Types of Deposits | Primary Functions of Commercial Banking
Banks mainly provides its products and service like many Types of Deposits to corporate, Business houses, institutions, and sometimes governments, which in turn boost GDP and Job Market. Commercial banks offer merchant services, commercial loans, global trade services, treasury services, and other corporate-oriented products like deposit products checking and savings accounts. Commercial banking or institutional banking plays very important role in economic growth of a country.
What are Commercial Banks?
The banks, which perform all kinds of banking business and generally finance, trade and commerce with corporate and Business houses are called Commercial Banks. Since In Commercial Banking, deposits are for a short period, these banks normally advance short-term loans to the businessmen and traders and avoid medium-term and long-term lending.
Functions of Commercial Banking
The commercial banks serve as the king pin of the financial system of the country.
Functions of Commercial Banks -Types Of Deposits
Time Deposits
These are deposits repayable after a certain fixed period. These deposits are not withdrawable by cheque, draft or by other means. It includes the following.
Fixed Deposits
The deposits can be withdrawn only after expiry of certain period say 7 years or 10 years. The banks allows a higher rate of interest depending upon the amount and period of time. Previously the rates of interest payable on fixed deposits were determined by Reserve Bank. Presently banks are permitted to offer interest as determined by each bank. Most banks offer FDs for tenure of 7 Days to 10 Years.
For very short Term Deposits, the interest rate is similar to that of Savings Account. Also Interest up to Rs 10,000 in Saving Account is Tax free. Most banks compound interest quarterly.
Banks offer Loan/Overdraft against the amount available in Fixed Deposit. The interest is generally 0.5% to 1% more than that offered to FD. There might be penalty for pre-mature withdrawal of Fixed Deposits. In times of urgent need for money, the bank allows premature closure of fixed deposits by paying interest at reduced rate. The Fixed Deposit Receipt cannot be transferred to other persons.
Recurring Deposits
In recurring deposit, the customer opens an account and deposit a certain sum of money every month. After a certain period, say 1 year or 3 years or 5 years, the accumulated amount along with interest is paid to the customer. The interest paid on such deposits is generally on cumulative basis. This deposit system is a useful mechanism for regular savers of money.
Cash Certificates
Cash certificates are issued to the public for a longer period of time. It attracts the people because its maturity value is in multiples of the sum invested. It is a very useful account for meeting future financial requirements at the occasion of marriage, education of children etc. Cash certificates are generally issued at discount to face value. It means a cash certificate of Rs. 1, 00,000 payable after 10 years can be purchased now, say for Rs. 25,000.
Demand Deposits
These are the deposits which may be withdrawn by the depositor at any time without previous notice. It is withdraw able by cheque/draft. It includes the following:-
Savings Deposits
The savings deposits can only be held by individuals and non-profit institutions. The rate of interest paid on savings deposits is lower than that of time deposits. The savings account holder gets the advantage of liquidity (as in current a/c) and small income in the form of interests. But there are some restrictions on withdrawals.
Corporate bodies and business firms are not allowed to open SB Accounts. While public sector banks offer 4 per cent interest on savings deposit, private players offer as much as 6 per cent.
In 2011, the central bank had decided to give freedom to commercial banks to fix savings bank deposit rates, the last bastion of the regulated interest-rate regime. While giving banks this freedom, RBI had said a uniform rate will have to be offered on deposits of up to Rs. 1 lakh.
On higher amounts, banks are allowed to offer differential rates to depositors.
On April 2016,Reserve Bank has asked banks to pay interest on savings banks account on quarterly basis or shorter duration.
Current Account Deposits
These accounts are maintained by the people who need to have a liquid balance.
Current account offers high liquidity. No interest is paid on current deposits and there are no restrictions on withdrawals from the current account. These accounts are generally in the case of business firms, institutions and cooperative bodies.
Nowadays, banks are designing and offering various investment schemes for deposit of money. These schemes vary from bank to bank. It may be stated that the banks are currently working out with different innovative schemes for deposits. Such deposit accounts offer better interest rate and at the same time withdrawable facility also. These schemes are mostly offered by foreign banks.
Key Takeaways
- Commercial Banks provide its services mainly to corporate, Business, institutions, and government.
- Commercial Banks offer merchant services, commercial loans, global trade services, treasury services, deposit and savings accounts and other corporate-oriented services.
- Commercial Banks offer deposits for a short term and provide short-term loans and avoid medium-term and long-term lending.
- Commercial Banks accepts deposits as a time deposits like Fixed Deposits, Recurring Deposits, Cash Certificates, and Demand Deposits like Savings Deposits Current Account Deposits
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