Introduction to Bank Deposits
One of the most important functions of any commercial bank is to accept deposits from the public, basically for the purpose of lending. Deposits from the public are the principal sources of funds for banks.
Bank Deposit Accounts
Financial intermediation by commercial banks has played a key role in India in supporting the economic growth process. An efficient financial intermediation process has two components: effective mobilization of savings and their allocation to the most productive uses. In this chapter, we will discuss one part of the financial intermediation by banks: mobilization of savings. When banks mobilize savings, they do it in the form of deposits, which are the money accepted by banks from customers to be held under stipulated terms and conditions. Deposits are thus an instrument of savings. Since the first episode of bank nationalization in 1969, banks have been at the core of the financial intermediation process in India. They have mobilized a sizeable share of savings of the household sector, the major surplus sector of the economy. This in turn has raised the financial savings of the household sector and hence the overall savings rate. Notwithstanding the liberalization of the financial sector and increased competition from various other saving instruments, bank deposits continue to be the dominant instrument of savings in India.
Types of Deposit Accounts
The bank deposits can also be classified into (i) demand deposits and (b) time deposits.
- Demand deposits are defined as deposits payable on demand through cheque or otherwise. Demand deposits serve as a medium of exchange, for their ownership can be transferred from one person to another through cheques and clearing arrangements provided by banks. They have no fixed term to maturity.
- Time deposits are defined as those deposits which are not payable on demand and on which cheques cannot be drawn. They have a fixed term to maturity. A certificate of deposit (CD), for example, is a time deposit.
Demand and time deposits are two broad categories of deposits. Note that these are only categories of deposits; there are no deposit accounts available in the banks by the names 'demand deposits' or 'time deposits'. Different deposit accounts offered by a bank, depending on their characteristics, fall into one of these two categories. There are several deposit accounts offered by banks in India; but they can be classified into three main categories:
- Current account
- Savings bank account
- Term deposit account
Current account deposits fall entirely under the demand-deposit category and term deposit account falls entirely under time deposit. Savings bank accounts have both demand-deposit and time-deposit components. In other words, some parts of savings deposits are considered demand deposits and the rest as time deposits. We provide below the broad terms and conditions governing the conduct of current, savings and term-deposit accounts.
Current Account Deposits
A current account is a form of demand-deposit, as the banker is obliged to repay these liabilities on demand from the customer. Withdrawals from current accounts are allowed any number of times depending upon the balance in the account or up to a particular agreed amount. Current deposits are non-interest bearing. Among the three broad categories of deposits--current account deposit, savings accounts deposit and term deposits--current account deposits account for the smallest fraction.
A current account is basically a running and actively operated account with very little restriction on the number and amount of drawings. The primary objective of a current account is to provide convenient operation facility to the customer, via continuous liquidity.
On account of the high cost of maintaining such accounts, banks do not pay any interest on such deposits. In addition, many banks insist on customers maintaining minimum balances to offset the transaction costs involved. If minimum balances are not maintained, these banks charge the customers a certain amount.
Current accounts can be opened by rich individuals/ partnership firms/ private and limited companies/ Hindu Undivided Families (HUFs)/ societies/ trusts, etc.
Savings Bank Deposits
Savings deposits are a form of demand deposits, which is 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 RBI (3.5 percent as of January 2010).
Savings bank accounts are used by a large segment of small depositors as they can put their regular incomes into these accounts, withdraw the money on demand and also earn interest on the balance left in the account.
The flexibility provided by such a product means that savings bank accounts cannot be opened by big trading or business firms. Similarly, institutions such as government departments and bodies, local authorities, etc. cannot open savings bank accounts. Savings account deposits together with current account deposits are called CASA deposits.
From a bank's viewpoint, CASA deposits (Current Account and Savings Account deposits) are low-cost deposits, as compared to other types of deposits. Current account is non- interest bearing, while interest payable on savings accounts is very low (currently 3.5 percent). To be competitive, it is important for banks to garner as much low-cost deposits as possible, because by doing so banks can control the cost of raising deposits and hence can lend at more competitive rates. The methods used by banks to mobilize CASA deposits include offering salary accounts to companies, and encouraging merchants to open current accounts, and use their cash-management facilities.
Banks with low CASA ratios (CASA deposits as % of total deposits) are more dependent on term deposits for their funding, and are vulnerable to interest rate shocks in the economy, besides the lower spread they earn. (As discussed above, banks earn profit on the spread between their deposit and loans rates.)
