Overview of Banking

Chapter IV

Deposit Products
After reading this chapter, you will be conversant with
Types of Bank Deposits
Computation of Interest on Deposits
Deposit Schemes
Composition of Bank Deposits

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Overview of Banking

The process by which banks create money is so simple that the mind is repelled.
John Kenneth Galbraith
Credit creation and investment in securities, both require banks to mobilize
deposits heavily from the marketplace. Equity capital serves very little purpose in
meeting these fund requirements. Deposits are the foundation upon which banks
thrive and grow. The ability of a banks management and staff to attract money
from customers and businesses is an important measure to gauge a banks
acceptance by the public. Deposits are the basis for bank loans and thus represent
the ultimate source of bank profits and growth. These generate cash reserves
through which new loans are created. The management effectiveness of a bank can
be gauged by finding whether the deposits are raised at the lowest possible cost
and whether enough deposits are available to fund those loans the bank proposes to
make.
In todays intensely competitive and increasingly deregulated market place, both
the cost and amount of deposits of the banks are heavily influenced by the pricing
schedules and competitive maneuverings of scores of bank and non-bank
institutions offering similar services. The globalization of the financial markets has
widened the avenues of funds for banks in the capital market. Banks are now able
to raise capital both in national and international markets. Nevertheless, deposits
gathered from the local markets are considered the primary support for assets in
most of the banks. Deposits have typically lower interest costs than the other
types of funds. Another important feature of these deposits is their relative
stability compared to hot money i.e. the money raised from the money market
etc. These two features of the deposits stability and low cost source of funds,
make them more preferred source of funds by banks. All things being equal,
banks that have a greater deposit base are more valuable than the banks with
poor deposit base.
In India, traditionally banks have been offering only mass banking products. Some
of the most common deposit products are savings bank, current account, and term
deposit account. The common lending products are cash credit and term loans. In
the past, banks had little choice in the matter and had to accept deposits at rates
and amounts fixed by Reserve Bank of India. Bank rate, which is dictated by the
RBI, is the benchmark for interest on the lending products. Further, remittance
products were limited to issuance of drafts, telegraphic transfers, bankers cheque
and internal transfer of funds.
With several developments ushered in by the liberalization and financial sector
reforms, in the 1990s the entire banking product structure has undergone a major
change. The banking sector has been deregulated and made more competitive.
New private and foreign participants have been allowed entry into the sector. IT
initiatives have made the banking operations easy and flexible to customers. Rapid
strides in technology have, in fact, redefined the role and structure of banking.
Further, due to exposure to global trends led by Internet, customers both
individuals and corporate are now demanding better services with more products
from their banks. Financial markets have turned into buyers markets. Banks are
also changing with time and are trying to become one-stop financial
supermarkets. Market focus is shifting from mass banking products to class
banking with introduction of value added and customized products.
A few new generation banks have already introduced customized banking
products like Investment Advisory Services, SGL II accounts, Photo-credit cards,
Cash Management services, Investment products and Tax Advisory services. Very
few banks have also gone into money market mutual fund schemes. Eventually,
the banks are planning to market bonds and debentures also. Banks selling
insurance has already become a reality, which was considered a distant dream
some time back. For eg. Aviva Life Insurance has tied up with ABN-Amro Bank to
market its insurance products. Banks also offer advisory services termed as
private banking to high relationship-value clients.

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 Deposit Products

New distribution channels have transformed the way banking is conducted. More
and more banks are outsourcing services like disbursement and servicing of
consumer loans, credit card business, etc. Most of the new generation banks have
been aggressively selling their products through Direct Selling Agents (DSAs).
Home banking, telephone banking and Internet banking have already become
common. ICICI bank was the first among the new private banks to launch its net
banking service, called Infinity. It allows the user to access account information
over a secure line, request chequebooks and stop payment, and even transfer funds
between ICICI Bank accounts. Citibank has been offering net banking through its
Suvidha program to customers. Products like debit cards, credit cards, flexi
deposits, ATM cards, personal loans including consumer loans, housing loans and
vehicle loans have been introduced by a number of banks.
Corporates are also deriving benefits from the increased variety of products and
competition among the banks. Certificates of deposit, Commercial papers, Non-
convertible Debentures (NCDs) that can be traded in the secondary market are
gaining popularity. Recently, market has also seen major developments in treasury
advisory services. With the introduction of Rupee floating rates for deposits as
well as advances, products like interest rate swaps and forward rate agreements for
foreign exchange, risk management products like forward contract, option
contract, currency swap are offered by almost every bank in the market. The list is
growing day by day.
Box 1: Whats Happening to Bank Deposits?
Focus on commercial banks reliance on non-deposit funding sources seems to
have overshadowed a fundamental area of liability management bank deposits.
It has almost become a clich that bank deposits are dwindling, but that is not the
case. In fact, total domestic deposits of FDIC-insured commercial banks have
increased 6 percent (annualized) over the past five years (1995-2000). In the
deposit mix, savings and time deposits increased incrementally in 1999, while
demand deposits declined less than 1 percent (annualized).
Deposit growth since 1994 has been dampened by competition, customer
attraction to equity markets, low interest rates on deposits, poor service, and a
host of other reasons. However, some concerns remain: While bank deposits have
grown 6 percent (annualized) over the past five years, in 1999 they posted a
growth rate of 2.1 percent, the lowest of the period. Moreover, with industry loan
growth exceeding deposit growth over the past five years, the funding shortfall
has necessitated increased use of noncore funding, a trend that shows no signs of
reversal.

The industrys inability to increase demand-deposit growth, which has partially

contributed to margin compression, is also cause for concern. If the banking
industry cannot establish itself as a dominant and trusted choice in the emerging
electronic bill payment and presentment area, significant bank-deposit migration
could occur.
A Federal Reserve Bank of New York study shows the internal growth rates of
the 50 largest banking companies lagging the industry, with growth in these
companies primarily attributed to mergers and acquisitions. With a lack of recent
merger and acquisition activity, larger companies may need to focus more on
internal growth.

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Overview of Banking

Considering the modest growth in deposits relating to loan and asset growth,
banks increasing reliance on higher-cost noncore funding, and the significant
impact of deposit disintermediation, analysts and examiners may increase their
focus in this area.
Further compounding liquidity risk is evidence to suggest that some
correspondent banks have been reducing or eliminating funding to their
community bank correspondents. In addition, some community banks may be
approaching their limit for Federal Home Loan Bank borrowing. As such, an
effective strategy for the retention and growth of bank deposits becomes more
critical in this environment.
Source: Federal Reserve Bank of Cleveland, volume1, issue 2, 2000

TYPES OF DEPOSITS OFFERED BY BANKS

Deposits are accepted in different ways. Differentiation in deposit types may arise
from the type of customer who holds the deposit, tenure of the deposit, its nature
and the interest factor. Based on these parameters, the deposits can be broadly
classified into transaction and non-transaction deposits.
Transaction (Payments) Deposits
A deposit which facilitates the account holder to transact through a negotiable or
transferable instrument, cheque, a written order of withdrawal, a telephone order to
transfer funds, or other similar means of making payments and transferring monies
to third parties is known as a transaction account. These are one of the oldest
deposit services offered by banks where banks make payments on behalf of its
customers. This transaction or demand deposit service requires the bank to honor
cheques and withdrawals. Transaction deposits include regular non-interest bearing
demand deposits, which do not earn an explicit interest payment but provide the
customer with payment services, safe keeping of funds and record keeping for any
transactions carried out through cheques. They also include interest bearing
demand deposits that provide all of the foregoing services and pay interest to the
depositor. Current account and Savings account are the most widely used
transaction accounts.
Non-interest bearing demand deposits
There are no interest payments on the current accounts. Payment of interest on
checking accounts has been prohibited with the passage of the Glass-Steagall Act
in the US. These demand deposits are among the most volatile and least
predictable of a banks sources of funds, with the shortest potential maturity as
they can be withdrawn without notice. Most non deposit bearing liabilities are held
by business firms. Many of the individual account holders have moved towards
other types of deposits that pay interest.
Interest bearing demand deposits
In the early 1970s in New England, hybrid checking-savings accounts were
introduced in the form of Negotiable Order of Withdrawal (NOW accounts).
NOWs are interest bearing saving deposits that give the bank the right to insist on
prior notice before the customer withdraws funds. As the notice requirement is
rarely exercised, the NOW can be used like checking account. In US with the
passage of the Depository Institutions Deregulation Act, 1980, NOWs became a
nationwide phenomenon.
In US, two other important interest bearing transaction accounts
were created in 1982 with the passage of the Garn-St Germain
Depository Institutions Act. Banks and non-bank thrift institutions
could offer deposits competitive with the share accounts offered by
money market funds that carried higher, unregulated interest rates
and were backed by a pool of high quality securities. The result was

