04.

Liability Products in Retail banking

Operational Provisions
DEMAND DEPOSITS
Accounts where the amount is payable by the bank on demand (within business hours , of course) are
called demand deposits e.g. savings bank account, current account, overdue time deposits which after
due date become payable on demand, margin money (borrowers contribution as part of loan liability,
held in bank guarantees or letter of credit issued accounts) when released on extinction of borrowers
liability.

SAVINGS BANK ACCOUNT

It pays a nominal interest for any sums remaining to the credit on daily basis around 4% per annum
currently. Banks are free to provide any rate of interest.
There are some restrictions on number of withdrawals during each half year (50). The withdrawal is
allowed through cheques. It can allowed with a withdrawal slip to the depositor only but pass book has
to be presented with this slip.
Minimum balance ranging from Rs. 1000 to Rs.10000 has to be maintained and there is a penalty for not
maintaining this balance that varies from bank to bank.
Eligibility to open SB accounts: The savings bank account is allowed to be opened by individuals and
specified institutions of religious or charitable nature or non profit motive organizations or government
departments serving public interest as approved by RBI. The firms and companies involved in business
are not allowed to open savings bank accounts.
The Basic Savings Bank Deposit Account
i. should be considered a normal banking service available to all.
ii. This account shall not have the requirement of any minimum balance.
iii. The services available in the account will include deposit and withdrawal of cash at bank branch as
well as ATMs; receipt/credit of money through electronic payment channels or by means of
deposit/collection of cheques drawn by Central/State Government agencies and departments;
iv. While there will be no limit on the number of deposits that can be made in a month, account holders
will be allowed a maximum of four withdrawals in a month, including ATM withdrawals; and
v. Facility of ATM card or ATM-cum-Debit Card;
3. The above facilities will be provided without any charges. Further, no charge will be levied for nonoperation/activation of in-operative Basic Savings Bank Deposit Account.
4. Banks are free to evolve other requirements including pricing structure for additional value-added
services beyond the stipulated basic minimum services on reasonable and transparent basis and applied in
a non-discriminatory manner.
5. Know Your Customer (KYC) / Anti-Money Laundering (AML) for opening of bank accounts issued
from time to time will be applicable.

The account is available only for resident Indians above the age of 18 years. Anyone can be included as a
joint applicant except a minor (less than 18 years of age).

Small Account
It means a savings account where(i) the aggregate of all credits in a financial year does not exceed rupees 1,00,000/(ii) the aggregate of all withdrawals and transfers in a month does not exceed rupees 10,000/-,
(iii) the balance at any point of time does not exceed rupees 50,000/-.
Documentation:
A self-attested photograph and affixation of signature or thumb print
Provided that
i.
ii.

the designated officer of the bank, while opening the small account, certifies under his
signature that the person opening the account has affixed his signature or thumb print, as
the case may be, in his presence;
a small account shall be opened only at Core Banking Solution linked banking company
branches

iii.

that foreign remittances are not credited to a small

iv.

a small account shall remain operational initially for a period of 12 months, and
thereafter for a further period of 12 months with the entire relaxation provisions to be
reviewed in respect of the said account after 24 months.

CURRENT ACCOUNTS
These can be opened by any type of depositor. There is a continuous flow or current of deposit and
withdrawal transactions in the account without any restrictions. There is no limit on deposits or
withdrawals. No interest is paid on credit balances. The withdrawal is allowed through cheques only.
TIME DEPOSITS :
Fixed deposits: amount deposited for a fixed term of 7 days to not exceeding 10 years. Interest can be
paid quarterly or paid a discounted sum monthly.
Monthly Income Deposits Discounted Interest (Quarterly Compounding)
i/4
(1+
i
) 2 + (1+
i
)+1
1200
1200
i = Rate of interest

Reinvestment Plan Fixed deposits: Interest every quarter is reinvested automatically every quarter and
added to the principal. Principal with Interest is payable at maturity cumulatively (compounded on
quarterly basis ) after the end of the term.
Reinvestment Plan Deposits Maturity Value (Quarterly Compounding)
A = P (1+ r
)n
400
r = Rate of interest n = Number of quarters P = Principal amount A = Maturity
value

Cash certificates : (discounted ) amount is accepted at the prevalent interest rate and lump sum rounded
figure , the face value is paid including interest after tenure (1 to ten years) selected by the depositor . No
interest is paid during the tenure of deposit. Cash certificate s are issued for different face values like
1000, 5000, 10000, 1,00,000 and so on.

Cash Certificates- Issue Prices (Quarterly Compounding)

A=
P
(1+ i ) n
400
A = Issue price, P = Maturity amount (Face value) , i = Rate of interest, n =
Number of quarters

Certificates of deposits CDs : These are bulk deposits with min Rs. 1 lakh accepted from public or
corporate clients for short duration up to one year when liquidity position of bank is tight. The bulk
deposits save operational and servicing costs and hence slightly higher rate of interest is offered on CDs.
Recurring deposits: Equal amount (say, Rs.500) is deposited every month for a fixed term say 1 to 10
years. Interest accrues and is applied quarterly on the amount outstanding at the end of each quarter but
compound interest is paid for the entire term on maturity.

