Different kinds of deposits:

Initially, there were only four types of bank accounts that were operating in India. These
included the Current Account, Savings Account, Recurring Deposit Account and Fixed
Deposit Account. But later with the advancement in the banking sector, various other types of
bank accounts were introduced.

Savings Account
As the name suggests, the savings accounts can be opened by an individual or jointly by two
people with an aim to save money.
The main benefit of opening a savings bank account is that the bank pays you interest for
opening this type of account with them.
Given below are a few features of the Savings account:

● There is no limit to the number of times the account holder can deposit money in this
account but there is a restriction on the number of times money can be withdrawn
from this account.
● The rate of interest that an account holder get varies from 4% to 6% per annum

● The savings account holders can get an ATM/Debit/Rupay Card if they want to

● Savings bank account is further divided into two types: Basic Savings Bank Deposit
Account (BSBDA) and the other one is Basic Saving Bank Deposit Accounts Small
Scheme(BSBDS)
● The savings bank account is mostly eligible for students, pensioners and working
professionals

Current Account
The second type of bank account is the current bank account. These accounts are not used for
the purpose of savings.
Some important pointers related to the current bank account have been discussed below:

● This type of bank account is mostly opened by businessmen. Associations,

Institutions, Companies, Religious Institutions and other business-related works, the
current account can be opened
● There is no fixed number of times that money can either be deposited or withdrawn
from such accounts
● Overdraft facility is available for current bank accounts

● There is no interest that is paid on such accounts

Recurring Deposit Account
Recurring Deposit account or RD account is a form of account wherein the account holder
needs to deposit a fixed amount every month until it reaches the fixed maturity date.
The features of the Recurring deposit account have been discussed below:

● Any individual or an Institution can open a recurring deposit account either separately
or jointly
● Periodic or monthly instalments that need to be added can be as low as Rs.50/- or may
vary from bank to bank
● The range of months for which an RD account can be opened varies from 6 months to
120 months
● The interest rate varies depending upon the bank you choose to open an account with

● Nomination facility is also available for RC accounts

● Premature withdrawal of the amount is permitted, provided a sum of amount is

deducted as penalty

Fixed Deposit Account

FD or a fixed deposit account is another type of bank account that can be opened in any
Public or Private sector bank.
The list of important things that need to be known with respect to the fixed deposit account
has been mentioned below:

● It is a onetime deposit and one time take away account. Under this type of account,
the account holder needs to deposit a fixed amount of sum (as per their wish) for a
fixed time period
● The amount deposited in FD account can only be withdrawn all at once and not in
instalments
● Banks pay interest on the fixed deposit account

● The rate of interest depends upon the amount you deposit and for the time duration of
the FD
● Full repayment of the amount is available before the maturity date of FD

DEMAT Account
Shares and securities which can be held in electronic format constitute the DEMAT account.
The DEMAT account also stands for Dematerialized Account.

● There are only two depository organisations which manage this type of bank account
in India. This includes: National Securities Depository Limited and Central
Depository Services Limited
● This helps facilitate easy trade of bonds and shares

● Helps in conducting stress-free transaction of shares

● KYC is required for opening the DEMAT Account

● Transaction cost is reduced

● Traders can work from anywhere

● The transfer of securities can be done with reduced paperwork

NRI Account
To fulfil the bank requirements of a Non-Residential Indian or a Person of India Origin, the
option of NRI account is available.
The NRI Accounts are further divided into three types:

1. NRO ( Non-Resident Ordinary Rupees) Account – This shall allow you to transfer
your foreign earnings easily to India. It can be opened in the form of an
FD/RD/Current/Savings account. These accounts can be opened by an individual or
jointly opened
2. NRE ( Non-Resident External Rupees) Account – When an Indian citizen moves
abroad to work there, his/her account needs to be converted into an NRE account.
This account can be jointly opened with an Indian resident
3. FCNR ( Foreign Currency Non-Resident ) Account – This type of account can be
opened to manage an international currency. It can only be in the form of Term
deposit and can be withdrawn after the maturity period only.
Principles of Sound Lending:
Lending is the most profitable business of a commercial bank, but it is highly risky too.
Leading is always accompanied by the credit risk arising out of the borrowers’ default in
repaying the money. A banker should, therefore, manage his loan business in a safe and
profitable manner. He should take all the necessary precautions to minimize the risk
associated with the grant of a loan. In considering a loan proposal, he should bear in mind
certain general principles of lending.

