'INTEREST' ED IN BANKING ?!!!

Always wanted to go to the bank and handle your account by yourself but didn't know how; was embarrassed because you know nothing about it? How to open an account, the different deposit schemes, financial planning.. Here's all the information you wanted plus useful tips!

When Mr. Ramakrishnan had to go unexpectedly out of town, his wife, Girija stepped into a bank for the first time in her life! Luckily for her, it was in the afternoon, and there was not much crowd, so she was able to get a lot of assistance from the staff there, who also had to explain almost everything to her, starting from what a deposit is, and what banks do!
Although it is true that most of us do not frequent banks as much as we would most other places, it is wise to keep ourselves informed of our accounts, and in general about the various facilities that banks offer to the account holders.

What do banks do?

Banks, as we all know, deal in money. Banks receive money from depositors (which is what you are called once you open an account) and lend this to borrowers, people who take money on loan. Borrowers may have various reasons, it may be a loan to build a house, or for their business. 'Interest' is the charge that is 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. So how does it make money? Simple - the interest it collects will be larger than the interest it pays and this difference represents the bank's profits after their overhead expenses (like electricity, rent for the branch, etc.) are removed. 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.

It is important to mention at this juncture that when you deposit money into the account, your account is being ' credited' and when you withdraw or take out money from your account, your account is being ' debited'.

Savings Account

These accounts are ideal for saving money as and when you can. You can open 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. This means that there must always be this minimum amount in the account for the account to function. If you take out more money than this, then the account may be closed, and you may have to go through the procedure and paper work of opening a new account all over again.
You will be given a cheque-book with the account number mentioned on the cheque leaves (cheque leaves are the individual pages in the cheque book).
You will then be permitted to deposit and withdraw money - upto a maximum of 120 withdrawals every half-year.

Important tip: Now since 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 your account has been one lakh rupees from the 1st upto the 29th, and the balance on the 30th is Rs. 5,000/-, just because you took out or withdrew Rs. 95,000/- on that day, the bank will consider the minimum balance for that entire month as Rs. 5,000/- only and pay the rate of interest for 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 you credited Rs. 95,000/- into the account on the 11th and you did not withdraw any money 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 you, the depositor will be allowed to make as many transactions as you wish. Normally, 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/-, but this amount varies from bank to bank. The biggest drawback having this kind of account, however, is that no interest is paid on the balance in the account, irrespective of how much money you have in the account. Some banks issue demand drafts (DDs) free of cost to current account holders as an added benefit.

Fixed Deposits:

As the name itself suggests, in this kind of account, the depositor has the freedom to decide 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 according to the number of days the money is "blocked". 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.

Important tips : The fixed deposits give the maximum interest of all the schemes, especially when the money is deposited for the longest period, which is usually five years and above.
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 will be a great idea 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, your money will continue 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:

In this scheme, you agree to the bank, saying, that you will pay a certain fixed amount of money every month, for a specified period without fail. So this is a scheme which works like 'forced' savings because of the agreement. After the period has elapsed, a lumpsum of these monthly deposits along with the interest will be returned to you. This scheme is ideally suited for getting ready to meet a big financial 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.

So now that we have seen what kinds of accounts are available, we come to the next important question: how does one open an account?

Opening an Account:

First of all, to open an account, you must be introduced to the bank by another account holder. You must also be above 18 years of age. For documentation purposes, 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. You might be thinking, why so much of trouble, but the truth is that All these are safety measures for your money, just to ensure that accounts are not being opened in fictitious names to encash stolen cheques or for other fraudulent purposes.

Financial Planning:

We have so far, seen the various options available for depositing money in a bank. But how do we should go about the same according to our needs and convenience?

"Liquidity" is the word used when one discusses the ease with which a deposit can be encashed or converted to 'hard cash'.
One thing we must understand here is that Banks are moneylenders. They use our deposit money to lend to others who need it. So, 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 also 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 as 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.

So what should we do? 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. I know of a couple who were so eager and enthusiastic with their savings that they converted almost all of their savings into fixed deposits and buying land, that finally when time came for them to do the monthly shopping they found themselves stuck without money!
Thus 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 expenditure. 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. I.e. if you have a fixed deposit for one lakh, and suddenly for some reason, you urgently need money, the bank can give you a loan upto 75% of that amount, which is 75,000/-. 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.

Sit together with your spouse and draw up a money savings plan and review it every month, by accounting for all the major expenses and finding out cost-effective alternatives if any. Make it a point to save some money every month, even if the amount is only a few hundreds. Talk to the manager of your bank and ask him to guide you in financial planning if you have any doubts. All your efforts will not go unrewarded because a sensible savings plan will lead to a very secure and happy life.