INSTITUTE OF MANAGMENT STUDIES, DAVV, INDORE

FINANCE AND ADMINISTRATION – SEMESTER IV

CREDIT MANAGEMENT AND RETAIL BANKING

LIABILITY PRODUCTS OF BANKS: VARIOUS DEPOSIT SCHEMES

SAVINGS BANK DEPOSIT SCHEME

Savings bank accounts inculcate the habit of saving among people. They meet their near future
needs and also earn some interest. The scheme is most suitable for service class people and for
those whose capacity to save is small. Due to increase in banking habits among the common people
Savings bank deposit of commercial banks have grown at a faster pace.
Savings bank account can be opened by:
- any individual either singly or in joint names,
- any minor of age 10 years can open and operate his own account subject to a stipulation of
maximum balance.
- any minor to be operated by natural guardian.
- JHF not engaged in trading and business activity.
RBI has prohibited the banks to open SB accounts in the name of:

- Trading firms (proprietary or partnership)

- A company or an association
- Government departments
- Bodies depending on budgetary allocation
- Municipal corporations
- Panchayat samitis
- State housing board/state housing co-operative societies
- Metropolitan development authorities

RBI has, however, allowed following institutions to open savings bank accounts:
- DRDA
- Khadi & Village Industry Board
- PACs financed by banks
- Small Farmer Development Agency (SFDA)
- Drought Prone Area Programme (DPAP)
- Integrated Tribal Development Agency
- Zila parishad/Gram panchayat in respect of funds released for implementation of rural
development/welfare programme and/or subsidy/margin money linked programme sponsored by
Government of India/State Government.
Minimum Balance
Depositors are required to maintain a minimum balance as prescribed by the banks. Banks have
introduced a practice of imposing service charge if minimum balance in the account is not maintained.

Payment of Interest
Interest was paid by the banks on the basis of minimum balance standing to the credit of
customers account between 10th and last day of the month at half yearly or yearly intervals. With
effect from 1.4.2010 banks are now paying interest on daily products basis. Rate of interest on
Savings bank has now been deregulated and banks are free to quote their own rate which is 4% for
major Public Sector banks. Minimum Interest paid is Rs.1/-. Now as per recent guidelines of RBI
banks are paying interest at quarterly rest.

Withdrawal of Money
The withdrawal of money from Savings bank account can be made by using a cheque or through a
withdrawal form. If the payment is sought by using withdrawal form it should invariably be
accompanied with the Pass Book. Banks also place some restrictions on number of withdrawal to
obviate operational difference with Current Account.

Pass Book
Pass Book is issued to each customer which contains the details of transactions made in the
account. As per recommendations of Goiporia Committee on customer service the Pass Book should
be updated on an on going basis and in legible hand writing. However, when it is not possible to
return the Pass Book immediately to the customer a paper token should be issued.

Overdraft in Savings Bank Account

Overdraft facility is not allowed in Savings Bank deposit account. In CBS banks system do not
allow processing of cheque if no funds are available and possibility of account coming in debit
balance is almost zero.

Inoperative Accounts
The account, which is not operated by a customer for a long time, is transferred to inoperative
account for convenience and with a view to checking the possibility of fraud in the account. All
accounts not operated after 10 years will be transferred to Unclaimed account, which will be used for
customer education.

Transfer of Accounts
Account can be transferred from one branch of the bank to another branch of the same bank.

Pensioners Account
Pensioner can open Saving Bank/Current account for credit of pension. The account in which
pension is credited can now be opened as joint account along with his spouse. The Pensioner cannot
give power of attorney in favour of other person to operate his account. However, RBI has permitted
banks with extension of facility of allowing issuance of cheque books / ATM to pensioners and
acceptance of standing instructions for transfer of funds from account of pensioner to other account.

Value added products – ATM cum debit card, credit card, personal internet banking, mobile
banking, Sweep for TDR.

'Basic Savings Bank Deposit Account' (BSBDA)

- All the existing ‘No-frills’ accounts opened pursuant to guidelines issued in 2005 as well as fresh
accounts should be treated as BSBDA. Accounts should enjoy additional facilities under the
reasonable pricing structure for value added services
- An individual is eligible to have only one 'Basic Savings Bank Deposit Account' in one bank.
- Holders of 'Basic Savings Bank Deposit Account' will not be eligible for opening any other savings
account in that bank. One can have Term/Fixed Deposit, Recurring Deposit etc., accounts in the bank
where one holds 'Basic Savings Bank Deposit Account'.
- BSBDA accounts are required to follow KYC guidelines issued from time to time, and these can also
be opened with simplified KYC norms.
- BSBDA-Small Accounts would be subject to the following conditions:
i. Total credits in such accounts should not exceed one lakh rupees in a year.
ii. Maximum balance in the account should not exceed fifty thousand rupees at any time
iii. The total of debits by way of cash withdrawals and transfers will not exceed ten thousand rupees in
a month
iv. Foreign remittances cannot be credited to Small Accounts without completing normal KYC
formalities
v. Small Accounts can only be opened at CBS linked branches of banks or at such branches where it
is possible to manually monitor the fulfillments of the conditions
- The services available free in the 'Basic Savings Bank Deposit Account’ will include deposit and
withdrawal of cash; receipt / credit of money through electronic payment channels or by means of
deposit / collection of cheques at bank branches as well as ATMs.
- There is no requirement for any initial deposit for opening a BSBDA.