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 Deposit Products

the appearance of Money Market Deposit Accounts (MMDAs) and

Super NOWs (SNOWs), offering flexible money market interest
rates but accessible via cheque or preauthorized draft to pay for
goods and services. MMDAs are interest-earning short maturity
savings accounts with limited transaction privileges. Banks pay
interest rates enough to attract and hold the customers deposit. The
customer is usually restricted to limited transfers or withdrawals per
month, with no more than three transactions as cheques written
against the account. The interest rate paid on a money market
account is usually higher than that of a regular passbook savings
rate. Money market accounts also have a minimum balance
requirement.
Box 2: Non-deposit Investment Products in Banking
In the beginning of 1990s, many of the customers of the banks have been
moving out their funds from out of deposits at banks and thrift institutions into
so called non-deposit investment products that promise better returns than are
available on many conventional bank deposits. The shift of preferences from the
conservative investments in bank deposits into uninsured stocks, mutual funds,
annuities, and other investment products has forced the banks to relook at their
business strategies to win back their customers. The potential advantages to
banks include generating considerable fee income that may be less sensitive to
interest rate movements than traditional bank services such as loans and
deposits. In addition, it is possible that it might add prestige to a banks name
and may help position the bank well for the future as more and more
individuals start planning for retirement. Of late even in India, many of the new
age retail banks are offering several non-deposit investment products.
What risks do non-deposit investment products pose for the banks?
There are several risks involved in the sale of these products. The value of these
products is market driven and customers may blame the bank when they do not
reach their earnings goals. Because of their reputation, customers may hold
banks to a higher standard than securities brokers. As a result, banks may end
up involved in costly litigation with customers who are disappointed or who
claim that the risks involved were not adequately explained. In addition, banks
may have compliance problems if they do not properly register their investment
products or fail to follow the rules for the sale of these products.
Regulators already require banks to sell these products in a separate area from
where deposits are taken and banks are required to prominently display that
these products are not covered by deposit insurance. In addition, customers also
must be informed that these products are subject to risks including potential loss
of principal. In addition, banks must make sure that the names of these products
cannot be confused with their regular banking products. Finally, banks must
demonstrate that they are regularly monitoring themselves to ensure that their
sales personnel are complying with the regulatory requirements and banks are
also supposed to be sure that the products they sell meet the needs of each
particular customer and situation. Compliance with these regulations would help
minimize the risks inherent in these products to the bank.
Source: Office of The Comptroller of the Currency (OCC), USA
Non-Transaction (Savings, or Thrift) Accounts
When the deposit account does not facilitate routine payments or transfer of funds
for other transaction purposes, it is a non-transaction account. These deposits are
designed to attract funds from customers who wish to set aside certain amount in
anticipation of future expenditures or financial emergencies. These deposits pay

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Overview of Banking

higher interest rates compared to transaction deposits. While their interest cost is
higher, thrift deposits are generally less costly for a bank to process and to manage.
Most familiar examples of such accounts are the term deposit accounts.
Based on this differentiation of a transaction and a non-transaction account, the
deposits mobilized by the Indian banks are generally classified into Current
Account, Savings Bank Deposits and Term Deposits. A detailed discussion on the
features of these deposit accounts, the computation of interests etc. is given below:
Banks receive deposits through three types of basic accounts: demand deposits
(also known as a checking account or demand deposit account), savings deposits
and fixed-time deposits.
Current Account
The depositor can withdraw the money at any time (as long as the money is
available in the account) and also can order the bank to use the money to pay third
parties, generally through a cheque. Banks may or may not pay interest on these
accounts. If they pay interest, the account is called a NOW (negotiable order of
withdrawal) account. It is possible that banks may charge fees for demand deposit
accounts, but in many cases these fees can be reduced or avoided by maintaining a
minimum balance or by satisfying other criteria established by the bank.
As mentioned earlier, current accounts are transaction accounts and hence are
offered to business firms. Due to the ease the business firms have in depositing and
withdrawing funds from this account, it actually facilitates cash management for
the firms. No advance notice is required to withdraw the amount. It being an
operating account, the customer can easily withdraw funds from the current
account using a cheque facility. However, banks do require the account holder to
maintain a certain amount of minimum balance continuously. In some cases,
depending on the credibility of the customer, the bank may also allow the deposit
holder to overdraw (OD) from the current account. As the account enables easy
liquidity, the deposit in this account does not earn any interest. Although these
accounts are non-interest bearing liabilities of the bank, they are not expense free
as they generate processing costs. To cover these costs, the banks usually collect
service charges related to account activity or account balances or both.
Savings Bank Account
The depositor usually plans to maintain the funds in the account for an extended
period of time. Banks pay interest on these accounts. Banks may also charge fees
for savings accounts, but in many cases these fees can be reduced or avoided by
maintaining minimum balances. Other than for business purpose, operating
accounts are also necessary for individuals, trusts, non-profit organizations, etc.
However, these types of deposit holders have fewer transactions when compared to
business firms. Savings bank (SB) account facilitates liquidity to these depositors.
A savings bank account however cannot be opened by banks in the name of:
Government Departments.
Municipal Corporations/Committees.
Panchayat Samitis.
Metropolitan Development Authority.
Societies.
State/District Level Housing Co-operative Societies, Housing Boards.
Bodies depending on Budgetary Allocations for performance of their
functions.
Water and Sewerage/Drainage Boards.
State Text Book Publishing Corporations.
Any trading, business or professional concern whether such concern is a
proprietary/partnership firm/company/association.

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 Deposit Products

Any political party.

Similar to the current account, the banks do not generally require any advance
notice for withdrawals for the SB account. While the SB account also has cheque
facility, only a limited number of cheques can be written. Again, banks require the
deposit holder to maintain a minimum balance. While the required minimum
balance may vary from bank to bank, most banks require the depositor to maintain
this amount on a continuous basis. Some other banks require the depositor to
maintain the minimum balance on an average basis over a period of time, say three
months. The bank may charge for any shortfall in this minimum balance. Some of
the new private banks are however offering zero balance facility i.e. deposit holder
need not maintain a minimum balance.

