Banking jargons -Tutorial #1

In this series I will try explaining certain commonly used terms in this field. 

Some of the details below has been taken from other websites, links are provided for your further reading.

Savings Account: As the name indicates, this account is meant for saving purposes. Any individual either single or jointly can open a savings account. In these accounts one has to maintain minimum balance as low as Rs1000/ in some PSU banks while it is Rs 10,000 and above in private sector banks. In savings account number of financial transactions are restricted.  Interest rates are higher when compared to current account. Any cash transactions of Rs 10 lakhs and above in a year will be informed to the IT department. In case, if you do many cash transactions and issuing of cheques in a savings account, banks have all the right to question you on the income and reason for transaction.

Read more at: http://www.goodreturns.in/classroom/2013/04/difference-between-saviings-account-current-account-167644.html

Current Account: Current account is mainly for business persons, firms, companies, public enterprises etc. This is useful when a person does a  number of business transaction on daily basis. While, there is no interest paid on amount held in the account, there is no limit on number of transaction. In case of ATM withdrawal if you have a salary account or zero balance account you should opt for the savings account.

Read more at: http://www.goodreturns.in/classroom/2013/04/difference-between-saviings-account-current-account-167644.html

Below are the term deposits that would be active for a fixed term.

 Recurring Deposit Accounts :These are popularly known as RD accounts and are special kind of Term Deposits and are suitable for people who do not have lump sum amount of savings, but are ready to save a small amount every month.    Normally, such deposits earn interest on the amount already deposited (through monthly installments) at the same rates as are applicable for Fixed Deposits / Term Deposits.   These are best if you wish to create a fund for your child's education or marriage of your daughter or buy a car without loans or save for the future. 

Under these type of deposits, the person has to usually deposit a fixed amount of money every month (usually a minimum of Rs,100/- p.m.).   Any default in payment within the month attracts a small penalty.    However, some Banks besides offering a fixed installment RD, have also introduced a flexible / variable  RD. Under these flexible RDs the person is allowed to deposit even higher amount of installments, with an upper limit fixed for the same e.g. 10 times of the minimum amount agreed upon. 

These accounts can be funded by giving Standing Instructions by which bank withdraws a fixed amount on a fixed date of the month from the saving bank of the customer (as per his mandate), and the same is credited to RD account. 

Recurring Deposit accounts are normally allowed for maturities ranging from 6 months  to 120 months. A  Pass book is usually  issued  wherein  the person can get the entries for all the deposits made by him / her and the interest earned.   Banks also indicate the maturity value of the RD assuming that the monthly instalents will be paid regularly on due dates. In case instalment is delayed, the interest payable in the account will be reduced and some nominal penalty charged for default in regular payments.  Premature withdrawal of accumulated amount permitted is usually allowed (however, penalty may be imposed for early withdrawals).    These accounts can be opened in single or joint names. Nomination facility is also available.

Fixed Deposit Accounts in India:All Banks in India (including SBI, PNB, BoB, BoI, Canara Bank, ICICI Bank, Yes Bank etc.)  offer fixed deposits schemes with a wide range of tenures for periods from 7 days to 10 years.   These are also popularly known as FD accounts.   However, in some other countries these are known as "Term Deposits" or even called "Bond".    The term "fixed" in Fixed Deposits (FD) denotes the period of maturity or tenor. Therefore, the depositors  are supposed to continue such Fixed Deposits for the  length of time for which the depositor decides to keep the money with the bank.  However, in case of need,  the depositor can ask for closing (or breaking) the fixed deposit prematurely by paying paying a penalty (usually of 1%, but some banks either charge less or no penalty).   (Some  banks   introduced variable interest fixed deposits.  The rate of interest on such deposits  keeps on varying with the prevalent market rates i.e. it will go up if market interest rates goes and it will come down if the market rates fall.  However, such type of fixed deposits have not been popular till date). 

The rate of interest for Fixed Deposits differs  from bank to bank (unlike earlier when the same were regulated by RBI and all banks used to have the same interest rate structure.   The present trends indicate that private sector and foreign banks offer higher rate of interest.   

The earlier trend that private sector and foreign banks offer higher rate of interest is no more valid these days.  However, now a days small banks are forced to offer higher rate of interest to attract more deposits.   Usually a bank FD is paid in lump sum on the date of maturity.  However, most of the banks have also facility to pay/ credit interest in saving account at the end of every quarter.  If one desires to get interest paid every month, then  the interest paid will  be at a marginal discounted rate.  In the changed computerized environment, now the Interest payable on Fixed Deposit can also be easily transferred on due dates to Savings Bank or Current Account of the customer.