CURRENT DEPOSIT SCHEME

A current account serves a purpose different from Saving Account. All money transactions either
for business or trade are routed through bank. It relieves the person of the responsibility of handling
cash thereby minimizing his risk through such accounts. Current Accounts are, therefore, more
suitable for traders, companies and institutions who need most of their entries to be routed through a
bank account.
Minimum Balance
Depositors are required to maintain minimum balance in the account, fixed differently for Rural,
Urban and Metro areas by different banks. In case of un remunerative accounts, banks recover some
incidental charges like Rs.10/- per folio used by the customer.
Payment of Interest
No interest is paid on the balance maintained by the customer. However, banks pay interest on
accounts maintained by RRB’s, sponsored by them. Banks are also permitted to pay interest on the
balance lying in current account of a deceased depositor from the date of death of the depositor till its
payment to legal heirs at the rate applicable to Savings Bank.
Operations in the account
All accounts are invariably operated by cheque books. There are no restrictions on the number of
cheques drawn on account. The customers are also provided with facility of collection of third party
cheques and cheques with endorsements. Overdraft facility can also be given in the current account
provided the customer is of good means and maintain the account satisfactorily.
Banks also open current accounts with RBI, SBI or other banks managing clearing house, or banks
with agency arrangement for local collection of cheques, or banks having Currency Chests.

Value added products – corporate internet banking, Power gain/ power pack accounts, pre-
sanctioned car loan for marketing of products
TERM DEPOSIT SCHEME
Under Term Deposit Scheme a customer keeps the money with the bank for a specified period.
The deposit is payable on the expiry of the period chosen by the customer as per his requirement. As
the customer part with his money for a reasonably long period (unlike demand deposits) banks do not
require to maintain cash for such deposits, a higher rate of interest is payable by the bank. Time
deposits constitutes more than 60% of deposits of ASCB (All Schedule Commercial Banks).
The deposits can be accepted from individuals in their sole name or in joint names operated in any
of the styles as under:
1. Both / All or survivor
2. Either or Survivor
3. Former / Later or survivor
When the account is payable to Both/ All or survivor, payment of deposit on maturity, or premature
payment of deposit or raising of loan permitted when all the depositors discharge the Term Deposit
Receipt.
In case of Either or Survivor, the TDR is payable to any one or the survivor if payment is requested
on maturity but if premature payment or loan is requested for, consent of all the depositors is
necessary.
In case of ‘Former or Survivor’, or ‘Later or Survivor’ as the case may be, Former/Later will have
full control over the deposit so long as he is alive and the survivor gets the right only after the death of
former/later. Therefore, former/later can obtain premature payment or raise loan even without the
consent of the survivor.
For amounts received by bank under the scheme, a Term Deposit Receipt (TDR) is issued. It
contains name/s, direction for payment at maturity (if joint account) period of deposit, date of deposit,
maturity date and maturity value.
TDR is not transferable.

Rate of Interest
Earlier, Reserve Bank of India used to regulate interest on TDRs which was binding on all the
banks.
Since 1992 Reserve Bank of India started policy of deregulating interest rates. With effect from
22nd April 1992 RBI permitted banks to prescribe their own rates for different maturity periods.
In July 1996 interest rates for deposits over one year were deregulated i.e. banks were free to
prescribe their rates for deposits for a period of more than one year.
In October 1997, all the ceilings were withdrawn by RBI and deposit rates were totally deregulated.
Banks are now free to quote their own interest rates for different maturity periods.
Earlier banks were required to quote fixed rate to all the customers irrespective of the size of
deposit for varying maturities. Since April 1998 banks can now offer higher rate of interest to
depositors having single deposits of Rs. 15 lac or more. However, the rates will have to be disclosed
in advance and are negotiable between banker and individual customer.

Payment of Interest
Interest can be paid on Term Deposit Quarterly, Half yearly or Yearly as per the request of the
depositor. Monthly interest can however, be paid at the request of the depositor but at the discounted
rate.
Period of Deposit
Minimum period for accepting term deposit is 7 days, maximum period is 10 years.

Premature Payment
Term Deposits are repayable on expiry of a fixed period (maturity date). However, banks allow
premature payment subject to following conditions stipulated by RBI:
(i) Rate of interest applicable for the period for which it remained with the bank will be determined.
(ii) Then the said rate may be reduced maximum by 1% if bank desires.