INTEREST RATES OFFERED ON DIFFERENT TYPES OF DEPOSITS

Different deposit products generally carry different rate of interest. In general the
longer the maturity the greater is the yield the depositors earn due to the time value
of money and the frequent upward slope of the yield curve. For example, a
customer can withdraw NOW accounts and savings deposits immediately;
accordingly the bank offers a rate that is lowest of all deposits. In contrast,
negotiable CDs and term deposits with longer maturity often carry the highest
deposit interest rates that a bank can offer. The size and the perceived risk
exposure of the offering banks also play an important role in shaping the deposit
interest rates. Other key factors are the marketing philosophy and goals of the
offering bank. Banks that choose to compete for deposits aggressively usually post
higher offer rates to bid deposits away from their competitors. In contrast when a
bank wants to discourage a type of deposit, it allows its posted rate to fall relative
to interest rates offered by its competitors.
As discussed earlier the current account does not have to pay any interest;
however, the SB account will earn interest for the deposit holder. The SB interest
rates are prescribed by the RBI and the prevailing rate is 3.5% per annum. This
interest will be paid on the minimum balance that is maintained in the account
from the 10th to the end of the month. This minimum amount is expected to be
maintained throughout the month and a monthly product is arrived at after
multiplying this amount with the number of days in the month. On this monthly
product, the interest will be calculated (rounded to a rupee). Having computed the
interest amount, the bank will pay the same at quarterly or longer periods.
Normally the periodicity is half-yearly.
Illustration 1
The following are the balances maintained by a depositor in the SB account as
shown in the SB passbook. Compute the interest that the bank will have to credit
into the account in the following two cases (1) quarterly payment (2) half-yearly
payment. Assume that the rate of interest is 4% p.a.
Date Balance (Rs.)
08/04/02 10500
17/04/02 18000
22/04/02 6500
30/04/02 4500
05/05/02 15000
19/05/02 7500
25/05/02 4000
02/06/02 14500
15/06/02 9000
29/06/02 5500
08/07/02 16000
22/07/02 6000
30/07/02 2000

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Overview of Banking

11/08/02 12500
21/08/02 7000
31/08/02 4000
09/09/02 14500
19/09/02 9000
29/09/02 4500
Solution
The interest that will be paid by the bank will be 4 percent as per the prevailing
rates. This will be earned on the monthly product of the minimum balance
maintained in the account.
Date Balance Monthly Product Interest (rounded
(Rs.) (Rs.) to a rupee)
08/04/02 10500
17/04/02 18000
22/04/02 6500
30/04/02 4500 4500 15
05/05/02 15000
19/05/02 7500
25/05/02 4000 4000 13
02/06/02 14500
15/06/02 9000
29/06/02 5500 5500 18
08/07/02 16000
22/07/02 6000
30/07/02 2000 2000 7
11/08/02 12500
21/08/02 7000
31/08/02 4000 4000 13
09/09/02 14500
19/09/02 9000
29/09/02 4500 4500 15
81
Note: The current savings bank rates have been reduced to 3.5%
The interest that the account will earn on a quarterly basis will be Rs.46 and Rs.35.
If the payment is half-yearly the amount would be Rs.81. Some banks credit the
interest during February and August; others during March and December. There
are banks, which credit the interest once in a year in December. A few banks credit
during calendar quarters.
Illustration 2
SFM Banking Ltd. requires a minimum balance of Rs.5,000 on a monthly average
for a quarter. Consider the following balances of a savings bank account and
suggest if the bank should levy any service charges on the customer.
Date Balance (Rs.)

01-05 July 14500

06-20 July 6000
21-31 July 1000
01-03 Aug 15000

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 Deposit Products

04-12 Aug 2000

13-31 Aug 0
01-10 Sept 7500
11-21 Sept 1500
22-30 Sept 500
Solution
The average daily balances for a quarter can be computed as follows:
Date Balance No of days Daily balances
(Rs.) (Rs.)
01-05 July 14500 5 72500
06-20 July 6000 15 90000
21-31 July 1000 11 11000
01-03 Aug 15000 3 45000
04-12 Aug 2000 9 18000
13-31 Aug 0 19 0
01-10 Sept 7500 10 75000
11-21 Sept 1500 11 16500
22-30 Sept 500 9 4500
Total 92 332500
The daily balances for the quarter = Rs.3,32,500
The monthly average for the quarter = 3,32,500/92
= Rs.3,614.13
As the account did not meet the average of Rs.5, 000 per month for the quarter, the
bank may charge a service fee on this SB account.
Term Deposits
Term deposits are a form of debt investments a customer lends, which in
essence, means that he is lending a sum of money to a bank or financial institution
for a specified period of time and the bank in turn pays him a rental stream
(interest) for the privilege. These accounts pay a higher interest rate than any other
deposit accounts. This type of account is sometimes called a certificate of deposit
(or CD). These are the accounts of funds to which depositors have no access for a
fixed period of time and penalties apply for early withdrawals. Cheques cannot be
written on term deposits or CDs. Other than liquidity, which the SB accounts and
the current accounts ensure, depositors would also prefer to earn interest on their
surplus balances. Banks facilitate this through term deposits. This account enables
savings plans for funds that can be kept as a deposit for a period of more than 15
days. It is 7 days in case of bulk deposits. While the maximum tenure of the term
deposits is 10 years, banks generally would not favor deposits with tenures beyond
three to five years. For tenures beyond three years, there will be a flat interest rate
structure and this in fact acts as a disincentive for the depositor. This statement is
substantiated by the FD rates of various banks given in Table 4.1. (Prevalent in
2001)
The other feature of the term deposit is the de-regulated interest rates. Banks are
free to set their own rates depending on the size of the deposit and the tenure. This
interest will be paid on a quarterly compounded basis. Apart from the annual
compounding, if the interest is compounded monthly/quarterly/half-yearly, the
effective rate of interest for such periods will be different from the nominal rate.
Given the nominal rate, the effective rate can be computed as follows:

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Overview of Banking

m
k
r = 1 1
m
....Eq (1)
Where,
r = Effective Rate
k = Nominal Rate
m = Frequency of compounding per year
For instance, if the nominal rate of interest on a 2 year term deposit is 9.5 percent
and if the interest amount is compounded on a quarterly basis then the effective
rate can be assessed as follows:
m
0.095
r =1 1 = 9.84%
4
Unlike the current and the savings accounts, the term deposits do not facilitate
transactions. This non-transactional type of deposit can, however, be classified into
various categories depending on whether the entire amount is deposited at one
time or over a period of time, whether the interest is compounded or withdrawn at
regular intervals etc. Thus term deposits can be in any one of the following forms:
Fixed Deposit Scheme
Reinvestment Scheme
Cash Certificate
Recurring Deposit Scheme.
Table 1: Movement in Deposit Interest Rates
Bank 15-29 30-45 46-60 61-90 91-120 120- 180- 271- 1yr - < 2 yrs - 3 yrs - 5 yrs & With
days days days days days 179 270 364 2 yrs < 3 yrs < 5 yrs above effect
days days days from

Citibank 4.25 6.50 6.50 7.50 7.25 7.25 7.50 7.75 7.75 7.75 7.75 8.00 01-06-01

Canara Bank 5.25 5.25 6.25 6.25 6.75 6.75 7.25 7.25 8.50 9.00 10.00 10.00 18-02-01

Corporation 6.25 6.25 6.50 6.50 7.25 7.25 8.00 8.00 9.25 9.25 10.25 10.25 01-03-01
Bank

Dena Bank 5.50 6.00 7.00 7.00 7.75 7.75 8.00 8.00 8.50 9.00 10.25 10.50 25-02-01

State Bank of 5.25 5.25 6.50 6.50 6.50 6.50 7.00 7.00 8.50 9.00 9.50 9.50 05-03-01
India

HDFC Bank 5.00 7.75 7.75 7.75 8.50 8.50 9.50 9.50 10.25 10.25 10.25 - 19-02-01

ICICI Bank 5.00 5.00 6.00 6.00 7.00 7.00 8.50 8.50 9.25 9.25 9.25 9.25 05-03-01

IDBI Bank 5.25 7.50 7.75 7.75 8.25 8.25 8.75 9.00 !!! !!! 9.25 - 20-04-01

!!! IDBI Bank offers 10.25% for 12 - 36 months

The current interest rates average at 6% (September 2003)
Source: www.rbi.org/trends in Banking
FIXED DEPOSIT SCHEME
In this scheme, a lump sum amount is deposited for a fixed term during which the
amount cannot be withdrawn. However, the interest is paid on a
monthly/quarterly/half-yearly/annual basis. This scheme provides liquidity to the
depositor as it can be withdrawn during these periods. By withdrawing the
amounts, the depositor can actually earn a return (interest) on this interest amount.
However, if the monthly interest is withdrawn for reinvestment, the returns earned
will be more than that earned for a quarterly repayment. To avoid this, the interest