1. Safety
2. Liquidity
3. Diversification of Risks
4. Profitability
5. Purpose
Some of these principles are incompatible, e.g., liquidity and profitability, but a judicious
banker is able to strike a satisfactory compromise between these two.

1.Safety:
The safety of funds is the most important guiding principle of a banker. The safety of funds
implies that the borrower would repay the principal sum and the interest thereon in the
manner and on the conditions provided for in the loan agreement.
Banker should examine the capacity of the borrower and his willingness to repay the loan
amount (For individual, it can be identified using CIBIL score)

2. Liquidity
Liquidity means ease of conversion of an asset into cash. As a major part of commercial bank
liabilities is payable either on demand or on short notice, the banker should ensure that the
loans are liquid. Liquidity, thus, signifies the readiness with which the bank can convert its
assets into cash with no or insignificant (small) loss.

1.A loan will be liquid if it has been given for a short period to finance some purchases of
stock, raw materials, etc.
2. A banker should give short-term advances which can be recalled in time to satisfy the
demands of the depositors.
3. Bank should not lend short period funds for a long time. As in that case, the loans and
advances will tend to be less liquid, and it would be a great problem for it to realise cash in
case of an emergency.
4. Loans, to be liquid, should be given against the security of quickly realizable assets so that
in case the borrower defaults in repayment; these might be readily converted into cash.

3. Diversification of Risks:
Banker should adhere to the principle of diversification (spread) of risks while lending funds.
Diversification implies the dispersal (lending) of funds over a large number of borrowers and
borrowing firms situated in different parts of the country. In other words, a bank should not
lend money to a few entities. Also, a bank should lend money in different types and ranges of
interest whereby some are risky, some with less risk and some risk-free.

Purposes of this principle are:

1. Minimizing the risk inherent in the grant of loans.
2. It is a defensive policy to protect the bank against risk.
3. Also, a device for increasing the average return on a fund that might otherwise, for the sake
of safety, be confined to risk-free assets providing little or no return.
4. A banker should remember that if he puts all his eggs in one basket he may lose all of them
together at a time. In view of this, he should avoid concentrating the bank’s funds in a few
customers. If these few customers do not pay then the bank may go bankrupt.

4.Profitability:
Equally important is the principle of profitability. The difference between the lending and
borrowing rates constitutes the gross profit of the bank. Banks need to earn profit for several
reasons:

1.Like other economic entities, banks must earn sufficient income to pay interest to the
depositors in order to meet establishment charges, pay dividends to owners, and retain a
portion of the income for the future growth, expansion and contingencies.

2. Lending rates are affected by the bank rate, interbank competition and interbank
agreements, where they have been agreed.

3. No banker will and should ordinarily think of an advance without a satisfactory margin
between the lending and borrowing rates.

4. Different rates are charged, depending on the credit risk involved in the lending to different
borrowers, type of loans, the nature of security, the mode of charge, the margin requirement.

5. Advances should be given to customers after proper enquiry about the risk and credibility
associated with him. Also, proper guarantees must be taken.

5.Purpose
Bankers should always inquire about the purpose for which the loan is taken. As a matter of
fact, the safety and liquidity of loan depends on the purpose for which it will be put.

1. An advance given for productive purposes in all probability will be repaid because the
grant of the loan will generate additional income for the borrower to enable him to repay it.
2. An advance made for non-productive and speculative purposes is subject to greater credit
risk because the purpose for which the loan was sought would in no way improve the
repaying capacity of the borrower. Borrower may or may not be able to pay.

3. There are chances that funds borrowed for a productive use may be used for speculative
purposes. The banker (as far as possible) should, therefore, take follow-up steps to see that
the end-use of credit is not for a purpose other than for which it is taken.
Thus, a banker should avoid giving loans for wasteful expenditure, social functions and
speculative transactions.

