Unit 2: Bank deposit accounts

FIN203 — Commercial Banking 7 min read

Bank deposits are the funds the public places with a bank for safekeeping, convenience or return, and they form the primary raw material from which a commercial bank builds its loan book. In India they are governed by the Banking Regulation Act 1949, Reserve Bank of India (RBI) directions and the bank's own internal policy, and they appear on the liability side of the balance sheet because the bank owes the money back to the depositor.

Legal nature: a deposit creates a debtor–creditor relationship; the bank is the debtor and the customer the creditor, confirmed in Foley v. Hill (1848).
Core function: deposits supply low-cost loanable funds; interest paid on deposits is the bank's "cost of funds".
Classification axis: deposits split by withdrawal behaviour into demand liabilities (payable on demand) and time liabilities (payable after a term).
Regulatory anchors: Cash Reserve Ratio (CRR) and Statutory Liquidity Ratio (SLR) are computed on Net Demand and Time Liabilities (NDTL).
KYC backbone: every account rests on Know Your Customer norms under the Prevention of Money Laundering Act 2002.

II. Types of Deposit Accounts

The product range through which banks accept funds.

Deposit products differ by liquidity, interest and purpose, and each maps onto demand or time liabilities.

A. Current and savings accounts

Current account: a demand deposit for businesses with unlimited transactions and no interest, since the balance is volatile and used for working capital.
Savings account: a demand deposit for individuals and non-trading bodies, bearing modest interest and carrying transaction caps to discourage commercial use.
CASA ratio: the share of Current And Savings Accounts in total deposits; a high ratio lowers the bank's cost of funds because these balances pay little or no interest.

B. Term deposit accounts

A term deposit locks a lump sum for a fixed tenure at a contracted rate.

Fixed Deposit (FD): principal placed for a set period (7 days to 10 years); interest paid periodically or at maturity.
Recurring Deposit (RD): a fixed monthly instalment for a chosen tenure, suiting salaried savers.

Maturity value of an FD:

TEXT

A = P (1 + r/n)^(n t)
P = principal, r = annual rate (decimal),
n = compounding frequency per year, t = years

Worked example: ₹1,00,000 at 7% compounded quarterly for 2 years:

TEXT

A = 100000 (1 + 0.07/4)^(4 × 2)
  = 100000 (1.0175)^8 ≈ ₹1,14,888

Penalty rule: premature withdrawal typically attracts a 0.5–1% rate reduction.

C. Specialised and no-frills accounts

Basic Savings Bank Deposit Account (BSBDA): a zero-balance account for financial inclusion with free basic services.
Flexi/sweep deposit: balance above a threshold in a savings account auto-converts into FD, improving yield while keeping liquidity.

III. Strategies of Mobilizing Deposits

How banks attract and retain deposit balances.

Deposit mobilisation is the deliberate effort to raise the volume and stability of deposits at the lowest sustainable cost.

A. Product and pricing strategies

Rate differentiation: higher rates on longer tenures and senior-citizen slabs (usually +0.25% to +0.50%) draw sticky funds.
Bundling: linking salary accounts, lockers and insurance to the deposit relationship raises retention.

B. Reach and relationship strategies

Branch and channel expansion: new branches, business correspondents and mobile banking widen the catchment area.
Targeted campaigns: deposit drives, festival schemes and doorstep collection for RDs mobilise small savers.
Service quality: prompt redressal and digital convenience reduce attrition, protecting the deposit base.

IV. Common Guidelines of Opening and Operating Deposit Accounts

The procedural and conduct rules binding every account.

Opening and operation follow a standard compliance cycle so that identity, authority and legitimacy of funds are established and maintained.

A. Opening guidelines

KYC documentation: proof of identity and address (Aadhaar, PAN, passport) plus a recent photograph.
Account opening form and specimen signature: records the mandate and provides the signature benchmark for verification.
Introduction/verification: customer due diligence proportionate to risk, with enhanced diligence for high-risk profiles.
Capacity checks: special rules for minors, illiterate persons, partnerships, companies and trusts, where authority to operate must be evidenced.