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rate that is paid for a monthly withdrawal scheme should be such that on
reinvestment it shall not yield more than the quarterly returns. Consider the
following mathematical expression:
X(1 + r/6) + X(1 + r/12) + X = Y
Where,
X = Monthly interest amount
Y = Quarterly interest amount
r = Reinvestment rate for the monthly interest.
Simplify the above equation by multiplying by 4.
r r
4X 1+ + 4X 1+ + 4X = 4Y
6 12
r r
12X + 4X + = 4Y
6 12
3r
12X + 4X = 4Y
12
X (12 + r) = 4Y
4Y
X=
12 r
Thus,
P xR
Discounted Monthly Interest =
(12 r)
...Eq(2)
Where,
P = Principal/Fixed Deposit Amount
R = Interest Rate
r = Reinvestment Rate for the monthly interest
In the above expression, it can be observed that the first months interest amount is
reinvested for 2 months, the second months interest for one month. To these
amounts, when the third months interest is added, it should give interest that
equals the quarterly interest amount.
Illustration 3
For a 2 year FD deposit of Rs.50,000 with GNN Bank Ltd. (GBL), the interest rate
is 10.5 percent.
a. Ascertain the interest amounts if the payment is made on a quarterly, half-
yearly and annual basis.
b. What should be the interest rate if the interest is withdrawn every month and
transferred to the savings bank account?
Solution
a. Quarterly interest amount = 50,000 x 0.105/4 = Rs.1,312.50
Half-yearly interest amount = 50,000 x 0.105/2 = Rs.2,625
Annual interest amount = 50,000 x 0.105 = Rs.5,250
50,000 x 0.105
b. Discounted Monthly Interest = = Rs.436.04
12 0.04
This can be verified by adding the monthly interest of 3 months; and the interest
earned during that period is as follows:

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Overview of Banking

(436.04 x 3) + (436.04 x 0.04 x 3/12) = 1,312.50

Thus, the interest rate that GBL can pay on the Rs.50,000 FD, if the interest
amounts are withdrawn every month will be 10.46 percent (i.e. 436.04 x
12/50,000).
It can be observed from the above illustration that the interest that can be paid for a
monthly withdrawal FD scheme will be slightly lower to the rate paid for the other
interest payment periods.
As mentioned above the minimum and the maximum tenures for a FD are 15
days / 7 days and 10 years respectively. Due to the tenure and the liquidity, this
deposit scheme suits retired people, pensioners etc.
REINVESTMENT SCHEME
In a reinvestment scheme, a lump sum amount is accepted for a fixed period and
repaid with interest on maturity. Interest on deposit is reinvested at the end of each
quarter, and hence there will be interest on interest. The minimum and maximum
durations for such schemes are 6 and 120 months respectively. The (minimum)
period accepted differs from bank to bank. The depositor can withdraw the interest
plus the principal at the end of the tenure. To ascertain the maturity amount in a re-
investment scheme, the following expression can be used:
RIm = RI (1 + r)n ....Eq(3)
Where,
RIm = Deposit amount at the end of re-investment period
RI = Initial deposit amount
m
k
r = Effective rate = 1 1
m
n = Number of years
Illustration 4
If a depositor opens a re-investment account at BNB Bank Ltd. the interest rate
offered will be 9 percent for one year scheme, 10 percent for two years scheme
and 11 percent for three years scheme. Ascertain the maturity amount for a
quarterly re-investment of Rs.10,000 for a period of 2 years.
Solution
The amount at the end of the re-investment period can be assessed as follows:
RIm = RI (1 + r)n
= 10,000 (1 + r)2
Since it is a quarterly re-investment,
4
0.10
r = 1 1 = 10.38
4
Thus, RIm = 10,000 (1 + 0.1038)2 = Rs.12,184
CASH CERTIFICATES
Under this type of reinvestment deposit scheme, odd sums are accepted for a fixed
period to pay whole sums at the time of maturity. The interest on deposits is re-
invested quarterly and hence there will be interest on interest. A deposit receipt
which gives the details of deposits will be issued to the depositor. The minimum
and maximum durations are the same as for the reinvestment scheme. The amount
that is deposited initially will be the issue price of the cash certificate and this will
be arrived at based on the maturity amount i.e. the face value of the cash certificate
and the tenure of the deposit. The later two are decided by the depositor. Based on
the tenure, the bank decides on the interest rate. The issue price can be arrived at
using the present value principle.

79
 Deposit Products

Issue Price = PV = Face Value (PVIFAn,k) ....Eq(4)

Where,
n = Tenure
k = Interest rate
Illustration 5
Given the interest rate of 12 percent p.a. on a certificate having a value of Rs.100
after one year, calculate the issue price of the cash certificate.
Solution
m
k
Effective rate (r) = 1 1
m
4
0.12
= 1 1 = 12.55%
4

Issue Price (PV) = Face Value (PVIFn,k)

100
=
1 k n
100
= = Rs. 88.85
1 0.1255 1
RECURRING DEPOSIT SCHEME
In a Recurring Deposit (RD) Scheme, a fixed sum will be deposited every month for
a fixed period. At the end of the period, the depositor will be paid the total amount of
deposit installments with interest. A passbook will be issued that will be updated to
show the details of deposits. Minimum and maximum deposit periods are 6 and 120
months respectively. To arrive at the amount on maturity, the future value of annuity
should be computed as follows:
RDm = RD(FVIFAn,k) .Eq.(5)
Where,
RDm = Maturity value of deposit
RD = Installment amount
Illustration 6
Compute the maturity value of a monthly Recurring Deposit of Rs.500 for 12
months, if the interest applied is 9 percent p.a. and is compounded quarterly.
Solution
4
0.09
Effective Rate (r) = 1 1 = 9.31%
4

