6 Deposit Management

8/3/2019 6 Deposit Management

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DEPOSIT MANAGEMENT

Presenter

Dr.S.C.Bihari


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IMPORTANCE OF DEPOSITS

1.Deposits are the foundation upon whichbanks thrive and grow.

2.The ability of a bank to attract deposit isimportant to gauge a banks acceptance by thepublic.

3. Deposits are the basis for bank loans and thusrepresent the ultimate source of bank profits

and growth .


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Types of deposits

Differentiation in deposit types mayarise from

the type of customer who holds

the deposit,

tenure of the deposit,

its nature and the interest factor.

Based on these parameters,

deposits are broadly classified into

transaction and non-transaction

deposits.


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TRANSACTION DEPOSIT

A deposit which facilitates theaccount holder to transact

through a negotiable or

transferable instrument,cheque, awritten order of withdrawal,to

transfer funds, or other similar

means of making payments andtransferring monies to third

parties

is known as a transaction account.


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Nature of Transaction Deposits

These are one of the oldest depositservices offered by banks whereBanks make payments on behalf of

its customers.

This transaction or demand depositservice requires the bank to honourcheques and withdrawals.

Current account and Savings accountare the most widely usedtransaction accounts.
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NON-INTEREST BEARING DEMANDDEPOSITS

There are no interest payments on thecurrent accounts.These are among the most volatile and leastpredictable of a banks sources of funds.

Most non interest bearing liabilities are heldby business firms.

A Current a/c is defined by the Reserve

Bank of India as a form of demand depositwherefrom withdrawals are allowed any

number of times depending upon the balance

in the account.


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Banks pay interest onthese accounts.Banks may also charge

fees for savings accounts,waived if higher balancesare maintained.

However, S.B. A/C holdershave fewer transactionswhen compared to

business firms.

SAVINGS BANK ACCOUNT
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The current account doesnot have to pay anyinterest.

The SB interest isprescribed by RBI and theprevailing rate is 4% per

annum.From 0104-2010, interestis paid on SB accounts on

the daily balance

INTEREST PAYMENT

SAVINGS

BANK LEDGER
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INTEREST PAYMENT Having computed the interestamount, the bank will pay thesame at quarterly or longerperiods. Normally the periodicity ishalf-yearly. In the Credit Policy

announced by RBI inApril2009, it has advisedbanks to pay interest on dailybalance from 01-04-2010.
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Differences between SB & Current a/c:SB A/c Current A/c

Object to promote the habit of

savings

Provide convenience to

customers

Suitable for individual depositors

needing safety, liquidity

Suitable for business

and big organizations

OD not available Available

Reasonable rate of interest No interest

Withdrawals are restricted No restriction

Comparatively lesser cash reserve More CR required


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Term deposits are a form ofdebt investments

A customer lends,Which Means that he is

lending a sum of moneyTo a bank or financialinstitutionFor a specified period oftimeThe bank in turn pays arental stream (interest) for

the privilege.

Term Deposits
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Term Deposits These accounts pay a higherinterest rate than any otherdeposit accounts. This type of account is

sometimes called a certificateof deposit (or CD). These are the funds to whichdepositors have normally no

access for a fixed period. Penalties apply for earlywithdrawals.
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The maximum tenure for

term deposits is 10 yearsas per presentguidelines.

The other feature of theterm deposit is the de-regulated interest rates.Banks are free to settheir own ratesdepending on the size ofthe deposit and the

tenure.

Term Deposits
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CLASSIFICATION OF TERM DEPOSITS

Interest is paid on a quarterly compoundingbasis.

If interest is compounded monthly, effective

rate will be discounted accordingly

TERMDEPOSITS

FixedDepositScheme

ReinvestmentScheme

CashCertificate

RecurringDepositScheme


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Given the nominal rate, the effective rate canbe computed as follows:

r =1

m

k1

m

Where,r = Effective Rate

k= Nominal Ratem = Frequency of compounding

per year

....Eq (1)


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For instance, if the nominal rate ofinterest on a 2 year term deposit is 9.5percent and if the interest amount is

compounded on a quarterly basis thenthe effective rate can be assessed asfollows:

r =

m

0.0951 1

4

= 9.84%

An Example


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FIXED DEPOSIT SCHEME In this scheme, a lump sumamount is deposited for a fixedterm during which the amountcannot be withdrawn. However, the interest is paid ona monthly/quarterly/half-yearly/annual basis. This scheme provides liquidityto the depositor as interest canbe withdrawn during theseperiods. By withdrawing the interest, thedepositor can actually earn areturn on this amount.
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REINVESTMENT SCHEME

In a reinvestment scheme, alump 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.
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REINVESTMENT SCHEME The minimum andmaximum durations forsuch schemes are 6 and120 months respectively. The (minimum) periodaccepted differs from bankto bank. The depositor can withdrawthe interest plus theprincipal at the end of thetenure


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. RIm = RI (1 + r)n

....Eq(2)Where,

RIm = Deposit amount at the end of re-investment period

RI = Initial deposit amountr = Effective rate =

1m

k1

m

n = Number of years

To ascertain the maturity amount in a re-investmentscheme, the following expression can be used:

( m being Frequency of compounding per year)


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An Example

If a depositor opens a re-investment account at A Bank Ltd.

the interest rate offered will be 9 percent for one yearscheme, 10 percent for two years scheme and 11 percent forthree years scheme. Ascertain the maturity amount for aquarterly re-investment of Rs.10,000 for a period of 2 years.SolutionThe amount at the end of the re-investment period can beassessed as follows:

RIm = RI (1 + r)n

= 10,000 (1 + r)2

Since it is a quarterly re-investment,r = 1

4

0.101

4

= 10.38

Thus, RIm = 10,000 (1 + 0.1038)2

= Rs.12,184


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CASH CERTIFICATES

It is like a reverse reinvestmentscheme, where odd sums are

accepted for a fixed period to pay

whole sums at the time of

maturity.

