FINANCIAL SERVICES

BANKING PRODUCTS

By Nadya Narsidani
BANKING PRODUCTS
Time Deposits

When money is deposited with a “tenure” , it cannot be withdrawn before its

maturity fixed at a particular time. Such deposits are called “Time deposits” or
“Term deposits”. The most common example of Time deposits is “Fixed Deposit”.
All time deposits are eligible for interest payments. Interest rate depends upon the
tenure and amount of deposit. This rate varies from bank to bank. The interest rate
is generally higher for time deposits of longer tenure. On the basis of their nature,
time deposits may be of three types as follows:

Fixed deposits A fixed rate of interest is paid at fixed, regular intervals

Re-investment deposits Interest is compounded quarterly and paid on maturity,

along with the principal amount of the deposit. In the Flexi Deposits amount in
savings deposit accounts beyond a fixed limit is automatically converted into term
deposits.
Recurring deposits

Fixed amount is deposited at regular intervals for a fixed term and the repayment
of principal and accumulated interest is made at the end of the term. These
deposits are usually targeted at persons who are salaried or receive other regular
income. A Recurring Deposit can usually be opened for any period from 6 months
to 120 months. Further, banks also provide a combination of demand and time
deposits in the form of various products. Examples of such products include
Recurring Deposits, Flexible RDs, Multiplier FDs, Special Term deposit accounts
etc.

Demand deposits

If the funds deposited can be withdrawn by the customer (depositor / account

holder) at any time without any advanced notice to banks; it is called demand
deposit. One can withdraw the funds from these accounts any time by issuing
cheque, using ATM or withdrawal forms at the bank branches. The money as
demand deposit is liquid and can be encashed at any time. The ownership of
demand deposits can be transferred from one person to another via cheques or
electronic transfers. There is no fixed term to maturity for Demand Deposits. The
demand deposits may or may not pay interest to the depositor. For example, while
we get an interest on savings accounts; no interest is paid on current accounts. As
mentioned above, there are two types of demand deposits viz. savings accounts
and current accounts.

Current Account

A current account is always a Demand Deposit and the bank is obliged to pay the
money on demand. The Current accounts bear no interest and they account for the
smallest fraction among the current, saving and term deposits. They provide the
convenient operation facility to the individual / firm. The cost to maintain the
accounts is high and banks ask the customers to keep a minimum balance.
Savings Accounts: Savings deposits are subject to restrictions on the number of
withdrawals as well as on the amounts of withdrawals during any specified period.
Further, minimum balances may be prescribed in order to offset the cost of
maintaining and servicing such deposits. Savings deposits are deposits that accrue
interest at a fixed rate set by the commercial banks.

CASA Deposits CASA Deposits refers to Current Account Saving Account

Deposits. As an aggregate the CASA deposits are low interest deposits for the
Banks compared to other types of the deposits. So banks tend to increase the
CASA deposits and for this they offer various services such as salary accounts to
companies, and encouraging merchants to open current accounts, and use their
cash-management facilities. The Bank is High CASA ratio (CASA deposits as %
of total deposits) are in a more comfortable position than the Banks with low
CASA ratios , which are more dependent on term deposits for their funding, and
are vulnerable to interest rate shocks in the economy, plus lower spread they earn.
NRO, NE(E)RA and FCNA(A) Accounts There are several kinds of accounts
available for non resident Indians , Persons of Indian Origin and Overseas Citizens
of India. They are as follows:
Non Resident Ordinary Accounts: (NRO): Any person resident outside of India
can open this account. Normally, when a resident becomes a non resident, his
domestic rupee account gets converted into the NRO account. This helps the NRI
to get his credits which accrue in India, for example rent or interest from
investments.
Non-Resident (External) Rupee Account: (NR(E)RA This account was introduced
as NRE scheme in 1970. It’s a Rupee account and the NRI can remit money to
India from the funds abroad. This means that depositor is exposed to the Currency
rates risk.
Foreign Currency Non-Resident Account: (FCNR) Foreign Currency Non-
Resident Account Bank or FCNR (B) was first introduced in 1993. It replaced the
existing FCNR (A) scheme. This account is opened by the NRIs in 6 designated
currencies as follows: US Dollar (USD) Great Britain Pound (GBP) Euro (EUR)
Japanese Yen (JPY) Canadian Dollar (CAD) Australian Dollar (AUD)
Please note that FCNR account is opened ONLY in the form of Term Deposits
and NOT in the form of Demand Deposits. The term is from 1 year to 5 years.
Repatriation of the principal and interest is allowed for repatriation after
maturity. Interest is paid on maturity, in the same currency of the deposit. For
deposits of tenure up to one year simple interest is paid and for deposits of tenure
beyond one year the interest is compounded at half yearly rests. The maturity
proceeds inclusive of interest is fully repatriable. The banks may decide the
interest rates after approval from RBI and within the limits fixed by RBI. If a
person has NRE account and wishes to transfer to FCNR, it is permissible
without prior approval of the RBI.

