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Different Deposits and Deposit insurance

Deposits are most important to a bank Deposits are basis for bank loans and represent ultimate source of banks profit & growth. Traditionally banks have been offering mass banking products but now because of high competition banks have started offering their deposit products along with add on value added services e.g. low premium insurance products, premium ATM /Debit cards, Advisory services, Cash Management, Gold card, Personal Banker services etc. to its class customers in terms of Private Banking. Stability and low cost source of funds make deposit products main thrust area. Deposits can be rightly said to be raw material for the Banks business operations.

Different deposit products offer different return depending upon nature and tenure of the product. Normally, higher tenure products offer higher return to the customers but again it depends upon economic conditions of the country e.g. inflation rate demand & supply position, strategic philosphy of the bank based on various socio-economic considerations etc. It always remain endeavor of banks to raise as much as possible low cost deposits (CASA deposits). Transaction Payment Deposits: (Demand Deposits) These facilitates the account holder to transact/ withdraw the deposit, transfer the deposit to a third

Person through a negotiable instrument (e.g. cheque), a written order, withdrawal, telephonic instructions, net banking etc. These accounts are payable to customer on demand and can be either interest bearing accounts (called Savings Bank A/cs) or non-interest bearing accounts (called Current Accounts). Savings Bank Accounts: These accounts can be opened in the names of individuals or joint (E or S; F or S, Both of them jointly; any one of them or survivor etc.)., Trust, clubs, associations, JHF etc. But the account can not be opened for any business purpose by any type of organisation. The account can also not be opened in the name of Govt.deptt./MCD/Political party etc.

These are interest bearing accounts and interest on these accounts was till presently regulated by RBI which was increased to 4% from 3.5% p.a. (w.e.f. 01/04/2011). But more recently, interest on these accounts have been deregulated by RBI. Banks are now free to offer any rate of interest on these accounts. Banks may charge fee maintenance on these accounts but normally banks do not charge any fee on these accounts which gets compensated by prescribing minimum balance to be maintained by the customer in these accounts. However, banks do charge penalty (service charges) if the customer does not maintain minimum prescribed balance in these accounts which differ from bank to bank.

Recently some banks have also started offering these accounts on zero balance basis to select customer e.g. salary accounts, no frill accounts etc. Limited number of withdrawals on monthly basis are permitted on these accounts. Further, no notice period is required to be given by the customer for withdrawal from these accounts. Interest is applied on these accounts presently on half yearly intervals ; till recently on monthly products taking into account minimum balance maintained by the customer between 10th and last day of the month but w.e.f.1st April 2010 it will be on daily basis products.

Date Particulars 01-04-08 Balance B/f 03-04-08 By Clg 08-04-08 To clg 16-4-08 To Cash 29-04-08 By Clg 06-05-08 To Cash 12-05-08 By Cash O9-07-08 By S/C 18-07-08 To Clg 22-07-08 To Clg 26-07-08 By clg 12-09-08 By S/c 28-09-08 To cash

Debit

Credit 1,20.215

80,000 3,500 12900 3,800 9,900 48,500 19,000 1,07,125 4,580 125 95

Balance 1,15,220 2,35,435 1,55,435 1,51,935 1,64,835 1,61,035 1,70,935 2,19,435 2,00,435 93,310 97,890 98,015 97,920

Interest calculation on monthly product basis : Month April May June July August September Total Product 151935 161035 170935 93310 97890 97890 772995

Interest = (Agg. Product/12) x Intt. Rate = (772995/12) x .035 = Rs. 2255/-

Interest calculation on daily product basis: Period 01/04 to 02/04 Days Product cal. 2 15220 x 2 Product 230440

03/04 to 07/04
08/04 to 15/04 16/04 to 28/04 29/04 to 05/05 06/05 to 11/05 12/05 to 08/07 09/07 to 17/07 18/07 to 21/07

5
8 13 7 6 58 9 4

235435 x 5
155435 x 8 151935 x 13 164835 x 7 161035x 6 170935 x 58 219435 x 9 200435 x 4

1177175
1243480 1975155 1153845 966210 9914230 1974915 801740

22/07 to 25/07 26/07 to 11/09 12/09 to 27/09 28/09 to 30/09 Total

4 48 16 3 183

93310 x 4 97890 x 48 98015 x 16 97920 x 3

373240 4698720 1568240 293760 26371150

Interest = (Agg. Product /365) x Intt.Rate = (26371150/365) x .035 = Rs. 2529/-

Illustration: Elite Bank Ltd. requires minimum average balance of Rs.5000/- on quarterly basis in Savings Bank accounts. Consider the following balances and find out if bank should levy services charges or not.

