What is Deposit ? - Types, Features, Advantages of Deposit A/C

Contents :

Meaning and Features of Deposits.
Types of Deposit Account.
Advantages and Features of Saving Deposit Account.
Advantages and Features of Current Deposit Account.
Advantages and Features of Fixed Deposit Account.
Advantages and Features of Recurring Deposit Account.
Advantages and Features of Non-Resident Indians Account.
Difference Between Current Account and Savings Account.

What is Deposits ?

One of the important functions of the Bank is to accept deposits from the public for the purpose of lending. In banking, The terms "deposit" and "withdrawal" tend to obscure the economic substance and legal essence of transactions in a deposit account. From a legal and financial accounting standpoint, the term "deposit" is used by the banking industry in financial statements to describe the liability owed by the bank to its depositor and not the funds (whether cash or cheque) themselves, which are shown asset of the bank.

In fact, depositors are the major stakeholders of the Banking System. The depositors and their interests form the key are of the regulatory framework for banking in India and this has been enshrined in the Banking Regulation Act, 1949. The Reserve Bank of India is empowered to issue directives/advices on interest rates on deposits and other aspects regarding conduct of deposit accounts from time to time. With liberalization in the financial system and deregulation of interest rates, banks are now free to formulate deposit products within the broad guidelines issued by RBI.

Features of Deposits :

The important features of bank deposits are as follows :

The interest rate on fixed deposits varies with the term of the deposit. In general, it is lower for fixed deposits of shorter term and higher for fixed deposits of longer term.
If the deposit is less than 90 days, the interest is paid on maturity, otherwise it is paid quarterly.
Loans can be raised against bank deposits.
Bank deposits are fairly safe because banks are subject to control of the Reserve Bank of India with regard to several policy and operational parameters.
The rate of interest may change from time to time according to the rules of Reserve Bank of India.
There is a ceiling on the interest rate payable on deposits in the savings account.
Most banks calculate interest on the minimum deposit between the 10th and the last date of the month.
Bank deposits enjoy exceptionally high liquidity. They can be enhased prematurely by incurring a small penalty.

Types of Deposit Accounts :

Opening an account is the most common and the first service of the banking sector. There are different types of bank accounts in the Indian banking sector such as :

Savings Deposits Account
Current Deposit Account
Fixed Deposit Account
Recurring Deposit Account
Non-Resident Indians Accounts (NRI)

Savings Deposits Account :

A savings deposit account is an account provided by a bank for individuals to save money and earn interest on the cash held in the account. A savings account can be used to save money for specific expenses or for longer term undefined goals, all while earning interest on the money in the account.

Some restrictions are imposed on the depositor under this account. For example, he can withdraw only a specified sum of money in a week. Of course, the depositors are given cheque facility to withdraw money from this account. The rate of interest allowed on this account is rather low. This type of deposit account encourages small savings in the country.

Advantages of Saving Deposit Account :

The advantages of saving deposit account are :

Saving account encourages savings habit among salary earners and others who have fixed income.
It enables the depositor to earn income by way of interest.
It helps the depositor to make payment by way of cheques.
The bank offers number of services to the saving account holders.

Features of Saving Deposit Account :

Following are the features of saving deposit account :

The main objective of saving account is to promote savings.
There is no restriction on the number and amount of deposits.
Withdrawals are allowed subject to certain restrictions.
The money can be withdrawn either by cheque or withdrawal slip.
The rate of interest payable is very nominal on saving accounts. At present it is about 3.50% p.a in India.
Saving account is of continuing nature. There is no maximum period.
A minimum amount has to be kept on saving account.
No loan facility is provided against saving account.

Current Deposit Account :

The depositor can withdraw the money from his current account whenever he requires it. Generally speaking the bank grants no interest on this account because it has to keep the cash ready at all times to meet the requirements of the depositor. This account is generally opened by businessmen who may have to withdraw money several times a day. The bank, however, levies certain incidental charges on the customer for the services rendered by it. In technical language, it is known as demand deposit or checking deposit. The debtor (i.e., bank) has to pay off the debt on demand either to the depositor himself or to anyone else whom he authorizes by writing a cheque. The money represented by demand deposits is the debt of the bank. It is a liability for the bank but an asset for the depositor.

Advantages of Current Deposit Account :

The advantages of current deposit account are as follows :

Current account enables businessmen to conduct his business transactions smoothly.
The businessmen can withdraw any amount at any time from their current accounts. There are also no restrictions on withdrawals.
The businessmen can make direct payment to their creditors with the help of cheques.
The bank collects money on behalf of its customers and credits the same to their accounts.
Current account enables the account holder to obtain overdraft facility.
The creditors of the account bolder can get credit-worthiness information of the account holder through inter bank connection.
Current account facilitates the industrial progress of the country. Without the help of this account, businessmen would have difficulties in running their business.

Features of Current Deposit Account :

The main features of current deposit account are as follows :

The main objective of current bank account is to enable the businessmen to conduct their business transactions smoothly.
There is no restriction on the number and amount of deposits. There is also no restriction on the withdrawals.
Generally bank does not pay any interest on current account. Nowadays, some banks do pay interest on current accounts.
Current account is of continuing nature and as such there is no fixed period.

Fixed Deposit Account :

Money in this account is accepted for a fixed period, say, one, two or five years. The money so deposited cannot be withdrawn before the expiry of the fixed period. The rate of interest on this account is higher than that on other accounts. The longer the period, the higher is the rate of interest. In technical language, this type of deposit is known as time or term deposit. It matures at a definite date and entails an interest penalty if it is withdrawn earlier due to some emergency by the depositor.