Recurring Deposits Maturity Value (Quarterly Compounding)

M =R [ (1+i)n 1]
-------------------1- (1+i) -1/3
M = Maturity value R = Monthly installment n = Number of quarters i = Rate of
interest/400

VARIANTS OR COMBINATIONS OF DEMAND AND TERM DEPOSIT ACCOUNTS

Multi Option deposit or Flexi deposit or Suvidha deposit or Super saver account :
This kind of deposit provides liquidity to fixed deposit that can be used partly for payment of cheques
drawn in savings or current account linked with this deposit account. Remaining amount continues to
enjoy the benefit of interest rate applicable to fixed deposits without any penalty for premature part
payment of fixed deposit.
In some accounts, any day, any amount in excess of some amount say Rs.10,000 or Rs 25,000 or any
other higher sum in savings or current account is automatically transferred to fixed deposit for a period
decided by the customer. The different banks have given different name or nomenclature to their
accounts with one or more of the above features.
Bank Term Deposit Scheme 2006 (Tenure 5 Years)
1.

Applicable Rate of Interest is 9.00% p.a. for General Category and 9.50% p.a. for Senior Citizens
Category for Deposit in Single name of value up to Rs. 1 Lac.

2.

The deposit under this scheme is available for deduction from total income under section 80C of
Income Tax Act.
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3.

Interest earned on the Fixed Deposit will be subject to Tax Deducted at Source as per Income Tax
laws.

PROVISIONS OF TAX DEDUCTION AT SOURCE (TDS) FOR INTEREST ON DEPOSITS

Clause (c) of Sub Sec 3 of Sec 194A of Income Tax Act
In the case of time deposits kept with banks, tax is to be deducted at source (10% currently where PAN is
disclosed otherwise 20%) if the interest payable by a branch to a depositor exceeds Rs 10,000 in a given
financial year. It is not only the branch wise limit but bank wise limit is applicable if customer ID for all
accounts for different branches is same
Of course, depositors often try to circumvent this provision by distributing their deposits to ensure that the
interest earned in any one branch of any bank during each financial year does not exceed Rs 10,000 under
the same customer ID.
Recurring deposits have been excluded from tax deduction provisions. Hence, interest earned on recurring
deposits is not subject to withholding of tax.
TDS is deducted every time the Bank pays interest during the financial year. TDS is also deducted on
interest accrued (due but not yet paid) at the end of the financial year viz. 31st March every year.
A consolidated TDS Certificate in Form 16A, for TDS deducted during a financial year will be issued
in the month of April of the following financial year.
If the depositor believes that his total interest income for the year will not fall within overall taxable
limits, he should inform the bank not to deduct TDS on deposits. He can do this by submitting a form
15H (15G for senior citizens) , available with the bank as per the provisions of the Income Tax Act. Of
course, a false declaration invites fines and prosecution.
Exemption from Income Tax on interest
Exemption up to Rs.10,000 earned in SB accounts with banks has been provided from FY 2012-13.
Interest on savings bank accounts is not subject to TDS.
Premature payment of fixed deposit:
The customer has a contract with the bank to keep the deposit for agreed period under Fixed deposit.
Banks may refuse to pay before due date. But banks normally use their discretion in favor of customer as
a facility to provide liquidity feature to this kind of product.
A penalty of reduction of one percent in rate of interest is charged by banks as per RBI rules. Interest rate
one percent less than the rate of Interest applicable at the time of initial deposit for the period for which
the fixed deposit has run on the date of pre- payment is paid.
Extension of Fixed deposit:
The depositor is also permitted extension of term of the deposit before expiry of the original term of
deposit without application of penalty clause provided the deposit in question is agreed to be held for a
further period reckoned from the date of extension which is longer than the remaining period of the
original contract.
Mode of payment of Fixed deposits:
Under section 269 T of Income Tax Act 1961, a bank or a co-operative bank shall repay any deposit by
an account payee cheque or an account payee draft or to credit of account of the depositor if the deposit
together with interest , if any, payable or aggregate of the deposits together with interest held by the same
person is Rs.20,000 or more.
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If this requirement is not fulfilled a fine equal to the amount involved will be imposed on the bank.
Loan against Fixed Deposits: Banks grant loans against fixed deposits issued by them and charge up to
1-2% higher rate of interest than rate allowed on the deposit. Loans against fixed deposits of other
banks are not generally granted.
Renewal of overdue fixed Deposits
If the customer neither obtains payment nor renews the Fixed Deposit although the term is over, it
is called an overdue Fixed Deposit. Payment/renewal of overdue Fixed Deposit is governed by
following rules.
i.

