1 INTRODUCTION TO BANKING

Banking is an industry that handles cash, credit, and other financial transactions. Banks
provide a safe place to store extra cash and credit. They offer savings accounts, certificates of
deposit, and checking accounts. Banks use these deposits to make loans. These loans include
home mortgages, business loans, and car loans.

Banking is one of the key drivers of the U.S. economy. Why? It provides the liquidity needed
for families and businesses to invest for the future. Bank loans and credit mean families don't
have to save up before going to college or buying a house. Companies use loans to start
hiring immediately to build for future demand and expansion.

How It Works

Banks are a safe place to deposit excess cash. The Federal Deposit Insurance
Corporation (FDIC) insures them. Banks also pay savers interest rates or a small percent of
the deposit.

Banks can turn every one of those saved dollars into $10. They are only required to keep 10
percent of each deposit on hand. That regulation is called the reserve requirement. Banks lend
the other 90 percent out. They make money by charging higher interest rates on their loans
than they pay for deposits.

The definition of a bank varies from country to country. See the relevant country pages under
for more information.

Under English common law, a banker is defined as a person who carries on the business of
banking by conducting current accounts for his customers, paying cheques drawn on him/her
and also collecting cheques for his/her customers.

In most common law jurisdictions there is a Bills of Exchange Act that codifies the law in
relation to negotiable instruments, including cheques, and this Act contains a statutory
definition of the term banker: banker includes a body of persons, whether incorporated or
not, who carry on the business of banking' (Section 2, Interpretation). Although this
definition seems circular, it is actually functional, because it ensures that the legal basis for
bank transactions such as cheques does not depend on how the bank is structured or
regulated.

The business of banking is in many English common law countries not defined by
statute but by common law, the definition above. In other English common law
jurisdictions there are statutory definitions of the business of banking or banking
business. When looking at these definitions it is important to keep in mind that they are
defining the business of banking for the purposes of the legislation, and not necessarily
in general. In particular, most of the definitions are from legislation that has the
purpose of regulating and supervising banks rather than regulating the actual business
of banking. However, in many cases the statutory definition closely mirrors the common
law one. Examples of statutory definitions:

 "banking business" means the business of receiving money on current or deposit

account, paying and collecting cheques drawn by or paid in by customers, the
 making of advances to customers, and includes such other business as the
Authority may prescribe for the purposes of this Act; (Banking Act (Singapore),
Section 2, Interpretation).
 "banking business" means the business of either or both of the following:

1. receiving from the general public money on current, deposit, savings or other
similar account repayable on demand or within less than [3 months] ... or with a
period of call or notice of less than that period;
2. paying or collecting cheques drawn by or paid in by customers.[14]

Since the advent of EFTPOS (Electronic Funds Transfer at Point Of Sale), direct credit,
direct debit and internet banking, the cheque has lost its primacy in most banking systems
as a payment instrument. This has led legal theorists to suggest that the cheque based
definition should be broadened to include financial institutions that conduct current
accounts for customers and enable customers to pay and be paid by third parties, even if
they do not pay and collect cheques .

VARIOUS TYPES OF BANK ACCOUNTS

Bank Accounts are classified into four different types. They are,

1) Current Account

2) Savings Account

3) Recurring Deposit Account

4) Fixed Deposit Account

What is Current Account?

Current account is mainly for business persons, firms, companies, public enterprises etc and are
never used for the purpose of investment or savings.These deposits are the most liquid deposits and
there are no limits for number of transactions or the amount of transactions in a day. While, there is
no interest paid on amount held in the account, banks charges certain service charges, on such
accounts. The current accounts do not have any fixed maturity as these are on continuous basis
accounts.

What is Savings Account?

Savings Account is meant for saving purposes. Any individual either single or jointly can open a
savings account. Most of the salaried persons, pensioners and students use Savings Account. The
advantage of having Savings Account is Banks pay interest for the savings. The saving account holder
is allowed to withdraw money from the account as and when required.

The rate of interest ranges between 4% to 6% per annum in India. There is no restriction on the
number and amount of deposits. But withdrawals are subjected to certain restrictions. Some banks
recommend to maintain a minimum amount to keep it functioning.

What is Recurring Deposit Account?

Recurring deposit account or RD account is opened by those who want to save certain
amount of money regularly for a certain period of time and earn a higher interest rate. In
RD account a fixed amount is deposited every month for a specified period and the total
amount is repaid with interest at the end of the particular fixed period.

