UNIT TWO
DEPOSITS
The
major function of a bank is to accept deposits and lend/invest the money
accepted as loans and advances. In the
course of business, a bank is bound to meet and interact with a large
cross-section of customers. Obviously,
their needs will differ; therefore, the bank has to put on the table various
types of deposits to enable customers to have manifold banking transactions.
Again, a banker should be very careful in opening deposit accounts. Some of the
deposit accounts are operated very often. Therefore, he should safeguard his
position in such a way that he may not be victimized by unscrupulous persons.
The should observe certain general precautions before opening a deposit
account.
GENERAL
PRECAUTIONS
Application
Forms:
The
prospective customer is first of all ask to fill and sign an application form prescribed for that purpose. This
application contains the rules and regulations of the bank along with the terms and conditions of the
deposit. The application forms vary with the classes of customers and for the kinds of deposit.
Different banks also print their application forms different from other banks.
Specimen
Signature
Every
new customer is required to give three or more specimen signatures. Usually,
they are obtained on cards which are filed alphabetically for easy reference.
Letter
of Introduction:
It
is always advisable on the part of the banker to allow the prospective customer
to open an account with proper introduction. The banker is to demand a letter of
introduction from a responsible person known to both parties. The person
issuing the introduction letter must be aware that if he supplies any false
information about the party, he would
be liable for any loss suffered by the banker (Bloodnok & Sons vs. United Kingdom
Bank). If the introduction turns out to be a forged one, the account is treated
as having been introduced at all.
Passport-size
Photograph:
In
recent times, prospective customers are required to affix their passport-size photograph to the application
forms to prevent impersonation and for easy identification at the of opening
the account.
Verification
of Documents:
If
the new party happens to be a corporate body, it is essential that the banker
should verify some of the important documents such as Memorandum of Association,
Article of Associations, bye-laws copy, etc. In Lumsden & Co. vs. London Trusty
Savings Bank, one of the grounds for banker’s negligence was the failure to
verify the passport of the customer who had recently arrived from Australia.
Interview:
At
the time of opening a new account, it is always advisable to have an interview with
the prospective customer so as to obviate the chances of perpetration of any
fraud in future
Account
in Cash:
It is a common practice to allow a new party
to open an account only in cash. In the absence of an express notice, a banker
need not worry about the source of money or the customer’s title over the
money.
What
is Deposit
Deposit means a claim of other
entities on the bank in cash, with or without interest or premium of any kind that
is to be repaid on demand or at a certain period, depending on the agreed
conditions at the time the deposit was placed.
Types
of Deposits
Savings Bank (SB)
Accounts
To
inculcate the habit of savings and to encourage thrift, the savings account
facility is available with all the banks. The main aim of this type of deposit
is to bring awareness among the general public that banks can help individuals
develop their savings habit.
Savings
Bank (SB) Accounts are opened with proper introduction or identification (to
confirm the genuineness of the person opening the account and conducting its
transactions and also to curb fraudulent transactions). The central bank
regularly advises banks, through its circulars to follow certain basic pattern
or know your customer (KYC) rules to ensure that accounts are opened properly
so that fraud and malpractices are avoided.
A
rate of interest is paid based on the amount (deposit) kept by the depositor
with the bank in the savings bank account.
The interest is calculated based on the minimum balance maintained in
the savings bank account between 10th and the last day of every
month. Interest is arrived at on the
basis of minimum balance and simple interest is calculated on product basis and
credited to the respective account, on a half-yearly basis. If the account is opened after the 10th
of any month, the account holder is not entitled to interest for that
month. Also, interest is not paid on the
SB balance for the month the account is closed.
An
individual may open a savings account with any bank subject to completing the
minimum formalities. The SB may be a single
account or a joint account.
While opening a SB account, the account holder (customer) has to fill up
an application form furnishing relevant details, duly accompanied by specimen
signatures. Other requirements like proper introduction, address/residence
proof, photographs, identity proof, etc are to be complied with.