Renewal is carried out at the rate of interest prevailing on the date of maturity provided overdue
period does not exceed 14 days from the date of maturity.

ii.

Where overdue period exceeds 14 days, interest for the overdue period, would be paid provided
the depositor renews the deposit for a further minimum period for which the deposit is lying
overdue. If not renewed for a time equal to or more than overdue period, interest rate applicable
to Savings Bank deposit is payable on the deposit.

iii.

The interest for the overdue period will be paid at the rate prevailing on the date of maturity or on
the date of carrying out renewal, whichever is less. This interest may be paid to the depositor or
clubbed with the deposit for renewal.

INSURANCE OF BANK DEPOSITS

The deposit insurance has been extended to all scheduled, non scheduled commercial banks and RRBs all
over India and co-operative banks . All public sector, private sector and foreign banks are insured banks.
Deposit Insurance and Credit Guarantee Corporation of India (DI &CGC) covers balances in deposit
accounts of a customer up to Rs. 1 lakh held in a bank in the same capacity and in the same right.
The cover is Rs. 1 lakh per customer for all accounts of the same customer in each bank (all deposit
accounts at all branches taken together) in case of failure of any bank to pay its liabilities and goes into
liquidation.
The joint account in name of A and B and other accounts if in name of A singly or B singly will be treated
as separate accounts.
STOP PAYMENT INSTRUCTIONS
A customer has the right to cancel his mandate before the payment is made by the bank.
Hence he has the right to countermand the payment of the cheque issued by him, before it is actually paid.
For such instructions, the customer cannot be questioned to provide reasons.
Who can instruct?
Such instructions are accepted from the drawer of a cheque and not from the payee or endorsee because
bank has contractual relationship with the drawer only.
If a payee or endorsee reports loss of the instrument to the bank, bank should advise them to get stop
payment instruction issued from drawer.
Time for instructions
Stop payment instructions can be given after business hours even and should preferably in writing but
oral instructions or telephonic or telegraphic request are accepted if followed by written confirmation.

If there are more than one persons authorized the operate the account, stop payment instructions, given by
any one of them shall be treated as valid.
Minimum information
Customer must provide certain minimum information while requesting for stop payment which includes
cheque number, date of cheque, name of the payee and the amount.
Effectiveness
The instructions are valid only when these are received before the payment of the cheque has actually
been made. Payment shall be deemed to have been made when
(a) paying cashier puts money on the counter and holder of the instrument extends his hands over it,
(b)cheque is presented through clearing and passed by bank and time of returning has already expired and
(c) if the proceeds of the cheque have been mailed to the payee or holder by way of demand draft.
Payment shall not be deemed to have been made when
(a) token has been issued but amount has not been handed over,
(b) debit entry has been made in the account but the amount is yet to be paid,
(c) cheque has been presented through clearing and time of returning the cheque has not elapsed and
(d) cheque has been paid by way of transfer entry from customers account to payees account but
credit advice has not been issued to the payee and payee is unaware of this credit.
Failure of bank
When the banker fails to take proper precautions and pays a countermanded cheque, even by mistake, the
payment will not be considered to be a payment in due course. The bank cannot debit customers
account in such circumstances nor claim the money from the holder whose rights to the amount of cheque
are unaffected.
Validity period
Stop payment instruction is valid till the time the cheque is returned by the bank marked payment
countermanded. In practice, the validity continues for three months since by that time, the instrument
becomes stale and payment is otherwise not made.
Acknowledgement
Banks are required to send acknowledgement of receipt of instructions for stop payment.
PAYMENT IN DUE COURSE
As per Sec 10, a payment would be considered in due course if:
a. Payment is in accordance with the apparent tenor of the instrument. ( whatever appears on face or
back of the cheque)
b. Payment must be made in good faith ( without knowing defect in title of cheque or ownership of
cheque) and without negligence ( without ignoring circumstances that lead to believe that the
holder is not a true owner) .
c. Payment must be made to the person in possession of the instrument.
d. Payment must be made under circumstances which do not afford a reasonable ground for
believing that he is not entitled to receive payment of the amount mentioned therein.
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e. Payment must be made in money only.

STANDING INSTRUCTIONS
The banks accept standing instructions from their customer for various purposes such as
(a) transfer of funds from one account to another account,
(b) payment of locker rent,
(c) payment of insurance premia etc.
Such instructions help the customer to save his time and effort and also help the bank in keeping
balances at lower cost of funds.
In this kind of transaction, the relationship of the bank and customer is that of the agent and
principal. Being an agent, the bank is expected to carry out the instructions and failure to do so, once
the instructions are accepted, can create problems for the bank, in case loss is suffered by the
customer. Banks levy service charges for recording and effecting the standing instructions.