1
80%

Scenario 2
60%

Scenario 3
50%

Scenario 4
40%

Saving
Current TOTAL

10%
10% 100%

25%
15% 100%

30%
20% 100%

20%
40% 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 .
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Differences between FD & SB a/c FD A/c SB A/c

Repayment on certain date No need of cash reserve
Introduction not mandatory High rate of interest Suitable for investors Loans available on FDR

On demand CR is needed
It is mandatory Low rate of interest Suitable for small savers No loan facility, ordinarily

Practically he is not a customer Only deposit receipt is given

He is a customer Cheque book, passbook & pay in slip will be given if necessary

Non-resident Accounts
Non-resident bank accounts may be
Rupees accounts Foreign currency accounts.

Rupees accounts
The different types of rupee accounts a nonresident 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

Non-resident (ordinary) account contd.

These can be savings, current, recurring or fixed deposit accounts. NRO accounts may be held by nonresidents jointly with residents. These may be opened jointly with Indian residents for other nonresidents. Credits may be from foreign remittances, travelers cheques, foreign currency, all legitimate dues in India like rents, dividends and the like.
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Non-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 non-residents to place their funds in Indian rupees to meet expenses in India or to make investments. The accounts may be current accounts, savings accounts or term deposits. NRE deposits are held jointly with non-residents only. 30

Foreign currency accounts

Foreign Currency (Non-resident) Deposit Accounts (FCNR (B)). Non-resident Indians, persons of Indian origin /nationality, residing outside India are eligible to open FCNR (B) accounts. These are fixed deposits denominated in certain foreign currencies. The currencies in which these deposits may be maintained are the US dollar, the British pound sterling, the Euro, the Japanese yen, the Australian dollar and the Canadian dollar.
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Insurance of Deposits
As per the provisions of Deposit Insurance & Credit Guarantee Corporation Act, 1961, DIGCC provides insurance cover on the deposits of banks. Banks Covered: Deposits of all Commercial Banks, Regional Rural Banks and the Cooperative Banks are insured this scheme. Maximum Cover: Rupees one lakh per deposit per bank (w.e.f 01.05.93). This limit includes all deposits (including interest accrued) held by a depositor in the same capacity and right in all branches of the bank. Deposits not Eligible for Cover: Deposits in the name of Central and State Governments, Banks and foreign Government are not covered under the scheme. Rate of Premium: The premium rate is 10paise p.a. for Rs.100 of e deposit from the financial year 2005-06. 32

Fixed & Floating Interest Rate:

In fixed interest rate, the interest to be paid is fixed in advance . In case of floating interest rate, it is not determined in advance, but is dependent on some underlying situation and variable from time to time. But this is usually applied in case of Interest Rates on Borrowing. Deposits being a contract with the Customer by the Bank, the conditions usually remain the same throughout the tenure of the deposit.

Thanks for your attention

Dr.

S. C. Bihari Tell:08417-236660 to 65(Extn: 6214) Mail:scbihari@gmail.com