0.0931
Rate of interest per month = = 0.78%
12
Maturity value = FVAn = A[FVIFAn,k]
1 k n 1
=A

k

1 0.0078 12 1
= 500

0.0078

= 500 x 12.53 = Rs.6,265

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Overview of Banking

The above discussed term deposits are non-transactional and cannot be withdrawn
during the tenure of the deposit. However, if the depositor plans to withdraw a part/full
amount of the deposit before the maturity date, then the bank may impose a penalty for
the same. Penalties will be imposed at the discretion of the bank. Apart from the
penalty, banks would also cut the interest rate on the deposit if there is a big difference
between the withdrawal date and the maturity date (called in banking terminology as
closure before maturity). For instance, if a two year deposit which has a deposit rate of
9 percent was withdrawn at the end of one year, then the applicable deposit rate for this
deposit will be one year deposit rate less penalty for foreclosure or withdrawal.
However, with product innovations taking place, banks are introducing the flexi
deposit schemes for the fixed deposits wherein the entire FD will be broken into
smaller denominations. Due to this, if the borrower would like to withdraw funds from
the FD, the entire deposit need not be foreclosed. The flexi deposit scheme enables
withdrawal of funds that are required without breaking the FD completely. For
instance, if a depositor has an FD for Rs.5,000, then the flexi deposit scheme will issue
5 deposits of Rs.1,000 each. Thus, when the depositor needs funds up to Rs.2,000, then
only 2 deposits will have to be withdrawn prematurely.
Table 2: Cost of deposits of various banks
Term Deposits C&S Deposits Cost of Deposits*
Banks
(%) (%) (%)
SBI 65 35 7.1
HDFC 59 41 6.2
UTI Bank 83 17 8.0
Bank of Baroda 67 33 6.6
Corporation Bank 74 26 7.2
IDBI Bank 54 46 6.2
Bank of India 67 33 5.9
J&K Bank 66 34 7.3
*Average cost of deposits
October 08, 2002
Source: www. Indiainfoline.com
Box 3: Structure of bank liabilities The US Scene
Demand deposits have dominated the liabilities side of the balance sheets of
commercial banks and while savings and time deposits have played a secondary
role in the acquisition of deposit funds, non-deposit funds were almost
insignificant. However, from the early 1960s the liability structure of commercial
banks started changing substantially. For example, in US by mid 1960s, time and
savings deposits surpassed demand deposits as the primary sources of bank
funds. In the 1970s, non-deposit borrowings grew rapidly and emerged as a
major source of funds for larger banking institutions. In addition, the variety of
deposit and non-deposit accounts and securities offered to the public by
commercial banks greatly expanded. Deregulation of deposit rates of interest in
the 1980s further expanded the variety of deposit accounts offered by the banks.
And finally the lower interest rates in the 1990s have prompted the banks to offer
deposit customers alternative money market and investment accounts.
Deposit sources of funds: Bank deposits may be categorized as either core
deposits or purchased deposits. Core deposits are typical deposits of regular bank
customers including business firms, government units and households. Whereas
purchased deposits are acquired on an impersonal basis from the financial market
by offering competitive interest rates. Core deposits provide a stable and long-
term source of funds whereas purchased deposits serve as a liquidity reserve that
may be tapped when the need arises. Extensive use of expensive purchased

81
 Deposit Products

deposits may expose the bank to liquidity problems. In contrast to core deposits a
large percentage of purchased deposits may not be insured by the Federal Deposit
Insurance Corporation (FDIC)1. Unlike core deposits that normally provide both
explicit interest returns and implicit service returns, purchased deposits provide
only explicit interest earnings. These differences cause purchased deposits to be
much more sensitive to both changes in bank risk and interest rates than core
deposits. If the financial market perceives a decline in a banks safety and
soundness, its purchased deposits would have to be rolled over at higher interest
rates and may even cease to be available as depositors shy away from placing
liquid assets in institutions that may become insolvent. Thus the risks and returns
of core deposits and purchased deposits differ considerably from one another.
Deposit accounts can be categorized as demand deposits, small time and savings
deposits and large time deposits.
Chequeable deposits including demand deposits are transaction balances
requiring relatively higher reserve requirements than other type of deposits.
They may be classified into a) consumer deposits b) corporate deposits and
c) government deposits.
Consumer deposit accounts may or may not be interest bearing. Interest
bearing demand deposits known as NOW (or negotiable order of
withdrawal) accounts were authorized in 1981.
Small time and savings deposits: Savings deposits are interest bearing
deposits that do not have fixed maturities and can be set up periodically to
cover overwithdrawals of transaction accounts (called Automatic Transfer
Service ATS) or to provide transaction funds by means of limited cheque
writing facilities. A good example of the matter type of savings account is
the Money Market Deposit Account (MMDA). MMDAs have no
restrictions and allow consumers to make up to six transfers (three by
cheque) per month. MMDAs are designed to compete with money market
mutual funds. Small banks rely upon retail CDs as a major source of funds.
Even though larger banks place less emphasis than small banks on retail
CDs, they can be a valuable source of liquidity for larger banks especially in
the event of liquidity crises.
Large time deposits: Large or jumbo CDs are marketable securities with
maturity ranging from 14 days to 18 months. They are also known as
Negotiable Certificates of Deposit. Originally large CDs were introduced by
New York banks in an attempt to retain corporate demand deposits that paid
no interest. Later on large CDs became a primary source of funds for
liability management.
Brokered deposits occur when large deposits are split into $100,000 pieces
and placed with different banks to obtain 100% insurance. Depository
Institutions Deregulation and Monetary Control Act (DIDMCA) of 1980
raised deposit insurance limits from $40,000 to $100,000 per account,
which encompassed large NCDs. FDIC Improvement Act of 1991 prohibits
depository institutions from using brokered deposits unless well or
adequately capitalized. Brokered deposits were used by failing savings and
loan associations in the 1980s to cover earnings losses.
IRA and Keogh plans are personal pension plans that individuals may use to
defer federal income taxes on contributions and subsequent investment
earnings. Roth IRAs allowed under the Taxpayer Relief Act of 1997.
Banks act as custodians and gain a stable, long-term source of deposit
funds. Other financial service firms are very competitive.
Non-deposit sources of funds: Non-deposit funds are money market
liabilities that are purchased for relatively short periods of time to adjust
liquidity demands. The use of these purchased funds came into existence
due to tight money periods in which deposit rate ceilings caused banks to

1
Deposit products in India are insured by the Deposit Insurance and Credit Guarantee Corporation
(DICGC).

82
Overview of Banking

develop alternative sources of funds. Unlike deposit funds, these deposits

are exempt from Federal Reserve requirements, interest rate ceilings and
FDIC insurance assessments.
Federal funds: Federal funds are short-term, unsecured transfers of
immediately available funds between depository institutions for on business
day (i.e., overnight loans). These loans are in general oral agreements
between corresponding officers of depository institutions.
Repurchase agreements: Non-bank firms supply funds to banks through
repurchase agreements. An over night repo is a secured, one-day loans in
which claim to the collateral is transferred. For example, a bank sells
securities to a corporate client and promises to repurchase the next day. A
repo is created by the sale of securities in exchange for immediately
available money with the simultaneous promise to buy back the securities at
a specific date at a set price.
Discount window advances: Banks can borrow from the 12 regional
Federal Reserve banks by this means (subject to Regulation A rules).
Federal Home Loan Bank borrowings: Under FIRREA of 1989, the FHLB
can provide discount window services not only to savings and loans (as in
the past) but also to banking institutions.
Bankers acceptances: Time drafts drawn on a bank by either an exporter or
importer to finance international business transactions. The bank may discount
the acceptance in the money market to (in effect) finance the transaction.
Commercial paper: Short-term, unsecured promissory note sold by large
companies with strong credit ratings. Banks can use their holding
companies to issue this short-term debt instrument.
Capital notes and debentures: Senior debt capital that is not federally
insured and considered subordinate to bank deposits. These are introduced
recently to encourage bank issuance and improve market discipline of banks.
Source: Commercial Banking: The Management of Risk Benton E. Gup, Donald
R. Fraser, James W. Kolari.

COMPOSITION OF BANK DEPOSITS

The different type of deposits that banks hold at any moment of time depends most
significantly on the publics demand for deposit services. The next important factor is
the banks fund raising policies, including the services fee charged and the interest rates
offered by the various deposit plans, the aggressiveness with which different deposit
plans are advertised and the time and resources devoted to attract and retain the
customers. Over the years the most successful and readily saleable deposits that banks
have offered are the demand and time deposits. Table 3 below shows the composition
of demand and time liabilities of the scheduled commercial banks
Table 3: Important Banking Indicators-Scheduled Commercial Banks
(Amount in Rupees crore)
Outstanding
Variations
as on
Financial year First Quarter
Item March 22, 02 2001- 02 2000- 01 2002- 03 P 2001- 02
Absolute Percent Absolute Percent Absolute Percent Absolute Percent
1 2 3 4 5 6 7 8 9 10
Gross Demand and Time 12,72,174 1,38,694 12.2 1,85,122 19.5 1,03,356 8.1 54,569 4.8
Liabilities (2+3+4+6)

Aggregate Deposits (a +b) 11,03,360 1,40,742 14.6 1,49,274 18.4 1,00,606 9.1 54,171 5.6
(58,014) (5.3)
a. Demand Deposits 048 10,496 7.4 15,186 11.9 3,677 2.4 5,392 3.8
b. Time Deposits 9,50,312 1,30,246 15.9 1,34,088 19.5 96,928 10.2 48,780 5.9
(54,336) (5.7)
Other Borrowings # 3,029 462 18.0 -168 -6.1 -423 -14.0 -341 -13.3
Other Demand and Time 1,11,883 20,676 22.7 12,766 16.3 -1,671 -1.5 2,205 2.4
Liabilities
Borrowings from the RBI 3,616 -280 -7.2 -2,595 -40.0 -3,280 -90.7 -280 -7.2
Inter-bank Liabilities 53,902 -23,186 -30.1 23,250 43.2 4,844 9.0 -1,467 -1.9
# Other than from RBI/IDBI/NABARD/EXIM Bank

83
 Deposit Products

* Data pertaining to June 2002.