Deposit Insurance in India In India, the bank deposits are covered under the
insurance scheme provided by DICGC. When a bank covered by DICGC fails,
or undergoes liquidation or is merged with another bank; the DICGC pays the
amount due to depositors via the officially appointed liquidator in a time bound
manner.
BANKING SERVICES
In the modern world, banks offer the variety of services to attract customers,
However, some basic modern services offered by the banks are discussed below:

1. Advancing of Loans Banks are profit oriented business organizations. So they

have to advance loan to the public and generate interest from them as profit. After
keeping certain cash reserves, banks provide short-term, medium-term and long-
term loans to needy borrowers.

2. Overdraft Sometimes, the bank provides overdraft facilities to its customers

through which they are allowed to withdraw more than their deposits. Interest is
charged from the customers on the overdrawn amount.

3. Discounting of Bills of Exchange This is another popular type of lending by the

modern banks. Through this method, a holder of a bill of exchange can get it
discounted by the bank, in a bill of exchange, the debtor accepts the bill drawn
upon him by the creditor (i.e., holder of the bill) and agrees to pay the amount
mentioned on maturity. After making some marginal deductions (in the form of
commission), the bank pays the value of the bill to the holder. When the bill of
exchange matures, the bank gets its payment from the party, which had accepted
the bill.

4. Cheque Payment Banks provide cheque pads to the account holders. Account
holders can draw cheque upon the bank to pay money. Banks pay for cheques of
customers after formal verification and official procedures.

5. Collection and Payment Of Credit Instruments In modern business, different

types of credit instruments such as the bill of exchange, promissory notes, cheques
etc. are used. Banks deal with such instruments. Modern banks collect and pay
different types of credit instruments as the representative of the customers.

6. Foreign Currency Exchange Banks deal with foreign currencies. As the

requirement of customers, banks exchange foreign currencies with local currencies,
which is essential to settle down the dues in the international trade.
7. Consultancy Modern commercial banks are large organizations. They can expand their
function to consultancy business. In this function, banks hire financial, legal and market
experts who provide advice to customers in regarding investment, industry, trade, income, tax
etc.

8. Bank Guarantee Customers are provided the facility of bank guarantee by modern
commercial banks. When customers have to deposit certain fund in governmental offices or
courts for a specific purpose, a bank can present itself as the guarantee for the customer,
instead of depositing fund by customers.

9. Remittance of Funds Banks help their customers in transferring funds from one place to
another through cheques, drafts, etc.

10. Credit cards A credit card is cards that allow their holders to make purchases of goods and
services in exchange for the credit card’s provider immediately paying for the goods or
service, and the card holder promising to pay back the amount of the purchase to the card
provider over a period of time, and with interest.

11. ATMs Services ATMs replace human bank tellers in performing basic banking functions
such as deposits, withdrawals, account inquiries. Key advantages of
ATMs include:  24-hour availability  Elimination of labor cost  Convenience of
location

12. Debit cards Debit cards are used to electronically withdraw funds directly from the
cardholders’ accounts. Most debit cards require a Personal Identification Number (PIN)
to be used to verify the transaction.

13. Home banking Home banking is the process of completing the financial transaction
from one’s own home as opposed to utilizing a branch of a bank. It includes actions such
as making account inquiries, transferring money, paying bills, applying for loans,
directing deposits.

14. Online banking Online banking is a service offered by banks that allows account
holders to access their account data via the internet. Online banking is also known as
“Internet banking” or “Web banking.” Online banking through traditional banks enable
customers to perform all routine transactions, such as account transfers, balance
inquiries, bill payments, and stop-payment requests, and some even offer online loan
and credit card applications. Account information can be accessed anytime, day or night,
and can be done from anywhere.
15. Mobile Banking Mobile banking (also known as M-Banking) is a term used for
performing balance checks, account transactions, payments, credit applications and
other banking transactions through a mobile device such as a mobile phone or
Personal Digital Assistant (PDA),
16. Accepting Deposit Accepting deposit from savers or account holders is the
primary function of a bank. Banks accept deposit from those who can save money
but cannot utilize in profitable sectors. People prefer to deposit their savings in a
bank because by doing so, they earn interest.
17. Priority banking Priority banking can include a number of various services, but
some of the popular ones include free checking, online bill pay, financial
consultation, and information.
18. Private banking Personalized financial and banking services that are
traditionally offered to a bank’s rich, high net worth individuals (HNWIs). For
wealth management purposes, HNWIs have accrued far more wealth than the
average person, and therefore have the means to access a larger variety of
conventional and alternative investments. Private Banks aim to match such
individuals with the most appropriate options.