A "Term deposit" is a deposit received by the Bank for a fixed period, after which it can be withdrawn. Term deposits include deposits such as Fixed Deposits / Reinvestment deposits/ Recurring Deposits etc. The term deposits account for the largest share and have remained within the range of 61% to 67% of total deposits in the recent years.
Interest is paid on term-deposits, either on maturity or at stipulated intervals depending upon the deposit scheme under which the money is placed. Also, a customer can earn interest on a term-deposit for a minimum period of 7 days. Interest rates on term-deposits are usually higher than on savings deposits. Term deposits include: Fixed deposits on which a fixed rate of interest is paid at fixed, regular intervals.
Strategies of mobilizing deposits
To maximize their profits, commercial banks always attempt to mobilize savings at the lowest cost possible. While mobilizing deposits, banks have to comply with various directives issued by the RBI, the Indian Bank Association (IBA), Government of India and other statutory authorities/agencies. At the same time, since banks operate in a very competitive environment, they have to reach out to a wide spectrum of customers and also offer deposit products that lead to higher customer satisfaction.
Banks devise various strategies to expand the customer base and reducing the cost of raising deposits. This is done by identifying target markets, designing the products as per the requirements for customers, taking measures for marketing and promoting the deposit products. It is essential not only to expand the customer base but also to retain it. This is done by providing counselling, after-sales information and also through prompt handling of customer complaints.
While the strategies for mobilizing bank deposits vary from bank to bank, one common feature is to maximize the share of CASA deposits. The other common features generally observed are as follows:
- Staff members posted at branches are adequately trained to offer efficient and courteous service to the customers and to educate them about their rights and obligations.
- A bank often offers personalized banking relationship for its high-value customers by appointing Customer Relationship Managers (CRMs).
- Senior citizens/pensioners have become an important category of customers to be targeted by a bank. Products are developed by banks to meet the specific requirements of this group.
- While banks endeavour to provide services to the satisfaction of customers, they put in place an expeditious mechanism to redress the complaints of the customers.
Common Guidelines of Opening and Operating Deposit Accounts
To open and operate a bank account, the following guidelines need to be followed.
Due Diligence Process: A bank before opening any deposit account has to carry out due diligence as required under "Know Your Customer" (KYC) guidelines issued by RBI and or such other norms or procedures adopted by the bank. The 'due diligence' process, while opening a deposit account, involves the bank having adequate knowledge of the person's identity, occupation, sources of income, and location. Obtaining an introduction of the prospective depositor from a person acceptable to the bank, obtaining recent photographs of people opening/ operating the account are part of the due diligence process. For customers providing proof of identification and address, there is no need for personal introduction to the bank for opening of a new savings bank account. To promote financial inclusion in rural areas / tribal areas, KYC norms have been relaxed for below the poverty line (BPL) families.
Minimum Balance: For deposit products like a savings bank account or a current account, banks normally stipulate certain minimum balances to be maintained as part of terms and conditions governing operation of such accounts. But for people below the poverty line, banks encourage the opening of 'No-frills Accounts', typically a special savings bank account where no minimum balance requirement is required. For a savings bank account, the bank may also place restrictions on number of transactions, cash withdrawals, etc., during a given period.
Transparency: Failure to maintain minimum balance in the accounts, where applicable, will attract levy of charges as specified by the bank from time to time. Similarly, the bank may specify charges for issue of cheques books, additional statement of accounts, duplicate passbook, folio charges, etc. All such details regarding terms and conditions for operation of the accounts and schedule of charges for various services provided should be communicated to the prospective depositor while opening the account for the sake of transparency.
Evolving Trends in Modern Banking
There are a number of trends evolving in modern banking, the most important of which relate to
- outsourcing of services and
- financial inclusion
Banks in India have started using technology in a proactive manner. The huge number of bank customers and their myriad needs are being met in increasingly sophisticated ways. In a number of areas, the foreign banks and the new private sector banks have been the first movers in the application of technology, but public sector banks are also catching up. One major advantage that Indian banks have is the availability of major IT companies in India who are the world leaders in IT applications.
Through its website, a bank may offer its customers online access to account information and payment and fund transfer facilities. The range of services offered differs from bank to bank depending mainly on the type and size of the bank. Internet banking is changing the banking industry and affecting banking relationships in a major way.
Examples of Online Payment Services offered by some banks
- Shopping Online: One can shop securely online with the existing debit/credit card. This can also be done without revealing the customer's card number.