Loan against TDR

Loan can be availed against TDR by pledge of security of TDR. Margin ranges from 10 to 25%

Important Provisions of Income Tax

(i) Cash Payment of TDR

If the amount of TDR along with interest exceeds Rs.20,000/- cash payment should not be
allowed. The amount should be credited in the account or account payee cheque/ draft be issued in
favour of the customer (Sec.269 of Income Tax Act 1961). The official violating the provisions is liable
for fine equal to the amount of TDR or 2 years imprisonment or both.
(ii) Tax Deduction at source
As per Sec. 194 A of Income Tax Act 1961 in case of time deposits, at the time of payment/credit
of interest income to the account of payee or any account called as interest payable account or
suspense account or to any other account under any name in the books of bank shall be deemed to
be payment of interest to payee and TDS will have to be made if this amount exceeds Rs.10000/- or
as per rate prescribed by Tax authorities from time to time.
However if a person furnishes a declaration on form 15 G/ 15 H tax may not be deducted.

Value added products – Unitized break up of TDR, Loan/ overdraft, linking account with MOD

SPECIAL TERM DEPOSIT SCHEME/ REINVESTMENT SCHEME

When the deposits are accepted with the benefits of reinvestment of interest till maturity it is known
as Special Term Deposit or Reinvestment Scheme. The interest is not paid to the customer in
between as in case of TDR. The Interest is compounded at Quarterly rest. The maturity amount is
incorporated in the receipt itself.
Minimum period for which deposit can be accepted is 6 months and maximum period is 10 years.
All other provisions of term deposit scheme are applicable to special Term Deposit Scheme also.

RECURRING DEPOSIT SCHEME

Recurring Deposit accounts are intended to inculcate the habit of saving on a regular basis by
offering a higher rate of return then Savings Bank. According to directives of Reserve Bank of India,
banks are required to ensure that the rates of interest offered on Recurring Deposits are generally in
accordance with the rates prescribed by them for their Time Deposit Scheme. The rate of interest for
Recurring Deposits are, therefore, generally same as that of their other Time Deposits in almost every
bank.
Recurring Deposits can be opened by selecting a definite amount and the period for which it will be
opened. The amount once chosen is not allowed to be altered. Period for a Recurring Deposit may be
from 6 months to 10 years.
Installments paid on any day during the month are treated as installment for that month. However,
maturity amount will be paid one month after the last installment has been paid or on the expiry of the
period for which the deposits was accepted, whichever occurs later. If the depositor fails to pay the
installments regularly some penalty is imposed by the banks.
The depositor can give standing instructions for transfer of monthly installments from his Saving
Bank account to his Recurring Deposit account.
In case premature payment of Recurring deposits, interest is paid at 1% below the rate of interest
applicable to the Recurring Deposit for the period it has actually run.
Loan facility is also available against Recurring Deposits.

Value added products – variable amount up to maximum 10 times of core amount per month

TAX SAVING TERM DEPOSIT SCHEME

The scheme has been launched for enabling the depositors to avail exemptions of Capital Gains
Tax under Section 54EB of Income Tax Act, 1961 issued by Central Board of Direct Taxes.
All Income Tax assesses, Resident/Non-resident/Not ordinary Resident assesses, Individual,
Hindu Undivided families (HUF), companies, firms, association of persons, body of individuals, or
Artificial Juridical persons, who have capital gains taxable in India and who may like to deposit their
capital gains for longer duration to avail the benefit of capital gains tax exemption.
The period of deposit should be 7 years to avail of exemption from tax in respect of long term
capital gains. An undertaking is required to be executed by the customer to abide by the
provisions/rules of Sec. 54EB of Income Tax Act, 1961 that no advance against the deposit will be
granted and premature payment will be permitted only on production of a specified authority letter
from the Income Tax Officer having jurisdiction and on the terms mentioned in the letter of authority.
Depositors Permanent Account number issued by the Income Tax authority will also be recorded
on the account opening form and TD/STD receipt.
Term Deposit and Special Term Deposit can only be made under the scheme.
The deposits can not be transferred from one branch to another branch.
Usual Nomination/cancellation of nomination/change of nomination facility is available under the
scheme.
The interest on the deposits would be subject to Tax Deduction at source (TDS), as per provisions
of Income Tax Act.

Scheme of Tax saving is also available for availing benefit under Income tax. Maximum benefit is
available upto Rs.150,000/- inclusive of all other permissible deductions under section 80C. Period of
Fixed deposit is 5 years. Premature payment is not allowed. No loan can be granted against such
fixed deposit.
MULTIPLE OPTION DEPOSIT SCHEME
The scheme has been launched in order to provide flexibility in operations of the deposit account to
meet out challenges imposed by private banks and foreign banks. The scheme is operative in
computerized branches only.
The scheme offers facility of linking the customer’s TD/STD account with Savings Bank/Current
account, with running facility of withdrawal of cash or issuing cheques against TDR/STDR.

Mode of operation in account

The principal amount would be accepted as TDR/STDR at the contracted rate and all the normal
rules governing these deposits will be applicable. A cheque book will be issued on his savings bank
account/current account for withdrawing the amount including against Term Deposit.
When a cheque is received in Savings Bank account for payment exceeding the balance available
(and in excess of minimum balance prescribed) amount will be transferred from the TD/STD in
multiples of agreed amount by effecting premature payment of TDR/STDR. When a cheque is
received in Current Deposit account overdraft facility will be allowed.

Prepared by :
Arvind Paranjape, M.Sc., CAIIB
paranjape.arvind@yahoo.com
9425067026