The period of deposit is minimum six months and maximum ten years. The interest rates
vary for different plans based on the amount one saves and the period of time and also on
banks. No withdrawals are allowed from the RD account. However, the bank may allow to
close the account before the maturity period.

These accounts can be opened in single or joint names. Banks are also providing the
Nomination facility to the RD account holders.

What is Fixed Deposit Account?

In Fixed Deposit Account (also known as FD Account), a particular sum of money is

deposited in a bank for specific period of time. It’s one time deposit and one time take away
(withdraw) account. The money deposited in this account can not be withdrawn before the
expiry of period.

However, in case of need, the depositor can ask for closing the fixed deposit prematurely by
paying a penalty. The penalty amount varies with banks.

A high interest rate is paid on fixed deposits. The rate of interest paid for fixed deposit vary
according to amount, period and also from bank to bank.

Various Types of Bank Accounts

1. Saving Account
2. Regular Savings
3. Current Account
4. Recurring Deposit Account
5. Fixed Deposit Account
6. DEMAT Account
7. NRI Accounts

1) SAVINGS ACCOUNT:-

a) Basic Savings Bank Deposit Accounts (BSBDA)

 This account will be considered as normal banking service.

 For this account, maintenance of minimum balance is not required.
 ATM card/ ATM cum Debit card, Rupay card will be given for the account holders.
 There are going to be no limit on the number of deposits that can be made in a month but,
account holders will be allowed most of 4 withdrawals in a month, which includes ATM
withdrawals also.
 The above facilities will be given without any charge. There will be no charge levied for non-
operation/ activation of in-operative basic saving bank deposit account.
 For this account, overdraft facility will be provided up to Rs. 5000/-.
b) Basic Saving bank Deposit Accounts Small scheme (BSBDS)

 These are accounts with relaxed KYC, with a minimum document requirement of self-
attested address proof & photograph.
 Total credit should not exceed 1Lakh rupees in a year.
 Maximum balance should not exceed Rs. 50,000/- at any time.
 Cash withdrawals & transfers must not exceed Rs.10, 000/- in a month.
 Remittance from foreign account cannot be credited to this account without completing
normal KYC formalities.
 This account can be opened only at Core Banking Solution linked branches of banks or at
such branches, where it is possible to manually monitor the fulfillments of the conditions.

2) REGULAR SAVINGS BANK ACCOUNT

 Any resident individual- single accounts, two or more individuals in joint accounts,
Associations, clubs etc., are eligible for this account.
 Modest credit option available to the depositor.
 Two free cheque books will be issued per year.
 Internet banking facility will be provided without any charge.
 Balance enquiry, NEFT, Bill payment, Mobile recharge etc., are provided through mobile
phones.
 Students can open this account with zero balance by providing the required documents.

3) CURRENT ACCOUNT

 Any resident individual- single accounts, two or more individuals in joint accounts,
Associations, Limited companies, Religious Institutions, Educational Institutions, Charitable
Institutions, clubs etc., are eligible for this account.
 Payments can be done unlimited number of times.
 Funds can be remitted from any part of the country to the corresponding account.
 Overdraft facility will be available.
 Internet banking facility is available.

4) RECURRING DEPOSIT ACCOUNT

CUMULATIVE DEPOSIT SCHEME

 Any resident individual- single accounts, two or more individuals in joint accounts,
Associations, clubs, Institutions/Agencies specifically permitted by the RBI etc., are eligible to
open this account in single/joint names.
 Periodic/Monthly installments can be for any amount starting from as low as Rs.50/-
onwards.
  Account can be opened for any period ranging from 6 months to 120 months, in multiple of
1 month.
 The amount selected for installment at the start of the scheme will be payable every month.
 The number of installments once fixed, cannot be altered.
 Approved rate of interest is compounded every quarter.
 The amount after maturity will be paid to customers one month after the deposit of the last
installment.
 Pass book will be given to the depositor.
 TDS will be applicable on the interest, as per the latest changes in the Income Tax Act on
cumulative deposits also.

5) FIXED DEPOSIT ACCOUNT

a) SHORT DEPOSIT RECEIPT

 Banks accepts deposits from customers varying from 7 days to a maximum of 10 years.
 The period of 7 days & above but not exceeding 179 days deposits is classified as ‘Short
Deposits’.
 The minimum amount that can be deposited under this scheme is Rs. 5 lakh for a period of
7-14 days.

b) FIXED DEPOSIT RECEIPT

 Any resident individual- single accounts, two or more individuals in joint accounts,
Associations, Minors, societies, clubs etc., are eligible for this account.
 The minimum FDR in metro & Urban branches is Rs. 10,000/- & in rural & semi urban & for
Senior citizens is Rs.5000/- .
 For the subsidy kept under the government sponsored schemes, Margin money, earnest
money & court attached/ordered deposits, minimum amount criteria will not be applicable.
 Depositors may ask for repayment of their deposits before maturity. Repayment of amount
before maturity is allowable.
 Interest rate differs from bank to bank depending upon the tenure of the deposits & as
when the bank changes the rate.
 Additional interest of 0.50% is offered for senior citizens on deposits placed for a year &
above.