Withdrawals
from the SB account are allowed with cheques or withdrawal slips or forms. If the account holder issues cheques without
sufficient funds in his/her account, the bank dishonours the cheque and if it
repeats, charges a penalty or even closes the account after issuing a proper
notice to the account holder.
During
the opening of the account, the account holder is required to nominate someone
by filling the relative nomination form.
Generally,
banks allow joint accounts (savings bank) with not more than three people. Apart from the usual formalities to be
followed, the instruction to operate such an account is very vital. A joint SB
account can be operated by all the account holders together. This means that
the bank will honour payment only after all three holders have given their
consent to withdraw money. However, if
the instruction to operate such an account is severally or by any one,
then the bank is required to pay based on any one of the joint holder’s
instruction subject to availability of funds in the account and the cheque in
question being otherwise in order. In
case the bank fails to carry out the instruction it cannot claim protection
under provisions of Negotiable Instrument Act.
In
addition to the above, banks also open SB accounts for NGO’s, clubs, registered
societies and educational institutions provided these are not engaged in any
trade or business. Those engaged in
trade cannot have SB accounts.
Banks
are also prohibited from opening an SB account in the name of government
departments/bodies, which depend on budgetary allocations for the performance
of their functions. Also, banks cannot
open an SB account for any trading or business or professional concerns and
political parties.
The
other requirements of an SB account are:
a) Completing the formalities such
as obtaining proper introduction, proof of residence, photographs, specimen
signature, etc.
b) As per KYC norms, proper
identification of the person is a must.
c) The introducer may be an
existing account holder or a well-known person from the locality acceptable to
the bank.
d) Borrowers may also introduce a
person wishing to open an account.
e) The address furnished by the
account holder must be verified and satisfied, based on any one of the
following:
i) Voter
ID card
ii) ID
issued by employer
iii) Valid driving license
iv) Passport
v)
Electricity/telephone
bills
f) The SB account holder is given
a cheque book / withdrawal slip.
g) An ATM card is made available
to an SB customer
Other
features of an SB account are:
a) No overdrawing is to be allowed
in the SB accounts
b) Nomination facility is
available for individuals only. The banker has to explain the importance of
nomination in a proper manner and obtain nomination. Joint account holders are allowed only one
nomination.
c) An SB account holder who wishes
to withdraw a huge amount of cash from the account is required to give an
advance notice to enable the branch to make necessary arrangements.
d) The bank reserves the right to
change the rules of business at any time with or without notice to the
depositors individually.
e) One cheque book is issued at a
time
f) The account holder who wishes
to close his/her accounts has to give an application. The bank has to make
enquiries about the reason for such a closure (especially to find out whether
the account is closed on account of non-satisfactory service of the bank) and
then proceed to close the account. The
bank will obtain the unused cheque book and ATM card before closing the
account.
g) In the case of death of the
account holder, the account will be closed after completing the formalities
(setting the claim in favour of the nominee or legal heirs or allowing
operation to the survivor, as the case may be).
Current Deposit
(CD) Account
Current
Deposit (CD) Accounts are opened to meet the transaction of business and
trade. A current account will generally
have more transactions and also involve large amounts. Current account balances do not earn any
interest.
A
current account can be opened by individuals who are competent to contract
business entities/traders/partnership firms/corporate/joint stock
companies/banks.
Before
opening a current account the formalities required for opening bank accounts
are to be followed without fail. A
current account can be opened only if introduced by another existing current
account holder.
While
opening the account, besides obtaining proper introduction, the other
requirements of KYC norms are to be followed.
The bank, at any point in time, has to prove that the account holder is
its customer. Only then can it claim
protection under Sec 131 of the NI Act, 1881 when he collects a cheque.
Unlike
an SB account, third party cheques may be collected for current holders. However, the required endorsements obtained
are to be verified and the bank has to be satisfied that its current account
customer is entitled to receive payment if the cheque is originally payable to
a third party.
The
current account holder is expected to maintain sufficient balance in his/her current
account while issuing cheques. If not,
cheques issued may be returned by the bank leading to the attraction of
provisions of Sec 138 and related section of NI Act, 1881.
