BANKING

Banks, as we all know, deal in money. Banks receive money from depositors and lend this to borrowers. Interest is the charge paid for using the money. When the bank receives money from depositors it pays them interest and when lending money to borrowers it collects interest. Obviously, the interest it collects will be larger than the interest it pays and this difference represents the bank's profits after their overhead expenses are deducted. The interest rates vary according to the different schemes.

Deposit Schemes:

Money deposited with the bank can be broadly classified under the following categories:

i) Savings Accounts,
ii) Current Accounts,
iii) Fixed Deposits, and
iv) Recurring Deposits.

We shall see each one of these, in detail. Please note that when money is deposited into the account, the account is credited and when money is withdrawn, the account is debited.

Savings Accounts: As the very name indicates, these accounts are ideal for saving money as and when we can. The depositor opens an account by paying an initial amount, which varies from bank to bank, usually Rs. 1,000/- or Rs. 2,000/- and this has to be maintained as the minimum balance. The depositor is given a cheque-book with the account number mentioned on the cheque leaves. The depositor is permitted to deposit and withdraw money - subject to a maximum 120 withdrawals every half-year. As the balance can be fluctuating throughout the month because of such credits and debits, the interest is paid on the minimum balance maintained in the account between the 10th and the last day of the month. So, even if the balance in the account has been Rs. 1,00,000/- from the 1st upto the 29th, and the balance on the 30th is Rs. 5,000/-, just because Rs. 95,000/- was withdrawn on that day, the bank will consider the minimum balance for that month as Rs. 5,000/- only and pay the eligible rate of interest on Rs. 5,000/- only, even though a balance of Rs. 1,00,000/- was being maintained in the account for 29 days. Similarly, if the balance was Rs. 5,000/- on the 10th, even if Rs. 95,000/- was deposited into the account on the 11th and there have been no withdrawals throughout the month, the minimum balance between the 10th and the last day being Rs. 5,000/-, interest for the month will be paid only on Rs. 5,000/- though Rs. 1,00,000/- was maintained in the account for about 20 days. So, it makes good financial sense to credit sizeable amounts before the 10th and avoid large debits during the last few days of the month.

Current Accounts: These are accounts where the depositors are permitted an unlimited number of transactions and such accounts will be useful to people conducting businesses where they will need to make numerous payments regularly. The minimum balance required is usually Rs. 5,000/- -- this amount varies from bank to bank. Generally, no interest is paid on the balance being maintained in the account.

Fixed Deposits: As the very name indicates, the depositor decides to block the funds with the bank for a 'fixed' period ranging from 15 days to 120 months and the depositor will be paid interest accordingly. Generally, the greater the period, greater will be the interest that the depositor is paid. Banks have different schemes where the interest is paid at regular intervals, either monthly or quarterly, or, if the depositor wishes, the interest is retained with the bank till the deposit becomes due and the deposit amount is returned with the interest as well as with the interest on interest. The monthly interest and quarterly interest scheme is ideal for meeting regular commitments like household expenses, school/college fees, telephone bills, etc. The interest on interest scheme, also known as the reinvestment scheme, is ideally suited for saving money for a specific purpose like college education, marriage, etc., where the savings can be earmarked even when the child is still young.

We have seen how the bank computes interest payable on Savings Deposits - 'the minimum balance between the 10th and the last day' rule. So, whenever a large amount is available for credit after the 10th, it makes good sense to open a fixed deposit account for that amount, provided it is for a minimum period of 15 days, so that it falls due on the 10th of the succeeding month. In this way, our money continues to earn interest till it is credited into the Savings Account on the 10th of the succeeding month, from which period it will qualify for the minimum balance amount provided it is not withdrawn before the last day of that month.

Recurring Deposits: This is a scheme which works like 'forced' savings because the depositor enters into an agreement with a bank that a fixed amount will be paid every month for a specified period and after the period has elapsed, a lumpsum of these monthly deposits along with the interest is received by the depositor. This scheme is ideally suited for getting ready to meet a sizeable future commitment with comparatively lesser financial burden. It will be easier to save Rs. 1,000/- every month for two years than to raise Rs. 25,000/- in one stroke. Some banks have this scheme with some flexibility whereby the depositor can vary the amount of the monthly instalment to a certain extent.

How to open an Account:

The person desirous of opening an account has to be above 18 years of age. (Children above 14 years of age can open accounts by themselves, but certain kinds of transactions are not permitted in these accounts. These are being dealt with in an ensuing article). Two recent passport-size photographs and a xerox copy of any document showing proof of residence like a ration card or a passport is essential. Introduction by an existing account-holder is another important requisite. All these are required to ensure that accounts are not being opened in fictitious names to encash stolen cheques or for other fraudulent purposes.

Financial Planning:

Now that we have seen the various options available for depositing money in a bank, we should go about the same according to our needs and convenience.

Liquidity refers to the ease with which a deposit can be converted into hard cash. Obviously, the more liquid the deposit, the lesser the rate of interest, because the bank is entering into a commitment with the depositor to return the money when the depositor wants it back. The bank, too, has to be cautious about the liquidity of the money it has lent to borrowers because of this commitment. For example, money received as a Fixed Deposit for 120 months can be lent to a borrower who will be using the loan to buy a factory building because, by the time the deposit matures for payment, the borrower would have also repaid the money by way of periodic instalments. But, if the money had been received as a Savings Deposit, the bank runs the risk of the depositor wanting the money on the very next day while the borrower will not be repaying the amount by then.

As a depositor, we should try to get the maximum interest possible, without having problems of liquidity - i.e. we should be able to meet our expenses as and when they occur. There is no point in blocking all our savings in a Fixed Deposit for 120 months just because it fetches the maximum interest, if we are not able to face the payment of, for example, school fees. Liquidity requirements vary from person to person but an ideal savings account balance would be an amount equivalent to one month's expenses. Recurring Deposits can be opened in such a way that the amounts will be received in time for meeting regular financial commitments like insurance premia, school fees, etc.

In case of unforeseen emergencies, a loan can be availed upto 75% of the Fixed Deposit amount. Usually the rate of interest charged on this loan is 2% above the rate that is being earned on the Deposit. This interest will be charged only on the outstanding balance in the loan account. This loan can be repaid in monthly instalments, or can be set off against the proceeds of the Deposit when it matures for payment. Current Account holders can avail an Overdraft Limit against Fixed Deposit whereby the account-holder is permitted to draw, in excess of the credit balance in the account, upto 75% of the Fixed Deposit Account. Interest will be charged to the Overdraft Account only upto the extent of the amount overdrawn in the Account at the specified 2% extra.