Banking – Summary Notes

 Bank: A bank is an constitution which carries on the business of depositing and lending
money.
 Functions of a Bank: The main functions of a bank are:
 Receiving money for deposits and paying interest on them.
 Lending money to the borrowers and receiving interest on it.
 Transferring money from one place to another.
 Advance of loans.
 Receiving payments for public utility services such as electricity bills, telephone bills,
insurance bills, water bills, tuition fee bills of the children, etc.
 Collection of taxes such as income tax, sales tax, house tax, etc.
 Buying and selling security bonds.
 To Open a Bank Account: For opening a bank account, we have to fill up a prescribed
application form provided by the bank. On the application form out specimen signature is
obtained and kept in a safe custody of the bank. For opening the account, we have to deposit
an initial nominal amount fixed by the bank. For withdrawal, we are issued withdrawal form
or a cheque book or an ATM card, and for depositing money we are provided pay-in-slip to
fill up the requisite amount to be deposited.
 Cheque: A cheque is a printed proforma issued by a bank. If is an unconditional order to the
bank and is always payable on demand.
Cheques are usually of three types:
 Bearer Cheque: The payment of a bearer cheque is to be made to anyone who presents the
cheque irrespective of the name written on the cheque.
 Order Cheque: The payment of an order cheque is to be made to only to the person whose
name is written on the cheque.
 Crossed Cheque: The payment of a crossed cheque cannot be encashed personally. It is to
be deposited in the payee’s account only. A cheque is crossed by drawing two parallel lines.
“A/c payee only” is written between the parallel lines.
 Pass book: When a person opens a bank account, a small book is provided just to keep the
details of amount deposited/withdrawn and balance amount date-wise. The general format of
a bank passbook is as follows:
Date Particulars Withdrawals Rs. Deposits Rs. Balance Rs. Initial Rs. P
P P P

 Banks encourage people to deposit their savings in the following types of different accounts:

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 Savings Bank Account: A Savings Bank Account is the most popular saving scheme
offered by the banks. It can be opened in a bank by any person to fill an application form
and get himself/herself introduced to the bank through someone who has such an account
in the bank. The account holder can thereafter deposit into or withdraw from his/her
account whenever required.
Features of the Savings Bank Accounts:
(i) A person can open a Savings Bank Account with an initial nominal amount fixed by
the bank.
(ii) Money can be withdrawn by withdrawal form only.
(iii) The bank pays a certain rate of interest on the money kept in the bank which keeps
changing time to time and compounded yearly or half-yearly.
(iv) A passbook issued to the depositor shows the date-wise deposits, withdrawals, interest
earned and balance amount.
Computation of Interest on Savings Bank Account: To calculate the interest on a
savings account proceed as under:
(i) Interest for the month is calculated on the minimum balance from the 10th day and the
last day of the month.
(ii) Convert the minimum balance of each month as a multiple of Rs. 10.
(iii) Add all these balances.
(iv) Find the simple interest on this sum for one month.
(v) If interest is less than Rs. 1, neglect it.
(vi) No interest is paid for the month in which the account is closed.
 Fixed Deposits or Term Deposits Accounts: Money is deposited for a fixed perios in
this scheme which can be withdrawn after the expiry of the fixed period. Higher rates of
interest are usually offered by the bank on such deposits depending on the period of
deposits.
 Recurring Deposits or Cumulative Deposits
Accounts: In this scheme, a specified amount is deposited in the account every month for
a fixed period chosen by the depositor in the beginning. Almost the same rate of interest
paid is recurring deposits as in case of fixed deposits. After the expiry of the fixed period
(maturity period), a lump sum amount is paid to the depositor.
 Current Deposits Accounts: The current account is maintained by companies,
government agencies, businessman, etc., who need to do a lot of money transactions daily.
There is no restrictions on the number of withdrawals in the current account. Normally,
there are restrictions in case of savings bank account. Moreover, no interest is paid for the
money deposited in this account.
 Recurring (or cumulative) Deposit Account: To boost the savings among the people of
small and middle income groups there are recurring (or cumulative) time deposit schemes
in banks and post offices. Under this scheme, an investor deposits a fixed amount (in
multiples of Rs. 5) every month for a specified number of months (usually, in multiples

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 of 3). On expiry of this period (called maturity period), he gets the amount deposited by
him together with the interest (usually, compounded quarterly at a fixed rate) due to him.
The amount received by the investor on the expiry of the specified period is called
maturity value.
 Calculation of Interest on Recurring Deposit:
Calculation of interest on a recurring deposit is cumbersome and time consuming work. To
overcome this difficulty, a printed table, called maturity value table, showing the amount (in
multiples of Rs. 5) of monthly instalments deposited and the number of months (in multiples
of 3) for which the instalments are deposited and the maturity value, is available with every
bank and post office. These tables are revised from time to time depending on the rate of
interest. One such table is given on the next page showing the maturity value of an RD/CD
with Rs. 100 per month for various periods (in multiples of 3 months) at various interest rates
(compound quarterly).
 Calculation of Recurring Deposits Using Formulae
(i) Total principal for one month,
 n  n  1 
P  x 
 2 
Where x  monthly instalments (MI), and n  number of months.
r 1
(ii) Total interest, I  P  
100 12
Where r  rate % p.a.
(iii) Amount deposited in n instalments  Rs.  x  n 
(iv) Total amount on maturity  Rs. x  n  totalinterest
Maturity value = Deposited sum + Interest
 xn  I
 n  n  1 r 1
 x  n  x    
 2 100 12 

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