Advantages of Fixed Deposit Account :

The advantages of fixed deposit account are as follows :

Fixed deposit encourages savings habit for a longer period of time.
Fixed deposit account enables the depositor to earn a high interest rate.
The depositor can get loan facility from the bank.
On maturity the amount can be used to make purchases of assets.
The bank can get the funds for a longer period of time.
The bank can lend such funds for short term loans to businessmen.
Fixed deposits indirectly boost economic development of the country.
The bank can also invest such funds in profitable areas.

Features of Fixed Deposit Account :

The main features of fixed deposit account are as follows :

The main purpose of fixed deposit account is to enable the individuals to earn a higher rate of interest on their surplus funds (extra money).
The amount can be deposited only once. For further such deposits, separate accounts need to be opened.
The period of fixed deposits range between 15 days to 10 years.
A high interest rate is paid on fixed deposits. The rate of interest may vary as per amount, period and from bank to bank.
Withdrawals are not allowed. However, in case of emergency, banks allow to close the fixed account prior to maturity date. In such cases, the bank deducts 1% (deduction percentage many vary) from the interest payable as on that date.
The depositor is given a fixed deposit receipt, which depositor has to produce at the time of maturity. The deposit can be renewed for a further period.

Recurring Deposit Account :

Recurring deposit account is generally opened for a purpose to be served at a future date. Generally this account is opened to finance pre-planned future purposes like, wedding expenses of daughter, purchase of costly items like land, luxury car, refrigerator or air conditioner, etc. Recurring deposit account is opened by those who want to save regularly for a certain period of time and earn a higher interest rate. In recurring deposit account certain fixed amount is accepted every month for a specified period and the total amount is repaid with interest at the end of the particular fixed period.

Advantages of Recurring Deposit Account :

The advantages of recurring deposit account are as follows :

Recurring deposit encourages regular savings habit among the people.
Recurring deposit account holder can get a loan facility.
The bank can utilize such funds for lending to businessmen.
The bank may also invest such funds in profitable areas.

Features of Recurring Deposit Account :

The main features of recurring deposit account are as follows :

The main objective of recurring deposit account is to develop regular savings habit among the public.
In India, minimum amount that can be deposited is Rs.10 at regular intervals.
The period of deposit is minimum six months and maximum ten years.
The rate of interest is higher.
No withdrawals are allowed. However, the bank may allow to close the account before the maturity period.
The bank provides the loan facility. The loan can be given up to 75% of the amount standing to the credit of the account holder.

Non-Resident Indians Accounts (NRI) :

Non-Resident bank accounts are those, which are maintained by Indian nationals and Persons of Indian origin resident abroad, foreign nationals and foreign companies in India. Bank branches can open ordinary non-resident accounts in the names of private individuals provided initial deposits for opening the accounts are received from abroad in an approved manner or the initial amount is tendered in foreign currency while on a visit to India or transfer of funds from the existing non-resident account of the same person. It is a savings account, which is ideal for Indians residing abroad.

Advantages of NRI Account :

There is no tax and no wealth tax.
The currency maintain in this account is in Indian rupees.
Funds can be easily transferred from NRI account.
Joint account facility is available with only NRI s.
Nomination facility is available with only NRI Indians.
Minimal Balance Requirement : You don’t need to maintain high balances in your NRI account.
NRIs choosing to park their funds in any fixed deposit account such as NRE FDs or FCNR enjoy substantial high returns on total deposits.
Facilitates investment in financial instruments.

Features of NRI Account :

Tax Benefit Interest earned not taxable in India.
Joint holding: With another NRI.
Low balance required: Minimum monthly account balance as low as 10,000 only.
Easy movement of funds: Funds in NRE account are fully & freely repatriable.
Beneficial interest rates: Interest rate calculated on daily closing balances at 4% per annum, Interest paid half-yearly in June and December.
Nomination Facility: You can add a nominee, must be family member or close relatives.
Mandate benefits: Free cheque book and ATM card for mandate holders.
NRE account can be opened by any NRI as Savings and Fixed Deposit Accounts.
The currency to be maintained is Indian Rupee and the interest earned on savings is not taxable.
Nomination is allowed and an NRI join account holder is permitted.
Best for paying bills and other expenses within the country.

Difference between Current Account and Savings Account :

Basis of Difference	Current Account	Savings Account
Meaning	Current account is maintained by businessman and other who have to do regular bank transaction.	Saving account is opened by individual for the purpose of saving a part of their income.
Purpose	The main purpose of opening a current account is to facilitate regular transactions.	The main purpose of opening a savings account is to save a part of the income.
Convenience	People do not have to go to a bank or ATM to access your current account.	People must go to a bank or ATM to excess your money.
Spending more than people have	If people need to borrow money from their current account they can do so in the form of an overdraft.	People cannot borrow money from a savings account.
Cost	The bank charges are high.	The bank charges are lower.
Access to Money	People can get to their money quickly and easily by writing cheques.	People may have to arrange beforehand to withdraw their money.
Operated by	Current account is operated by businessman and other organisations.	Saving account is operated by salary earners, small traders and others.
Minimum amount	To open current account more amount is required.	The savings account can be operated with lesser amount.
Interest	Some current accounts offer very low interest.	Interest on saving accounts is usually higher.