6) DEMAT ACCOUNT

 Used to conduct stress-free transactions on the shares.

 An individual, Non-Resident Indian, Foreign Institutional Investor, Foreign National,
Corporate, Trusts, Clearing Houses, Financial Institution, Clearing Member, Mutual Funds,
Banks and Other Depository Account.
 For opening this account, an individual has to fill a form, submit a photo of the applicant
along with a photocopy of Voter ID/ Passport/ Aadhar card/ Driving License & Demat
 account number will be provided to the applicant immediately after the completion of
processing of the application.
 Facilities provided under this account are- Opening & maintaining of Demat accounts,
Dematerialization, Rematerialization, Purchases, sales, Pledging & Unpledging, safe custody.

7) NRI ACCOUNTS:-

a) NRO ( Non-Resident Ordinary Rupees) Account

b) NRE ( Non-Resident External Rupees) Account
c) FCNR ( Foreign Currency Non-Resident ) Account

HOW INTEREST IS CALCULATED IN BANK ACCOUNTS

SAVINGS ACCOUNT

Earlier banks used to pay an interest rate of 4% p.a. against the lowest available balance in
the account between the 10th and final day of a month. Any deposits happening during this
period were not eligible for interest rate calculation of that month, but at the same time,
withdrawals during the period were taken into account.

For instance, Vishal had a balance of Rs.50000 in his account as on January 10th. On January
20th, he received Rs.100000 as maturity bonus for his LIC policy. On 28th January he had
withdrawn Rs. 125000 for making a down payment for his new flat, thereby reducing his
account balance to Rs. 25000. In his case, the bank would consider Rs.25000 for interest
calculation, as it is the lowest amount available in his account between 10th and 28th
January. So, the interest amount Vishal is eligible for the month of February will be for
Rs.25000 @ 4% p.a. which amounts to Rs.83.33.

Effective from April 1, 2010 onwards, following RBI's mandate to rework interest rate
calculation methods, banks started calculating interest on a daily balance method

Let's see what difference this move can make to Vishal's interest earned on his savings
account:

From January 1st to 20th, he will be paid an interest for Rs.50000.

From 20th to 28th, interest is calculated for Rs. 150000 and for the remaining three days,
interest is calculated on Rs.25000/-

So, the interest he earns for January will be Rs.249.28/- against the older method, whereby he
would have earned Rs. 83.33 only.
So, now every rupee you keep in your account earns for you and you need not plan ahead for
your withdrawals to gain maximum benefits.
 Bank Tenure Interest Rate
Axis Bank 6 months to 8 months 29 days 6.75%
Kotak Mahindra Bank 180 days to 269 days 7.00%
State Bank Of India 180 days to 210 days 6.35%
ICICI Bank 61 days to 184 days 6.25%
HDFC Bank 46 days to 6 months 6.25%
Bank of Baroda 91 days to 180 days 5.75%
IDFC Bank 91 days to 180 days 6.75%

How is fixed deposit interest calculated?

The returns on your fixed deposit investment, are determined by your interest rates and
frequency of interest payouts. These interest rates are compounded periodically, and
the formula for calculation of FDs is listed below:
FD Calculation Formula:

This is A = P (1 + r/4/100) ^ (4*n) and A = P (1 + r/25)4n.

Where,
A = Maturity Amount
P = Deposit Amount
n = Compounded Interest Frequency
Here’s an example.
Suppose you are investing Rs.1,00,000 in a fixed deposit for a tenor of 3 years at an
interest rate of 10%.

Now A is your maturity amount = 100000*(1+(10/25))^(4*3)

Here, P is the principal amount, n is the tenor and r is the interest rate.

A = 100000*(1.025)^12 A = 100000*1.34489
x
A = Rs.1,34,489 (Maturity Amount) Interest= 134489-100000 = 34,489

If you plan to evaluate your returns and plan your investments beforehand, try using
the FD return Calculator. All you have to do is enter your investment amount and tenor,
which helps you calculate the amount receivable on maturity.

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