B. Operating guidelines

Operating mandate: "either or survivor", "jointly", or "former or survivor" governs who may transact and claim.
Nomination: depositor names a nominee under the Banking Regulation Act so proceeds pass smoothly on death.
Dormant/inactive accounts: no customer-induced transaction for two years makes an account inoperative; balances unclaimed for ten years move to the RBI Depositor Education and Awareness (DEA) Fund.
Account closure and transfer: closed on request, death or regulatory direction, with portability of the balance.

V. Deposit Related Services

Ancillary facilities that make deposit accounts transactional.

Deposit accounts are the gateway to a cluster of payment and value-added services that deepen the customer relationship.

A. Payment and withdrawal services

Cheque facility: current and savings accounts receive cheque books for third-party payments.
Card services: debit and ATM cards allow cash withdrawal and point-of-sale payment against the balance.
Electronic transfers: NEFT, RTGS and IMPS move funds between accounts, RTGS being real-time for large value.

B. Convenience and value-added services

Standing instructions: the bank auto-executes recurring payments (loan EMIs, SIPs) from the account.
Passbook/e-statement and alerts: record of transactions and SMS/email confirmation of debits and credits.
Sweep and auto-renewal: idle savings sweep into term deposits; maturing FDs renew automatically unless instructed otherwise.
Locker linkage: safe-deposit lockers offered against a maintained relationship.

VI. Deposit Services Offered to Non-Resident Indians

Accounts tailored to NRIs under exchange-control rules.

NRI deposits are regulated by the Foreign Exchange Management Act 1999 (FEMA) and distinguished chiefly by currency, repatriability and tax treatment.

A. Rupee accounts

Two rupee-denominated schemes serve NRIs with opposite repatriation and tax features.

NRE (Non-Resident External) account: holds foreign earnings converted to rupees; both principal and interest are fully repatriable and interest is tax-free in India, but the balance carries exchange-rate risk.
NRO (Non-Resident Ordinary) account: holds income earned in India (rent, dividends); repatriation is capped (up to USD 1 million per financial year) and interest is taxable in India.

B. Foreign-currency accounts

FCNR(B) (Foreign Currency Non-Resident Bank) deposit: a term deposit held in a permitted foreign currency (e.g. USD, GBP) for 1–5 years, so the depositor bears no rupee exchange risk; principal and interest are fully repatriable.

C. Common NRI operating features

Eligibility: open to Non-Resident Indians and Persons of Indian Origin; status change on return requires redesignation to resident accounts.
Joint holding: NRE/FCNR may be held jointly with another NRI, or with a resident on "former or survivor" basis.

VII. Deposit Insurance

The safety net protecting small depositors against bank failure.

Deposit insurance guarantees repayment of deposits up to a ceiling if an insured bank fails, sustaining public confidence in the banking system.

A. Institutional framework

Insurer: the Deposit Insurance and Credit Guarantee Corporation (DICGC), a wholly-owned RBI subsidiary established in 1978.
Covered banks: commercial banks, local area banks, regional rural banks and cooperative banks are compulsorily insured.
Premium: paid by the bank, not the depositor, at a flat rate on assessable deposits (currently 12 paise per ₹100 per annum).

B. Scope and limit of cover

Coverage ceiling: up to ₹5,00,000 per depositor per bank, covering both principal and interest.
Aggregation rule: all accounts of one depositor in the same bank are added together and capped at the single ceiling, but holdings in different capacities (individual, as partner, as trustee) are insured separately.
Covered deposits: savings, current, recurring and fixed deposits; excluded are inter-bank deposits, government deposits and deposits of foreign governments.

C. Payment on failure

Trigger: cover crystallises when a bank's licence is cancelled, it is liquidated, or amalgamated, or placed under an RBI scheme.
Interim access: depositors of a bank under RBI directions can receive insured amounts within 90 days under the 2021 DICGC amendment, ensuring liquidity before final liquidation.
Significance: by guaranteeing the small deposit, insurance limits the risk of bank runs and protects the least-informed savers.