In
the ordinary course of business, there may be instances when the balances in
the account may not be sufficient to meet the cheque(s) received, then the bank
may consider the customer’s request and use its discretion to permit
overdrawing in the current account. This
facility is extended for a temporary period.
Though
there is no interest paid on the current account balance, banks can charge a
fee for handling the account based on maintaining the minimum amount, folio
fees, cheque books charges, cheque return charges, etc.
There
are no restrictions with regard to the number of transactions. The latest cash withdrawal Tax – The Banking
Cash Transaction Tax – is applicable to current account cash withdrawals
(individual/business entity).
While
opening a current account, in addition to the current account opening form,
specimen signature cards, photos, and address proof, the banks also obtain
additional documents to safeguard the interest of the bank. Account opening forms are duly signed by the
account holders to authenticate their identity.
In
addition to the respective application forms, the other important documents
required to be obtained are:
For
Proprietorship concerns
1. Proprietorship letter: The proprietor has to sign in his/her
individual capacity.
2. Copy of the shop and establishment
certificate.
For Partnership
firms
1. Partnership letter signed by all the partners
in their individual capacity.
2. Copy of partnership deed certified as the
latest by the partner(s).
3. Copy of registration certificate issued by
the Registrar of Firms.
For Joint Stock
Companies
1. Copy of Memorandum of Association.
2. Copy of Articles of Association
3. Copy of Certificate of Incorporation
4. Board Resolution for opening/operating a
current account.
The
above documents are required for opening an account for a private limited
company. In addition to the above, for a
public limited company that wishes to open an account, a copy of the
Certificate of Commencement of Business should also be taken. A list of present
Directors as filled with the Registrar of Companies has also to be kept on
record.
The
current account holders are entitled to all types of banking transactions like
i) Standing
instruction facility
ii)
Cheque book facility including
personalized cheque book.
iii) Pass book or monthly pass sheets. In case of more or frequent operations in the
account, banks do consider and provide pass sheets on weekly or fortnightly
basis at the request of the customer.
iv) Collection of outstation cheques/other
instruments.
Fixed Deposit
Account (FDA)
Fixed
deposits, also known as term deposits are accepted for a certain period and are
repayable on the date of maturity. As compared to the SB account, the rates of
interest on term deposits are higher depending on the tenure of the deposit.
The minimum period of a term deposit is 7 days and the maximum is 120 months.
Fixed
deposits carry simple interest payable on monthly, quarterly, half yearly or
yearly basis. Fixed deposit is for a fixed period and simple interest is
payable as per the instruction of the customer. However, under a monthly income
scheme, the interest is payable at a discounted rate.
The
Fixed Deposit Receipt: A deposit receipt is not a negotiable instrument. The
transferee, therefore, cannot get a better title than that of the transferor
himself. That is why the receipt has been specifically marked “Not
transferable”. However, money in deposit account becomes a debt from the bank
and like any other debt this can be assigned. To be effective, prior notice of
assignment should have been served on the banker. The assignee should also give
a notice to the banker informing him of his right to the deposit.
REINVESTMENT
PLAN
While
fixed deposits carry simple interest, the reinvestment plans give compound
interest. Reinvestment plan is an extension of fixed deposit. The option is
with the customer to decide the type of deposit in which he / she would like to
keep his / her funds.
Unlike
the fixed deposit where the interest earned is paid back to the depositor on
maturity (on the basis of monthly, quarterly, half yearly or yearly), under the
reinvestment scheme, the bank retains the interest earned and gives to the
customer the principal plus interest upon interest is given on compounded
basis.
All
other aspects as applicable to the fixed deposits are applicable to the
reinvestment plan deposits. Generally, banks decide their own rates of interest
structure for term deposits which are applicable to all term deposits like
fixed, reinvestment plan, recurring deposits, etc.
Reference
Anim-Addo SK- Principles of Banking Laws 3rd
ed (2007), Chartered Institute of Bankers, Accra
Lekshmy & KC Shekhar - Banking Theory and
Practice (19th ed.) 2007) VIKAS Publishing House, New Delhi
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