- Prepaid Mobile Refill: A bank's account holder can recharge his prepaid mobile phone with this service.
- Bill Pay: A customer can pay his telephone, electricity and mobile phone bills through the Internet, ATMs, mobile phone and telephone.
- Register &Pay: One can view and pay various mobile, telephone, electricity bills and insurance premiums on-line. After registering, customers can get sms and e-mail alerts every time a bill is received.
- RTGS Fund Transfer: RTGS is an inter-bank funds transfer system, where funds are transferred as and when the transactions are triggered (i.e. real time).
- Online Payment of Taxes: A customer can pay various taxes online including Excise and Service Tax, Direct Tax etc.
Mobile Banking TransactionsSome banks have started offering mobile banking and telebanking to customers. The expansion in the use and geographical reach of mobile phones has created new opportunities for banks to use this mode for banking transactions and also provide an opportunity to extend banking facilities to the hitherto excluded sections of the society. The RBI has adopted Bank Lead Model in which mobile phone banking is promoted through business correspondents of banks. The operative guidelines for banks on Mobile Banking Transactions in India were issued on October 8, 2008. Only banks who have received one-time approval from the RBI are permitted to provide this facility to customers.
Mobile Banking in India - Till June 30, 2009, 32 banks had been granted permission to operate Mobile Banking in India, of which 7 belonged to the State Bank Group, 12 to nationalised banks and 13 to private/ foreign banks. Source: Report on Trends and Progress of Banking in India 2008-09, RBI.
Point of Sale (PoS) Terminals - To use smart cards/debit cards/credit cards for the purchase of an item or for payment of a service at a merchant's store, the card has to be swiped in a terminal (known as Point of Sale or POS terminal) kept at the merchant's store. As soon as the card is put on the terminal, the details of the card are transmitted through dial-up or leased lines to a host computer. On verification of the genuineness of the card, the transaction is authorised and concluded. It is thus a means to 'check out' whether the cardholder is authorized to make a transaction using the card. POS terminal is a relatively new concept.
A Point of Sale (PoS) terminal is an integrated PC-based device, with a monitor (CRT), PoS keyboard, PoS printer, Customer Display, Magnetic Swipe Reader and an electronic cash drawer all rolled into one. More generally, the POS terminal refers to the hardware and software used for checkouts.
In recent years, banks are making efforts to acquire Point of Sale (PoS) terminals at the premises of merchants across the country as a relatively new source of income. 'Acquiring' a POS terminal means installing a POS terminal at the merchant premises. The installer of the PoS terminals is the acquirer of the terminal and the merchants are required to hold an account (merchant account) with the acquirer bank. The acquirer bank levies each transaction with a charge, say 1% of the transaction value. This amount is payable by the merchant. Most merchants do not mind absorbing this cost, because such facilities expand their sales. Some merchants, however, pass on the cost to the customer. This business is known as merchant acquisition business.
Banks are levying with one another for PoS machine acquisition, since it offers a huge opportunity to generate additional income by increasing the card base and encouraging card holders to use them for their merchant transactions. Leading banks--both in the public and private sectors-- are planning to install thousands of these terminals across the country. Some banks are planning joint ventures with global companies who have experience and expertise in this area.
PoS terminals are predominantly used for sale and purchase transactions. The PoS terminals have proved to be very effective in combating fraudulent transaction by on-line verification of cards. Also, the RBI is expected to permit cash withdrawal transactions to cardholders from PoS terminals installed with shopkeepers, mall stores, etc. PoS terminals, having gained significant acceptance in metros, need to become more popular in tier-2 and tier-3 cities. Public sector banks appear to be more interested in targeting the smaller towns and cities where they have strong branch presence. The challenges of setting up a widespread PoS network will be primarily (a) operational costs and (b) viability in smaller towns and cities. Experts feel that once the technology stabilises and costs per unit comes down, PoS terminals will become popular all over India.
Outsourcing of Non-core Activities
Outsourcing can enable banks to stay ahead of competition. Growing competition in the banking sector has forced banks to outsource some of their activities to maintain their competitive edge. Decision to outsource could be on cost considerations as well as lack of expertise in banks in delivering certain services. Banks typically outsource their non-core functions so that they can concentrate on their core functions.
However, there are risks involved in the process of outsourcing to a third party. These risks include non-compliance with regulations, loss of control over business, leakage of customer data, lack of expertise of the third party, poor service from third party, etc.