** Data pertaining to May 2002.
@ Inclusive of borrowings by Primary Dealers.
Figures in brackets exclude the impact of mergers since May 3, 2002.
Note : Revised in line with the new accounting standards and consistent with the methodology suggested by the Working Group on Money
Supply : Analytics and Methodology of Compilation (June 1998). The revision is in respect of pension and provident funds with
commercial banks, which are classified as other demand and time liabilities, and includes those banks, which have reported such
changes so far.
The best mix of deposits for the bankers would be a high proportion of low yielding
time and savings deposits. These accounts are among the least expensive sources of
funds compared to others for a bank and often include substantial percentage of core
deposits a stable base of deposited funds that are not highly sensitive to
movements in market interest rates (i.e. bears a low interest rate elasticity) and tends
to remain with the bank. While many core deposits (such as small savings accounts)
could be withdrawn immediately, core deposits have an effective maturity often
spanning several years. Thus, the availability of a large block of core deposits
increases the duration of a banks liabilities and makes the institution less vulnerable
to swings in interest rates. The presence of substantial amounts of core deposits in
smaller banks help explain why large banks and bank holding companies in recent
years have acquired so many smaller banking firms to gain access to a more stable
and less expensive deposit base. However the combination of inflation, deregulation,
stiff competition and better-educated bank customers has resulted in a dramatic shift
in the mix of deposits that banks are able to sell.
Bank operating costs have soared over the recent years in offering deposit services.
The interest payments on deposits for all the insured US commercial banks that
stood at $10.5 billion in 1970, or 38 percent of total operating expenses, had jumped
to over $100 billion or more than half of total operating expenses by the 1990s. At
the same time the new higher yielding deposits proved to be more interest sensitive
than the older, less expensive deposits, thus putting pressure on the bank managers to
pay competitive rates on their deposit offerings. Banks that offer lower than the
market interest rates will have to meet for extra liquidity demands that arise due to
substantial withdrawals and fluctuating deposit levels. Faced with substantial interest
cost pressures, many bankers have pushed hard to reduce their non-interest expenses
like expenses on automating their operations and reducing the number of employees
on the payroll; and to increase operating efficiency.
Table 4: Interest Rate Structure of Scheduled Commercial Banks
(Per cent per annum)
July 11, 2003 March 28, 2003 Feb. 21 , 2003 Jan 29, 2003 Jan 17, 2003 Jan 03,
2003
1 2 3 4 5 6 7
A. Lending Rates
Size of Credit Limit
1. Up to Rs.2 lakh PLR PLR PLR PLR PLR PLR
2. Over Rs.2 lakh:
(Prime Lending Rate)* 10.75 11.50 10.75 11.50 10.75 11.50 10.75 11.50 11.00- 12.00 11.00-
12.00
a. Maximum Spread
over PLR 2.5- 4.00 2.5-4.00 2.5- 4.00 2.5- 4.00 2.5- 4.00 3.35- 4.00
B. Deposit Rates
Category of Account
1. Current Nil Nil Nil Nil Nil Nil
2. Savings 4.00 4.00 4.00 4.00 4.00 4.00
3. Term Deposits @
a) Upto and
including one year 4.25- 6.00 4.25- 6.00 4.25- 6.00 4.25- 6.00 4.25- 6.00 4.25- 6.00
b) > 1-2 years 6.00- 6.50 6.00- 6.50 6.25- 6.50 6.25- 6.50 6.50- 7.00 6.50- 7.00
c) > 2-3 years 6.25- 6.50 6.25- 6.50 6.25- 6.50 6.25- 6.75 6.75- 7.25 6.75- 7.25
d) > 3 years 6.25- 6.75 6.50- 6.75 6.50- 6.75 6.50- 7.00 7.00- 7.50 7.00-7.50
Memo Item:
Bank Rate ## 6.25 6.25 6.25 6.25 6.25 6.25

84
Overview of Banking

not exceeding
* Data relate to major public sector banks
@ The minimum maturity period of term deposits I 15 days effective April 29, 1998
## The change in the Bank rate was made effective from the close of business of respective dates indicated in the bracket.
Source: RBI
All other things remaining the same, a banker would prefer to raise funds by
selling those deposits that are least costly for the bank. The banker would also
prefer to sell those loans that generate the greatest net revenue after all the
expenses. If a bank can raise all its capital from sales of cheapest deposits and then
turn around and purchase the highest yielding assets it will maximize its spread
and the shareholder value.
Time deposits, CDs and money market accounts generally display low amount of
activity in terms of deposit withdrawals compared to the savings accounts and
current accounts. However the higher interest costs on most time deposits tend to
offset the cost advantage over the savings accounts. Smaller banks incur higher
interest costs on savings accounts than the larger banks but offset this by issuing
time deposits at a lower average cost than the average cost of time deposits issued
by larger banks. Nevertheless larger banks generate more revenue from chequeable
and thrift deposits because of the greater average size of these deposits at the
biggest banks.

Deposits form an integral part of a banks portfolio as they are the main source of
funds. Today most of the banks are able to sustain themselves on deposits and fee
based income given the background that the fund income is on a decline due to
lack of credit offtake. While in the global scenario several banks have experienced
a decline in their core deposits due to declining interest rates, the Indian scenario
depicts a different picture. The inflows into bank term deposits continue to be
surprisingly large despite the fall in interest rates. Yet, bank term deposits attracted
substantial inflows in the last three years (2001-03). Investors in these instruments
may need a change in strategy. Without a change in strategy, the post-tax yield on
their portfolio may well plummet below 4 percent. In the case of selected public
sector banks, the growth in inflows of term deposits has crossed 10% in the last
three years. When investors are being coaxed to invest in equities to enhance
portfolio returns, the preference for bank term deposits is puzzling. In addition, the
bulk of the deposit inflows are into savings deposits and other shorter-term
instruments. For a public sector bank, savings bank deposits range between 12 - 20%
of their deposit base. Deposits of less than a years maturity would constitute another
12-20%. This shows that retail-bank customers for deposit products such as checking
accounts and certificates of deposit are much less price sensitive than actually
perceived. Checking account customers, for instance, are surprisingly sticky, citing
convenience, the quality of service, and their relationships with bank personnel as
reasons for not switching to other banks after price increases. More than one-third of
these customers do not even recall the last price change to their checking accounts,
and only 13% of those who do remember troubled themselves to shop around for a
better deal. In the end, just 2% of all customers moved their accounts. In a 2001
market research study of more than 500 banking customers in the US Southeast and
Midwest, by McKinsey & Company, Inc., a consultancy firm also revealed this
phenomenon. This is good news for banks: if they had more flexibility to price retail
products without sparking widespread customer defections, they could boost their
bottom-line retail earnings by as much as 5 7%.

85
 Deposit Products

A bank that can fund most of its funds with deposits will have an interest cost-
advantage over competitors with lower proportions of deposits, all other things
being equal. The bank also has to keep the public preference in mind while
offering deposit products. In the recent past, public has demanded both high
yielding thrift accounts and chequeable deposits that pay interest rates comparable
to returns in the open market. At this juncture, the deregulation of financial
markets has made it possible for more kinds of financial service firms to respond
to the publics deposit preferences. This combination of greater competition and
higher costs helps to explain why bank profits have become more volatile and
uncertain in the recent years.