Different types of Loans and Advances:

On the basis of Style:

Banks, these days, extend loans and advances to their customers in the following ways

1.Term Loans:
Banks provide loans for a fixed period. The borrower pays interest on the entire amount
he has borrowed.
● Term loans are the opposite of fixed deposits in the bank. The repayment of these
loans is to be made in fixed, predetermined instalments.
 ● This type of loan is normally given to the borrowers for acquiring long-term assets,
which will benefit the borrower over a long period (exceeding at least one year).
● Purchases of plant and machinery, constructing building for factory, setting up new
projects fall in this category.
● Financing for purchase of automobiles, consumer durables, real estate and creation of
infrastructure also falls in this category.

2.Cash Credit System:

Cash credit is the main method of lending by banks in India and accounts for about 70% of
total bank credit. Under this system, banker specifies a limit, called cash credit limit for each
customer, up to which the customer is permitted to borrow against the security of tangible
assets or guarantees. The customer withdraws from the cash credit account as and when he
needs funds and deposit any amount of money which he finds surplus with him on any day.

Note: Separate account has to be opened for cash credit.

3.Overdraft:

The word overdraft means the act of drawing more than the money deposited in the bank
account. In other words, the account holder overdraws. When a customer gets an overdraft
facility from a bank, he is allowed to draw cheques in excess of the balance standing to his
credit to the extent of the amount of overdraft.

Example: If a bank has allowed overdraft to the extent of ` 50 lakh to a businessman, he

can draw cheques in excess of the amount of his own deposits with the bank to the tune of `
50 lakh. The bank charges interest only on the amount overdrawn. For a businessman, the
overdraft facility is the easiest and most convenient method of borrowing funds from banks.

4.Discounting of Bills of Exchange

Discounting or purchasing the bills of exchange is an important form of bank lending. Bill
discounting is a major activity of some of the smaller banks. The bank takes the bill drawn by
borrower on his (borrower’s) customer and pays him immediately deducting some amount as
discount/commission.

The bank then presents the bill to the borrower’s customer on the due date of the bill and
collects the total amount. If the bill is delayed, the borrower or his customer pays the bank a
predetermined interest depending upon the predetermined terms.

Thus, by discounting bills, the bank pays money to the creditor when he needs it and allows
the debtor to make payment only when the bill is due for payment. Discounting of bills of
exchange is, therefore, really important form of bank lending.

On basis of Purpose:
Almost all the banks in the country provide following kind of loans
On the basis of security:
Secured Advances:
A secured loan is a loan backed by collateral—financial assets you own, like a home or a car
—that can be used as payment to the lender if you don't pay back the loan.
The idea behind a secured loan is a basic one. Lenders accept collateral against a secured loan
to incentivize borrowers to repay the loan on time. After all, the prospect of losing your home
or car is a powerful motivator to pay back the loan, and avoid repossession or foreclosure.

Unsecured Advances
Unsecured loan is a loan that doesn't require any type of collateral. Instead of relying on a
borrower's assets as security, lenders approve unsecured loans based on a borrower’s
creditworthiness.
Examples of unsecured loans include personal loans, student loans, and credit cards.
On the basis of period:
Short-term loans of up to one year;
Medium-term loans between one and three years;
Long-term loans of over three years.
Modes of Creating Charges:
1. Hypothecation
2. Pledge
3. Mortgage
1. Pledge: As per Indian contract Act 1881, Pledge can be defined as “Bailment of goods as
security for the payment of a debt or performance of a promise.”
Possession of the Gold is being transferred to the lender.
Remedy for default by borrower: Lender can sell the asset to recover debt amount.
Example: Gold Loan – Movable asset.
(Section 172 of Indian Contract Act 1881)
2. Hypothecation: It is a method of creating a charge over the movable asset, neither
ownership nor the possession of the goods is transferred to the creditor but an equitable
charge will be created in favour of creditor.
Possession remains with the borrower.
Since lender does not have physical possession, he can file a suit to take possession and
dispose it off to recover debt amount.
Example: Vehicle Loan – Movable asset.
Section 2(n) of SARFESI Act 2002
3.Mortgage: When the customers offer immovable property like Land Building as a security
for a loan. Charge there on is created by means of mortgage.
Possession remains with the borrower.
Mortgagee can file a suit in court to take possession of mortgaged property and sell it to
recover debt amount.
Example: House loan.
Section 58 of Transfer of Property act 1882