COMMERCIAL BANKING: TYPES OF ACCOUNTS

Introduction:  Banks and Banking institutions, of late, have been in the news for all the wrong reasons.   However, one cannot wish away the Banking industry and the services they render to society.   Banks are part and parcel of society, and perform within the overall limitations of the environment they function in.

In this article, we take a look at one of the basic services offered by Banks, namely, various Deposit accounts.   Banks in different countries offer variations of these type of accounts, and may carry different nomenclature.   What is discussed here, are three of the common varieties of accounts.

Current Account:  This is running account, usually opened and operated by businesses of various descriptions, although individuals with specific needs may also avail of this facility. 

Operations:  In this type of account, there is no restriction, as to the number of transactions, that can be put through in a day.   This account offers ease of operation, and convinience to conduct business transactions.   Cheques and other collection instruments may be deposited in this account for realization of proceeds.

Commercial Banks, normally, do not pay any interest on the balances lying in current accounts.   However, they may offer the facility of transferring the balances lying in this account, over and above the minimum required to maintain the account, to a seperate interest bearing deposit account.    That would not only help the customer take care of his business requirements, but also earn a little interest.

The balance lying in the current account can be withdrawn on demand, leaving aside the minimum required balance.   Under certain circumstances, Banks may allow the balance in the account fall below the required level also, in order to ensure that cheques drawn on such accounts are not returned unpaid for want of funds.   However, in such cases, Banks also levy a penalty in the account.

Savings Account:  Like a current account, a Savings Account is also a running account.   However, the profile of the Account holder and the nature of operations in this type of account are different.

Operations:  As the name of the account indicates, this account is meant for saving money, received either from salary, or other sources, periodically.   This account is not meant to carry out business transactions, though transactions like payment for utilities, etc, are permitted.

Banks may or may not stipulate a minimum balance required to be maintained in this account.    The minimum balance, where prescribed, is generally smaller than that prescribed for current accounts.    Further, there may be certain restrictions on the number of withdrawals or debits, especially in cash, that can be effected in this type of account, on a daily basis.   Savings account holders may also deposit cheques and other instruments in their account for realization of proceeds.

Normally Banks pay interest on the credit balances lying in the savings accounts, periodically.   Though the rate of interest paid is not very high, it is still an incentive for the general public to save.   Promoting the savings habit among members of the public is one of the major reasons for offering this facility.

Some Banks may also offer the facility of transferring the balance lying in the  savings account, over and above what is required to be maintained in the account, to a seperate deposit account, that carries a higher rate of interest.   That way the customer can maximize the returns on his savings.   This type of account caters to the largest cross section of society, taking care of their basic banking needs.

Fixed Deposit Accounts:  As the nomenclature indicates, this type of account is a deposit of money that is kept with the Bank for a specific tenure or period, say 90 days, or 180 days, or 1 year, and so on.   The tenure or period of the deposit is also called the ‘maturity’ of the deposit.

Operations:  Generally, fixed deposits fetch a higher rate of interest compared to other deposit accounts, because these deposits, as pointed out earlier, are kept with the Bank for a fixed period.   This allows the Bank to deploy the funds at its disposal,  more efficiently,  and to maximize its own returns from the market.   Hence, they offer a higher rate of interest on these type of deposits.

The fixed deposit accounts are subject to certain restrictions in regard to repayment etc.   Like they are  not repayable on demand.  However, Banks, rarely, if ever, refuse to repay a fixed deposit on demand, to the depositor.   But Banks do levy a penalty, by way of a reduction in the interest rate, for making payment of a fixed deposit before the completion of the term of the deposit.

This type of deposit is suitable for long term savings, to take care of periodic expenditure, or to make reinvestments etc., as per needs of the depositor.

Fixed Deposits are again divided into various types which will be discussed in a future article.