Date 01/01/2010 23/01/2010 05/02/2010 10/02/2010 25/02/2010 15/03/2010 20/03/2010 24/03/2010 27/03/2010

Balance
16529 8320

4140 1120 4328 6125 823 3520 9540

PERIOD

DAYS

PRODUCT CAL.

PRODUCT

01/01 TO 22/01 23/01 TO 04/02 05/02 TO 09/02 10/02 TO 24/02 25/02 TO 14/03 15/03 TO 19/03 20/03 TO 23/03 24/03 TO 26/03 27/03 TO 31/03

22 13 05 15 18 05 04 03 05

16529 X 22 8320 X 13 4140 X 5 1120 X 15 4328 X 18 6125 X 5 823 X 4 3520 X 3 9540 X 5

363638 108160 20700 16800 77904 30625 3292 10560 28620

TOTAL :

90

660299

Daily average balance = 660299/90 = 7337; As such No service charges should be imposed.

Current Accounts : The account can be opened in the name of individual, joint or for any business firm or for any other entity. The Depositor can withdraw the money any number of times so long as funds are available in the account. Some times on creditworthiness of the customer or by creating charge on a security, bank can also sanction an overdraft limit in these accounts. Customer is then entitled to withdraw the funds from the account up to the sanctioned limit. However, bank will charge interest on the overdrawn amount on daily product basis at contracted rate of interest. Normally no interest is paid by the bank in these accounts to customer and credit balances

Available in these accounts provide interest free funds to the bank. Sometimes, banks do pay interest to the customers on the credit balances in these accounts. In such a case these accounts are called NOW Accounts i.e. Negotiable order of withdrawal account. Current accounts facilitate cash management for the firm. However, banks require customer to maintain certain minimum balance in the account. Banks usually collect service charges on these accounts related to account activity or account balance or both (unremunerative accounts).

Non-Transaction Savings or Thrift Accounts These deposits do not facilitate routine payments or transfers. These are designed to attract customers to save for future expenditure or financial emergencies. Term Deposits ,Recurring Deposit, Cash Certificate Accounts can be categorised as Non-Transaction Accounts. The interest rate paid by the banks in these accounts is higher than SB A/c but cost of operation of these accounts is much less than that of SB A/c & C/A. Interest rates in these accounts have been deregulated by RBI. Banks normally pay interest rates on these accounts relating to term maturity of the account; higher the term, higher the interest rate but their may be some exception to this rule i.e.

Expected behaviour of interest rates in future periods. TERM DEPOSITS: These are debt investments by the customers. Funds can be accepted by banks for a period ranging from 15 days(Changed to 7 days recently) to 120 months. Interest is paid on these deposits according to the interest rate for a particular period of investment. In case of bulk deposits, say 15 lac/1 cr & above an additional interest say 25-100 basis points is also paid than the normal interest rates. In these deposits interest is compounded on quarterly basis, excepting fixed deposit, where interest can be paid on quarterly

Basis. As such annual effective rate of interest is much higher than nominal rate of interest. m Effective annual rate, r =( 1 + k/m) - 1 If nominal interest rate for a Term Receipt of 2 years maturity is 10%, then 4 Effective annual rate = (1 + .10/4) -1 = 10.38% These type of accounts are also sometime called CDs These accounts are payable on maturity after expiry of term of deposits. But in case of emergency, customer can also get it paid before maturity by paying penalty of 0.50% to 2%. However, the interest rate applicable will be for the period the deposit has actually run and not the contracted rate.