The amount that is deposited

initially will be the issue price of

the cash certificate ,based on thematurity amount .

The issue price can be arrived at

using the present value principle.
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RECURRING DEPOSIT SCHEME

A fixed sum is depositedevery month for a fixedperiod.At the end of the period, totalamount of installments withinterest is paid.A passbook is issued to

show details of deposits. Minimum and maximumperiods are 6 and 120 months

respectively.

COST OF DEPOSITS AND ITS IMPACT ON
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COST OF DEPOSITS AND ITS IMPACT ONPROFITABILITY

All other things remaining thesame, a banker would prefer to

secure those deposits that are

least costly for the bank.If a bank can raise all its funds

from cheapest deposits and

then create the highest yielding

assets it will maximize its

spread and the shareholder

value.
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Greater the Demand Deposits relative

to Time Deposits, larger will be the

banks liquidity needs.

On the basis of costs, Demand

Deposits are Low Cost Funds for

Banks.

As the liquidity and the cost of funds

are affected by the composition ofdeposits, it has a direct impact on the

earnings of the bank.

Composition of deposits is Crucial

Th CASA E h i
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The CASA Emphasis

Let us assume that the cost of term deposits is 7.5%

per annum and the real cost of savings account is3% per annum. The weighted average

Deposit Scenario 1 Scenario 2 Scenario 3 Scenario 4

Fixed 80% 60% 50% 40%

Saving 10% 25% 30% 20%

Current 10% 15% 20% 40%

TOTAL 100% 100% 100% 100%

Cost 6.30%p.a 5.25%p.a 4.65%p.a 3.60%p.a

It is clear from the above that increase in current andsavings account percentage in the total deposits decreases

the cost of funds .


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Differences between FD & SB a/cFD A/c SB A/cRepayment on certain date On demand

No need of cash reserve CR is needed

Introduction not mandatory It is mandatory

High rate of interest Low rate of interest

Suitable for investors Suitable for small savers

Loans available on FDR No loan facility, ordinarily

Practically he is not a customer He is a customer

Only deposit receipt is given Cheque book, passbook & pay

in slip will be given if

necessary

N id A


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Non-resident Accounts

Non-resident bank accounts may beRupees accountsForeign currency accounts.

Rupees accounts

The different types of rupee accounts a non-resident may have are:

Non-resident (ordinary) (NRO) account.Non-resident external (NRE) account.

Non-resident (ordinary) accountThe account that an Indian has in India is convertibleto an NRO account when he emigrates or goes

abroad to work except if he goes to Nepal or Bhutan.
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These can be savings, current,recurring or fixed deposit accounts.NRO accounts may be held by non-residents jointly with residents.

These may be opened jointly with

Indian residents for other non-

residents.

Credits may be from foreign

remittances, travelers cheques, foreign

currency, all legitimate dues in India like

rents, dividends and the like.

Non-resident (ordinary) account contd.

N id t (E t l) A t
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Non-resident (External) Account

This has to be opened with convertible foreign

exchangeAny NRI can open an NRE account with fundsremitted to India through a bank abroad.Withdrawals are permitted for local payments, andinvestments permitted by the RBI.The intent of these account is to help individualnon-residents to place their funds in Indian rupees

to meet expenses in India or to make investments.The accounts may be current accounts, savingsaccounts or term deposits.NRE deposits are held jointly with non-residents

only.

Foreign currency accounts


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Foreign currency accounts

Foreign Currency (Non-resident)

Deposit Accounts (FCNR (B)).Non-resident Indians, persons ofIndian origin /nationality, residingoutside India are eligible to openFCNR (B) accounts.These are fixed depositsdenominated in certain foreigncurrencies.The currencies in which these

deposits may be maintained are theUS dollar, the British pound sterling,the Euro, the Japanese yen, theAustralian dollar and the Canadian

dollar.
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Insurance of Deposits

As per the provisions of Deposit Insurance & Credit

Guarantee Corporation Act, 1961, DIGCC provides insurancecover on the deposits of banks.Banks Covered: Deposits of all Commercial Banks, RegionalRural Banks and the Cooperative Banks are insured this

scheme.Maximum Cover: Rupees one lakh per deposit per bank (w.e.f01.05.93). This limit includes all deposits (including interestaccrued) held by a depositor in the same capacity and right inall branches of the bank.Deposits not Eligible for Cover: Deposits in the name ofCentral and State Governments, Banks and foreignGovernment are not covered under the scheme.Rate of Premium: The premium rate is 10paise p.a. for Rs.100

of e deposit from the financial year 2005-06.


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Fixed & Floating Interest Rate: In fixed interest rate, the interest to be paid is

fixed in advance .

In case of floating interest rate, it is notdetermined in advance, but is dependent on

some underlying situation and variable fromtime to time.

But this is usually applied in case of InterestRates on Borrowing.

Deposits being a contract with the Customer bythe Bank, the conditions usually remain thesame throughout the tenure of the deposit.
http://www.algebra.com/algebra/homework/Finance/interest-rate.lesson


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Thanks for your attentionDr. S. C. BihariTell:08417-236660 to 65(Extn: 6214)Mail:[email protected]

Documents

6 Deposit Management