SUMMARY
The transaction and the non-transaction accounts have been among the most
important of all financial services provided by banks, principally because of
their safety, convenience, flexibility and explicit or implicit returns to the
customer.
The combined total of transaction and non-transaction deposits is one of the
most important financial assets for most of the households.
More than being a service, deposits are an important source of funds for the
banks. It is not just essential for the banks to have a good deposit base,
equally important is the composition of these deposits. Composition of
deposits refers to the demand deposit and the time deposit composition.
Savings and the current account deposits can be withdrawn any time; these
deposits are generally known as the demand deposits. However, the
withdrawal of term deposits is time bound and hence they are known as time
deposits.
The composition of these deposits becomes essential for the bank firstly, to
know its liquidity requirements. The greater the proportion of demand
deposits relative to time deposits of a bank, the larger will be the banks
liquidity needs as the demand for cash withdrawals may arise any time. On
the other hand, the liquidity needs for time deposits will not be unexpected
and the bank can identify in advance the cash outflows due to these deposits.
However, comparing them on the basis of costs, the demand deposits are the
low cost funds for the banks.
As the liquidity and the cost of funds are affected by the composition of the
demand and the time deposits, these deposits have a direct impact on the
growth and the earnings of the bank.

86
Overview of Banking

Appendix
Deposit products of various banks across the globe
INDIA
ICICI Bank
ICICI banks Roaming Current Account enables business while traveling. With
advanced technological features such as Multi-City Cheques and Local Cheques
Collection, customers banking needs are well taken care of. He can access his
account at over 250 networked branches across the country. Besides, there is
round-the-clock phone banking. He can also log on to www.icicibank.com or
even get Mobile Banking Alerts.
ICICI banks Value Added Savings Account gives the depositor the liquidity of a
Savings Account coupled with high earnings of Fixed deposit. This is achieved
by linking his Savings Account to Fixed Deposit Account providing the customer
the following unique facilities. The Auto Sweep Facility ensures higher rate of
interest on his Savings Bank Deposits. A customer can withdraw the funds in his
Value Added Savings Account from any channel such as the ICICI Bank ATM,
ICICI Bank Phone Banking, and ICICI Banks Internet Banking facility. No
penalty is levied on premature withdrawal for fixed deposits of less than Rs.15
lakh. In case of withdrawal, ICICIs Reverse Sweep Facility breaks the last Fixed
Deposit in units of Rs. 1000. The Fixed Deposits are broken on Last-In-First-Out
(LIFO) Basis. The remaining balance in your fixed deposit account will continue
to earn higher interest at the original rate applicable to the fixed deposit. Under
this facility, when the deposits fall due, the bank will automatically renew the
principal and accrued interest for a similar period as the original deposit.
State Bank of India
SBIs Multi-Option Deposits (MODS) are term deposits permitting partial
premature withdrawal in small tranches or a loan when required. The loan limit is
set up automatically when a customer places his deposits in SBIMOD. They are
available at computerized branches for maturities of 1, 2 and 3 years. A customer
can enjoy, a) Unmatchable safety and security of his funds, b) A secured high rate
of return, c) An auto renewal facility which ensures that the customer continues
to earn interest even after the deposit matures and if he had overlooked to give
renewal instructions to the bank. On maturity the bank will automatically renew
his deposit for a similar term. The amount can be withdrawn at any time and
there is no notice required. The facility of taking a loan at a very nominal net cost
(just 2% p.a.) is also there.
With SBIs savings plus, depositors have the option of a special savings account,
Savings Plus, where he can earn interest at term deposit rates on balances
exceeding a predetermined limit. The limit is set by the depositor (minimum
requirement is Rs.10,000) and the period of the term deposits is also selected by
him (over a wide range of 6 - 36 months). The bank makes the investments
automatically. As all term deposits are created under SBIMODS he can enjoy
high liquidity with high interest. Savings Plus accounts can be opened in single
or joint names. Unlimited credit is permitted in all accounts.
Citi Bank India
The Citibank Suvidha Junior Account Package, Indias first and only package is
aimed at securing a childs future and also does much more. The customer should
start early and invest regularly through his childs Investment Services Account.
This Account will be funded from his Childs Savings Account which in turn will
be funded through the customers Citibank Suvidha Savings Account. Citibanks
Investment Counselors will help achieve his goals by selecting the right mix of
investments. The customer just needs to set up a Regular Investment Scheme in
any of the portfolios he selects. The features of the scheme are:
Free insurance cover for education support for the child up to Rs. 25,000 per
year for 5 years in case of untoward death of the guardian in an accident.

87
 Deposit Products

This account gives the child a first hand experience of international banking.
At the same time, it makes handling finances easy for the child. The child
can access the funds in his or her Savings Account with his or her Citibank
Junior ATM / Debit Card, with a monthly limit as preset by the customer.
Family ATM/Debit card: With this, the Citibank Account of the customer gets
more powerful. The spouse, parents, etc., of the customer can readily access
Citibank Family ATM/Debit Card that is linked to Citibank Account. In this
account the family member need not be a joint account holder. The customer can
even preset the monthly spend limit. The family member can use the Family
ATM/Debit card as
A Debit card to shop at over 22,000 merchant outlets across India.
An ATM card to withdraw cash at over 150 Citibank ATM centers spread
across 13 cities in India. And at over 2,200 Cirrus & Swadhan ATMs at over
150 locations in the country.
International Deposit Products
Bank of America
A Master Relationship Account: A Master Relationship Account offers
potentially higher returns on idle checking account funds while investing to meet
customers financial goals. The scheme features include Automatic Daily
Investing. Money in excess of $1,000 is invested automatically each day in a
money market mutual fund through Bank of America Investment Services, Inc.
Bank of America Prima Account: Customers enjoy the rewards of a premium
package of services with interest checking and many free or discounted services.
Prima Checking features are:
Free cheques with unlimited cheque-writing privileges: Premier Banking clients
receive special Premier Banking cheques, a leather chequebook cover and ones
choice of regular or duplicate cheques at no charge. Other privileges are online
Banking with Bill Payment Service via the Internet with no monthly fee, and no
fee for most banking services, such as travelers cheques, cashiers cheques, stop
payments on cheques and more.
Overdraft protection from a Regular Savings account or credit card: Customers
get a Gold Visa card including a low rate and no annual fee. Premier Banking
clients can get a Platinum Visa with a minimum credit line of $15,000 at no
additional charge. Platinum Priority Cheque Card can be used for everyday
purchases and at ATMs. Premier Banking clients can receive a Platinum Priority
Cheque Card at no additional charge that offers higher daily ATM withdrawals of
up to $1,000, based on customers available balance.
Citi Bank
CitiGold Account: Special checking accounts CitiGold checking allows the
customers liquid money work harder for them. A customer can choose from:
Interest Checking: Receive a preferred interest rate that is competitive with
money market funds which comes with the benefit of FDIC insurance.
Regular Checking with our Sweep feature: Balances over $500 are
automatically swept into one money market mutual fund that a customer
selects from the available fund family.
With either account, a customer can enjoy unlimited cheque writing
privileges. Plus, a preferred rate on overdraft protection with Checking
Plus (variable rate), and Safety Cheque with a waived fee.
Waived fees on banking services, include: CitiGold cheques, Incoming wire
transfers, Travelers cheques, Stop payment requests and more, Money orders
and official cheques.
Fleet Bank
The Small Business Value Package is a full-featured banking package that