Term Deposit can be classified into 4 categories, depending upon pattern of deposit, withdrawal of interest on regular intervals or accumulation of interest etc. Fixed Deposit Scheme Re-investment scheme Cash Certificate Recurring Deposit scheme Fixed Deposit Scheme: Lump-sum amount is deposited for a fixed period. Interest is with drawn by the customer on monthly/quarterly/half-yearly/annual basis

Since interest in these accounts are accumulated quarterly, and if monthly interest is payable, the interest paid on monthly basis will be at discounted value, so that total interest paid during the quarter should not exceed the quarterly interest, taking into account reinvestment rate (say SB interest rate). X(1+r/6) + X(1 +r/12)+ X= Y; Multiply both sides by 4, we have 4X(1+r/6)+4X(1+r/12)+4X = 4 Y, Simplifying, we get X = 4 Y/(12+r) Thus discounted monthly interest = P x R (12+r) Can be issued in the name of individual or jointly in name of two or more persons with suitable mandate. Nomination facility available

ILLUSTRATION: For a 2 year fixed deposit of Rs.60,000/- @ 10% with Elite Bank Ltd., how much interest will be payable on monthly /quarterly/half-yearly/annual basis. Quarterly = (60000 x .10)/4 = Rs.1500/ Half-yearly = (60000 x .10)/2 = Rs.3000/ Annual = 60000x .10= Rs.6000/ Monthly = (60000 x .10)/(12+.035) =Rs.498.55 Verification of monthly interest 498.55(1+.035/6) + 498.55(1+.035/12) +498.55= 501.4582+ 500.0041+498.55 = 1500/-

Reinvestment scheme: Deposits are accepted for a fixed period in lump-sum and repaid along with interest on maturity. Interest is compounded quarterly. Deposits can be accepted for a minimum period of 6 months and maximum period of 120 months. Premature payment permissible with imposition of penalty permissible. Deposit can be in the name of individual or jointly in names of two or more persons with suitable mandate. Nomination facility available. Deposit receipt is non-transferable.

ILLUSTRATION: Calculate maturity amount of Reinvestment deposit for a period of 3 years @ 10% p.a. when the amount invested is Rs.50,000/-. 4 Effective annual interest rate = (1+.10/4) -1 = 10.38% 3 Maturity value = 50,000 (1+.1038) = Rs. 67,242/ Maturity value = 50,000 (1+ .10/4) ^ 12 = Rs.67,244/-

Cash Certificate: Certificates are issued at discount to the face value which is a whole sum and is paid at maturity. As such issue price will be an odd amount. Certificates have maturity period of 6 months to 120 months as in case of re-investment plan. Interest is compounded at quarterly intervals, treating the issue price as principal amount. This is a non-transferable instrument but can be issued in individual or joint names of two or more persons with suitable mandate. Nomination facility available

Calculate issue price of a cash certificate with face value of Rs.1000/- payable after 4 years when interest rate is 12% p.a. 4 Effective annual interest rate=(1+.12/4)-1= 12.55% Issue price x FVIF (12.55%, 4) = Face value Issue price = Face value/ FVIF (12.55%, 4) Issue price = 1000 = Rs.623.19 (1+.1255)^4

Recurring Deposit: A fixed sum is deposited every month for a fixed period ranging from 6 months to 120 months. Interest is compounded at quarterly intervals. Account can be opened in individual or joint names of two or more persons. Nomination facility available. A pass-book is issued to show monthly deposits. Accumulated interest with principal amount is paid at maturity. Premature payment permitted with penalty.

ILLUSTRATION: Compute maturity value of Rs.100/- deposited in Recurring Deposit (RD) account which pays 10% interest if the instalments are deposited for a period of 3 years 4 Effective annual interest rate= (1+.10/4) -1= 10.38% Rate of interest p.m. = .1038/12 = .865% Maturity value = A x FVIFA (.865%, 36) = A { (1+k)^n - 1}= 100{ (1+.00865)^36 - 1}= k .008651 = 100 x 41.0192 = Rs.4102/

Flexi Deposit Scheme NRO Deposit NRE Deposit NRNR Deposit FCNR(B) Deposit

Effect of wrong entries to the advantage of customer in the pass book/statement The pass-book is written by the banker and hence the entries therein form an evidence against the banker. The customer is rightly entitled to believe them as correct and to act on the basis of such entries. If the pass book shows a higher balance and the customer withdraws such balance treating it as his own and subsequently spends it away, the banker shall not be entitled to recover such amount wrongly paid to the customer. But the customer shall have to prove that (a) he acted in such a manner relying on the correctness of the balance and had no knowledge of the mistake