The key driving force behind outsourcing activities by any firm, irrespective of the nature of its business, is cost saving. Initially, foreign banks were involved in outsourcing their activities in order to leverage India's significant cost advantages. Organisations such as American Express, Citibank, Standard Chartered Bank, ANZ Grindlays, HSBC, and ABN Amro have been outsourcing their Information Technology Outsourcing (ITO)/Business Process Outsourcing (BPO) requirements to leading Indian IT companies.
Outsourcing Activities of Indian Banks
During the recent years, Indian banks also have started outsourcing their non-core activities. The outsourced services may include software application support, maintenance of hardware and software, hosting services, managing data centres, managing ATM networks across the country, and disaster management. Further, banks are also giving contracts to third parties in order to manage other support services such as call-support services, help-desk support, credit card processing, cheque processing and clearing, ATM cash replenishment, cheque clearing and collection, loan servicing, data processing, etc. The two main reasons for Indian banks outsourcing non-core activities are similar to the overseas banks, i.e. cost consideration and lack of expertise in certain areas. Through outsourcing, banks can also benefit from the domain expertise of the service providers.
Outsourcing helps banks not only to focus on their core activities, but also in certain cases to reduce the capital investment in developing the required infrastructure. Further, in-house provision of services may be more expensive because they do not enjoy any economy of scale. Service providers on the other hand may enjoy economies of scale because they cater to the outsourcing requirements of a number of banks and companies and pass on some of the benefits of scale to the outsourcing banks. It is not only the small banks who have started outsourcing non-core activities; large public sector banks are also outsourcing their non-core services.
Certain precautions need to be taken while outsourcing non-core functions. The legal contract entered into with the vendors should be approved only after the quantification of benefits through a thorough analysis. The vendor's domain knowledge is important for delivering the services as per contract; for example customizing the bank's IT requirements. It is therefore important for banks to verify whether the vendors have the required domain knowledge.
While outsourcing, the major concern for banks relates to security. There have been case instances where the employees of vendors have leaked confidential information of clients. For banks, such leakage of customer's account details can be disastrous, with huge fallout in terms of monetary losses as well as severe damage to the bank's reputation.
To cope with the challenges, the RBI has proposed that the board of directors of a bank should be responsible for the outsourcing policy as well as approving such activities undertaken by a bank. In addition, the Information Technology Act, 2000 aims at tackling some aspects of cyber crimes such as leakage of confidential information by vendors. As part of internal inspection/audit, internal inspectors/ auditors in banks look into security related aspects of outsourcing.
Going forward, it is expected that outsourcing in the banking sector in India will increase as competition in the industry grows and support services increasingly becomes more sophisticated and expensive.
Despite the expansion of the banking network in India since independence, a sizeable proportion of the households, especially in rural areas, still do not have a bank account. Considerable efforts have to be made to reach these unbanked regions and population. Financial Inclusion implies providing financial services viz., access to payments and remittance facilities, savings, loans and insurance services at affordable cost to those who are excluded from the formal financial system. Box 8.3 gives indications of the low access to banking services in India.
- Financial Inclusion Statistics: National Sample Survey Organisation (NSSO) data reveal that 45.9 million farmer households in the country (or 51.4% of the total) do not access credit, either from institutional or non- institutional sources. Further, despite the vast network of bank branches, only 27% of total farm households are indebted to formal sources; of which one-third also borrow from informal sources. Farm households not accessing credit from formal sources as a proportion to total farm households is especially high at 95.91%, 81.26% and 77.59% in the North Eastern, Eastern and Central Regions respectively. Thus, apart from the fact that exclusion in general is large, it also varies widely across regions, social groups and asset holdings. The poorer the group, the greater is the exclusion. Source: Report of the Committee on Financial Inclusion, January 2008
- Initiatives taken by the RBI: The Lead Bank Scheme introduced by the RBI in 1969 is the earliest attempt by the RBI to foster financial inclusion. Under the scheme, designated banks are made key instruments for local development and entrusted with the responsibility of identifying growth centres, assessing deposit potential and credit gaps and evolving a coordinated approach for credit deployment in each district, in concert with other banks and other agencies. As at March 2009, there were 26 banks, mostly in the public sector, which have been assigned lead responsibility in 622 districts of the country. The RBI's recent measures to promote financial inclusion includes: advising banks to open 'no frills' accounts, introduction of Business Correspondent (BC)/ Business Facilitator (BF) model and adoption of Information and Communication Technology (ICT) solutions for achieving greater outreach.