88
Overview of Banking

includes a comprehensive set of business banking services, simplified pricing,

and relationship benefits as well as a free consumer checking account. Small
Business customers and prospects can now combine their personal and business
banking at Fleet with no additional cost.
Features of this product includes:
200 free transactions per month and free cash handling.
Earn interest at a competitive rate and save money with a free Small
Business Money Market Savings Account.
Savings Overdraft Protection with no transfer fee.
Customer can get minute account balances, pay bills online and transfer
funds between accounts with Fleet OfficeLink Online Banking. Plus as a
Small Business Value Package customer receives free bill payment services.
With Small Business Payroll Services provided by Paychex, he can save
money with one free month of payroll processing and one free year of direct
deposit processing. And, for every month he processes payroll, he will
receive a $5 monthly relationship credit to his checking account.
Customer can make online payments by credit, debit and ATM cards through
Fleets Merchant Service products. As a Small Business Value Package
customer, the bank waives the $85 set-up fee* and gives a $5 monthly
relationship credit to the customers checking account.
With Fleets Small Business Total Access Cheque Card, the customer can
enjoy the flexibility of 24/7 access to more than 300,000 ATMs worldwide,
plus the power to make purchases wherever Visa cards are accepted.
Combine checking, savings, and more on one monthly statement.
Business Savings Overdraft Protection offers:
A low fee of just $3 per transfer
A record of transactions on both monthly statements
Protection against checking overdrafts
Automatic transfers from savings to checking
Every Fleet Small Business Money Market Savings Account offers the option of
adding Fleet Savings Overdraft Protection for just $3 per transfer with no
monthly fee. This overdraft protection will automatically transfer any checking
overdrafts from savings account, so the difference is instantly covered. This
convenient solution provides a simple way to prevent checking overdrafts while
maintaining control over a customers finances.
Bank of Scotland
International Flexible Current Account
This account will cover all day-to-day banking needs of a customer, offer a
competitive interest rate on his balance and the flexibility to have an overdraft
facility tailored to his needs. It offers:
Preferential Rate Overdraft Facility The bank jointly identifies the overdraft
needs of a customer and provides the facility he needs at an attractive and
competitive interest rate 1% below the Bank of Scotland Base Rate (Gross).
Free banking no charges for any transactions (while the account is in credit) the
customer also enjoys; A Switch debit card that allows guarantee cheques for up
to 100 and can draw up to 250 per day from any of the 30,000 LINK cash
machines in the UK at no charge (subject to available funds in the account); Free
Internet banking and 24 hour telephone banking that lets a customer check his
balance, review recent transactions, pay regular bills, order cheque books and
more.
Gold Visa Card
The Bank of Scotland Private Banking Gold Visa Card not only gives flexibility
and convenience in paying for goods and services, but also provides valuable

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additional benefits. These include:

9.9% APR on purchases (11.6% APR on cash advances)
Credit limit to suit customers needs, subject to prior agreement
Up to 8 weeks interest-free credit on purchases
Flexible repayment options by post, direct debit or telephone
Withdraw up to 500 a day from over 400,000 cash machines worldwide
(subject to available funds in the account. Some banks and building societies
may charge for this service and may limit the amount one can withdraw at
any one time). No annual fee PLUS
Free Travel Accident Insurance upto 250,000
Free 100 Day Purchase Care Insurance insures purchases against loss, theft
or accidental damage
The customer also gets upto 10% discount on travel and holidays booked through
the banks Travel Service when he pays with the card. In association with
Thomas Cook, the banks Travel Service offers convenient phone bookings,
seven days a week, with a wide range of quality holidays to choose from. He can
also get Travelers cheques and foreign currency ordering with no cash advance
fee and low 1% commission (minimum charge 3).
Treasurers
This product is specially designed to overcome the problem that treasurers of
organizations face in juggling money between two accounts. This combines an
interest-paying savings account with a current cheque book account: free banking
while in credit, no minimum or maximum balance, free cheques, no transaction
charges, free Standing Orders and Direct Debits.
The bank offers competitive interest rates which is paid to qualifying
organizations. Other privileges include Monthly statements, free Internet banking
and 24 hour telephone service that lets reconciliation of balances, review recent
transactions, pay regular bills, order cheque books and more.
Abbey National
Abbey Nationals new Sweep Facility takes the hassle out of saving and offers
the flexibility to suit a customers individual needs. Sweep automatically
transfers any spare money from the bank account to Abbey National savings
account on a chosen date each month. So, whether its 1 or 1,000 thats
available to sweep, a customer can be sure that the account would boost his
savings. Alternatively the bank offers credit interest on the bank account.
The Abbey National Switcher Service is the easy way to transfer an account in
another bank to Abbey National Bank. The bank does all the proceedings right
from writing to the existing bank to changing a customers Direct Debits and
standing orders. Switching to Abbey National not only give a straightforward,
easy-to-use bank account but also an interest-free overdraft for a set period. If a
customer currently benefits from a 12 month interest free overdraft as a result of
switching accounts, and he has opted for the Preferred In-Credit Rate, his
continuing eligibility for this offer will be affected. The Abbey National Bank
Account gives excellent value for money and a convenient and flexible way to
manage money on a day-to-day basis.
Alliance-Leicester bank
Access Plus: This immediate access account gives a yearly bonus for limiting
withdrawals.
This tiered interest rates mean the more one saves the more he can earn. A
customer can enjoy a 1% gross bonus, payable on anniversary of account
opening, by making not more than 3 withdrawals per year. He can withdraw up
to 250 a day in branch, or use a cheque for larger amounts. Interest is credited
annually on 1 April. The minimum opening balance is 10. And a customer

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should not exceed more than 3 withdrawals per year to qualify for annual bonus.
The maximum investment is 1 million per individual.
Access Direct: This convenient postal account gives a customer easy access to
his money and high interest benefits. The other benefits include,
Enjoy easy access to money as no withdrawal notice is needed.
An extra bonus of 0.5% (gross per annum) for 2 or less withdrawals a year.
Freepost makes it cheap and convenient to make transactions.
A customer can take the interest on his savings as monthly income.
Tiered interest rates mean the more one saves, the more he earns.
The minimum opening balance is 5000.
Maximum balance:
Single account holder, 1 million.
Joint account holders, 2 million.
Minimum deposits of 100/minimum withdrawals of 100.
This facility is not available to trustees/nominees or businesses.
TESSA Maturity ISA: If a customer has a maturing TESSA (Tax Exempt Special
Saving Account), this tax-free savings account does not restrict the amount one
can invest in an ISA (Individual Savings Account). The benefits include:
Investment upto 9,000 that maximizes return with tax-free interest.
Earn gross interest straight away even in case of withdrawals.
Easy access to savings as no withdrawal notice is needed.
No need to include ISA on a tax return.
This scheme is available to sole accounts only.
This must be opened on maturity of an existing TESSA or within six
months of maturity.
The maximum balance is the amount of the maturing TESSA capital.
The minimum opening balance is 1 (matured TESSA capital only).
No further deposits are allowed.
Barclays
Variable Rate (Mini Cash) ISA: If a person is looking for tax-free returns on his
cash, this ISA could be ideal for him. Key aspects of this account are:
Savings are kept in cash.
No investment risk to capital.
Interest earned is tax-free.
Save from 10 to 3,000 each tax year.
Easy access to money.
Open plan Savings: Open plan Savings enables creating a number of savings
pots for specific purposes, such as a wedding or new car. The pots balances are
combined to give a potentially higher interest rate on his total savings. One can
combine Open plan Savings with Money Manager to automatically move spare
cash from Barclays current account into Open plan Savings. One can also use
Openplan Savings to offset an Open plan Mortgage. This could cut years and
thousands of pounds off a customers mortgage.
To set up Open plan Savings without Open plan Money Manager one will need a
minimum initial balance of 5,000.
Benefits with Open plan Savings are:
Offset Open plan Savings against mortgage.
Earn more interest on combined balances.
Customers can name savings pots to help organize his finances.
Manage savings accounts online.
Use Money Manager to automatically save spare cash.

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