Therein. (b) He altered his position by spending the same. This benefit has been given to customers in various judgments because of the presumption that normally a person spends what he presumes to belong to him and if the banker permits him to withdraw excess money on the above presumption, it would be great prejudice to him, if he is called to pay them back. However, there are some exceptions to above mentioned principle of estoppel. If the customer regularly maintains his account books and the bank regularly sends him the statement/pass-book, the customer can not act on the above presumption

Because he regularly maintains his account and the mistake would have been detected with ordinary prudence (Oakley Bowden & Co. vs The Indian Bank Ltd. (Madras High Court). Effect of wrong entries in favour of the Banker: When a credit entry has been totally omitted or its figure has been wrongly stated at reduced value or any debit entry has been erroneously made in the customer account, such entries are favourable to the banker against the customer. The customer is entitled to get the mistake rectified as soon as he happens to detect it. The right of the customer does not lapse even if he returns the pass-book without raising objection regarding the wrong entry.

However, there is an exception to this rule i.e. If the customer comes to know of a forgery in the cheque debited to his account and does not inform the bank, it will constitute negligence on his part. The customer will, therefore, not be entitled to recover the amount paid by the bank on the forged cheque. The most important part is that the negligence on the part of the customer should have been actually proved (Canara Bank vs. Canara Sales Corp. & others in Madras High Court, 1964).

Deposit Insurance & Credit Guarantee Corp. (DICGC) DICGC is a wholly owned Subsidiary of RBI. It provides Deposit Insurance for depositors of all type of banks to the maximum extent of Rs.1 lac, including accrued interest. It is compulsory for all banks and the premium is paid by the banks. It covers all deposits of the banks e.g. SB, CA, RD, FD, Cash certificates, Annuity Deposits etc., except Deposit of Govt./Foreign Govt., Inter-Bank, CDs, Deposit taken as cash collateral, Deposits of land development banks, Deposits held abroad.

Different deposits kept by a person in different branches of the same bank are aggregated together and maximum cover available is Rs. 1 lac. However, deposit in different banks are treated separately. Deposits held in the same right in a bank in different accounts are treated together, However deposits held in different rights in the same bank are treated separately. ILLUSTRATION (Deposits held in different capacities: (Rs./lac) Account Name SB CA FD Total Insured Sh.Henry Sh.Henry (Partner ABC ent.) Sh.Henry (N/G Master Alex 0.10 Sh. Henry (Director ABC Ltd. 0.26 0.24 0.80 1.80 1.00 0.90 0.50 1.40 1.00 0.80 0.90 0.90 2.50 0.60 3.10 1.00

Sh. Henry (Prp. JK Udhoyg)

0.50 0.40 0.90

The a/c will be clubbed with individual a/c total deposit 1.80 + 0.90=2.70 but insurance will only be available for Rs. 1 lac

Deposits held in joint a/cs Account (i) A&B Maximum Rs. 1 lac

Account (ii)

A&C

Maximum insurance Rs. 1 lac A/c will be clubbed with A/c (i) maximum Rs. 1 lac Maximum insurance Rs. 1 lac A/c will be clubbed with A/c (iv) maximum Rs. 1 lac

Account (iii)

B&A

Account (iv)

A, B & C

Account (v)

B, C & A

DICGC is liable to pay when bank goes in liquidation through the liquidator, who puts up a claim to DICGC on behalf of the depositor. Before putting up the claim any dues payable to the bank in any account (OD etc) by the customer, right of set-off is exercised and deposit insurance is made available after netting off. Insurance claim is made available within two months from the date claim received. In case of amalgamation/merger with other bank, the difference between the amount due to depositor under insurance claim and the amount received by him under the reconstruction scheme is paid. Deposit insurance coverage of a bank can be withdrawn if it has been prohibited from receiving

Fresh deposits or its license has been cancelled by RBI or it has been ordered to be wounded up etc. However, existing depositors will continue to have the benefit of insurance coverage for the amount they held with the bank up to the date coverage is withdrawn.

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