- Basic banking 'no-frills' account: To achieve the objective of greater financial inclusion, all banks have been advised by the RBI to make available a basic banking 'no-frills' account either with 'nil' or very low minimum balances. They have also been advised to keep the transaction charges low, which would make such accounts accessible to vast sections of population. The nature and number of transactions in such accounts could be restricted by the banks, but such restrictions must be made known to the customer in advance in a transparent manner. The growth of such deposits should be encouraged with affordable infrastructure and low operational costs through the use of appropriate technology.
- No-frill Accounts: Scheduled Commercial Banks (SCBs) are making considerable efforts towards opening no- frills accounts. The number of no-frills accounts opened by SCBs during 2006-07, 2007-08, and 2008-09 were 6.73 million, 15.79 million and 33.02 million respectively. Source: Report on Trends and Progress of Banking in India, 2008-09, RBI.
- Use of Business Facilitators and Correspondents: With the objective of ensuring a greater financial inclusion and increasing the outreach of the banking sector, the RBI has introduced business facilitators and business correspondent models to enable banks to use the services of NGOs, Self Help Groups (SHGs) and micro finance institutions as intermediaries in providing financial and banking services. These intermediaries serve as the facilitators /correspondents of the banks.
As the engagement of intermediaries as business facilitators/correspondents involves a significant reputational, legal and operational risks, banks need to give due consideration to those risks. The bank's arrangement with the business correspondents should:
- Specify the suitable limits on cash holding by intermediaries, as also limits on individual customer payments and receipts.
- Require that the transactions are accounted for and reflected in the bank's books by the end of the day or next working day.
- Require all agreements/contracts with the customer to clearly specify that the bank is responsible to the customer for acts of omission and commission of the business facilitator / correspondent.
Banks pay reasonable commission/ fees to the Business Facilitators/ Correspondents. The banks' agreement with them however should specifically prohibit them from charging any fees to the customers for the services rendered by them on behalf of the banks.
- Adoption of technology: To give an impetus to financial inclusion, the RBI has formulated a scheme to accelerate the pace of adoption of the biometric access/ smart card based Electronic Benefit Transfer (EBT) mechanism by the banks and roll out the EBT system in the States that are ready to adopt the scheme. As per the scheme, RBI would partially reimburse the banks, for a limited period, the cost of opening accounts with biometric access/ smart cards. Through these accounts, payment of social security benefits, National Rural Employment Guarantee Act (NREGA) payments and payments under other government benefit programmes would be routed. The potential of information technology (IT) in extending banking services to under-served markets in rural and semi-urban areas is enormous. The use of Smart Card technology, mobile ATMs, coverage of rural post offices under electronic payments networks - all could contribute to providing financial services to more people and thereby serve financial inclusion.
India is experiencing an explosion in the use of mobile communication technology, and this could be exploited by the financial sector for spreading the banking habit. Mobile phone users belong to all strata of society, spread across urban, semi-urban and rural areas. However, while encouraging the spread of cost-effective banking through mobile communications, it has to be ensured that essential security features are maintained.
Difference Between RTGS and NEFT:
The fundamental difference between RTGS and NEFT, is that while RTGS is based on gross settlement, NEFT is based on net-settlement. Gross settlement is where a transaction is completed on a one-to-one basis without bunching with other transactions. As for a Deferred Net Basis (DNS), or net-settlement, this is where transactions are completed in batches at specific times. Here, all transfers will be held up until a specific time. RTGS transactions are processed throughout the working hours of the system.
RTGS transactions involve large amounts of cash, basically only funds above Rs 200,000 may be transferred using this system. For NEFT, any amount below Rs 200,000 may be transferred, and this system is generally for smaller value transactions involving smaller amounts of money.
RTGS processes in real-time (âpushâ transfer), while NEFT processes in cycles during the given working day. This causes a NEFT transaction that is initiated later than the last cycle to be completed the next day.
RTGS is Real Time Gross Settlement, while NEFT is National Electronic Funds Transfer.
RTGS completes transactions in real-time, and is therefore faster than NEFT, which completes transactions in cycles.
RTGS is gross settlement, where a transfer is completed on a one-to-one basis, while NEFT is on a Deferred Net Basis, where transfers are bundled and deferred for a specific time.
RTGS is a high value transfer system, handling funds worth Rs 200,000 and above, while NEFT transfers generally smaller amounts below Rs 200,000.