Merchant Banking involves the provision of banking services and consultancy to its customers regarding financial, marketing, managerial, and legal services. Consultancy denotes providing advice, guidance, and service for remuneration. It involves the provision of a wide range of services that help businesses from its inception to successful operations to winding up the business.

A merchant bank is an organization that underwrites securities for corporations advises such clients on mergers and is involved in the ownership of commercial ventures.

Merchant banker is defined as a person who is engaged in the business of issue management either by making arrangements regarding buying and selling securities or acting as a management consultant, advisor in relation to such issue management.

Merchant banking services help individuals and businesses in the following ways –

• It helps an individual to start a new business.
• It helps businesses to raise finance
• It helps businesses to modernize, expand and restructure their business
• It helps in revival sick business units
• It also helps companies to register, buy and sell shares at the stock exchange

Merchant banking is a type of banking where both commercial banks and investment banks can participate. It is involved in trading of unregistered securities including stock, bonds, and private equities. 

Significance of Merchant Banking

The reason for the very existence of merchant banking is illustrated by the need for specialized investment information and services. An experienced merchant banker knows exactly where strategic assets are located, and which organizations and strategies to ward off. With a merchant banker, a businessman enjoys the benefit of hiring a skilled and knowledgeable partner with a long-term commitment to the business. The real benefit here is that a merchant bank helps to lower the risks for a new firm.

Functions of the Merchant Bank

Corporate Counselling

• Provide guidance in diversification
• Undertaking evaluation of product lines
• Rejuvenation of old companies
• Evaluation of revival prospects

Project Counselling

• Undertaking the general evaluation of projects
• Providing advice on procedures
• Conducting technical feasibility
• Assisting in technical feasibility
• Identification of potential investment avenues

Pre-investment Studies

• Carrying out detailed environmental studies and feasibility studies
• Assisting the client in shortlisting projects with greater return

Capital Restructuring

• Evaluating the capital structure of clients
• Preparing comprehensive memorandum related to Capital issues
• Suggesting alternative capital structures

Credit Syndication

• Estimating the total cost of projects
• Drawing up financial plans
• Preparing loan plans for financial assistance

Issue Management and Underwriting

• Creation of an action plan
• Creation of budget
• Drafting of prospects

Portfolio Management

• Undertaking investments in securities
• Undertaking a review of the portfolio
• Carrying out a critical evaluation of the investment portfolio

Working Capital Finance

• Assessment of working capital
• Providing advice on the issue of debentures

Acceptance Credit and Bill discounting

• Acceptance and the discounting of bills of exchange

Mergers, Amalgamations, and Takeovers

• Identifying organizations with similar characteristics
• Undertaking management audit
• Obtaining approvals from shareholders

Venture Capital

• Financing high risk yet high return projects

Lease Financing

• Providing guidance on the feasibility of leasing as a substitute source for financing capital investment projects.
• Providing guidance on the choice of a favourable rental structure.

Foreign Currency Finance

• Evaluation and assistance in carrying out a study of turnkey projects
• Guiding for exchange risk
• Assisting in operating international bank accounts

Fixed Deposit Broking

• Assisting the company to observe and maintain all rules
• Making arrangement for payment of loans
• Drafting of advertisements for inviting deposits

Mutual Funds

• Collecting public savings
• Investing in a diversified portfolio
• Earning for the investor a steady flow if returns

Relief to Sick Industries

• Rejuvenating old and sick firms
• Creating rehabilitation packages
• Exploring merger and acquisition opportunities

Project Appraisal

• The evaluation of industrial projects on the basis of technology, cost, capacity, etc.

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Retail Banking is different from retail lending. Under Retail banking, the banks have to reach out to customers on both sides of the balance sheet, assets, and liabilities.

When we talk of Assets, we have the credit/loan schemes of the various banks. Bankers today are offering various concessions to attract potential customers. For example, payment of free insurance premium is attached to the vehicle loan. Some banks offer total credit solutions with housing loans. This way, retail banking includes designing of customized products from both sides of the balance sheet. The following channels are effectively utilized by the bankers to activate business from the potential clients:

• Doorstep Banking
• Automated Teller Machines
• Debit Cards and Credit Cards
• Telephone banking
• Internet Banking
• Mobile Banking
• Electronic Funds Transfer/Electronic Clearing System debit

The relationship between the bank and its customers has undergone a big change in recent years. Customers have become more demanding and the banks have to constantly improve their services as well as their products in order to retain customers. The banking market has transformed from a buyers’ market to the sellers’ market. It is the customer who designs the banking products. Banks have to constantly alter their product mix in order to satisfy customer demand.

The product mix offered by banks under retail banking is –

• Savings and Deposit Accounts
• Debit and Credit Cards
• Money Orders
• Wire Transfers
• Personal Loans
• Bank Lockers
• DEMAT Accounts
• Insurance products
• Home Loans, Car Loans, Education Loans, etc.

Customers would not just want to deposit but also gain more by depositing. The age of walk-in deposits is long gone. Rate of interest, time taken to complete processing and the ease of doing business are some of the areas where the banks have to focus more.

Other than savings bank rates, the entire sector of deposits has been deregulated. Products like housing loans, loans on consumer durables which used to be shunned earlier are a haven for profit today.

Retail Lending

Retail lending refers to loans/credit provided by banks to their retail customers.

While the competition has heated up between banks, newer ideas have led to better products. Retail lending offers a higher return, quicker turnaround time, lesser probability of bad loans, and effective monitoring.

Some examples of retail lending are:

• Housing Finance.
• Consumer durable finance.
• Vehicle (for both two-wheelers and four-wheelers) finance
• Personal Loan
• Advance against future lease rentals
• Mortgage Loan
• Pension Loan

The contribution made by the borrower is called the Margin. Margin requirements differ from one type of finance to another and from bank to bank. The interest has been deregulated by the apex bank. Hence, banks have the option to set an interest rate as per their requirements.

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A bank mandate is a written order to the bank, asking it to open an account, name the peon/s authorized to sign the cheques on behalf of the account holder, and provide the specimen signature.

It is also a written request passed by one bank to another. This is to request the second bank to allow a customer to open an account and carry out transactions in a way an existing account holder would.

Power of Attorney

The Power of Attorney is a legal document giving one person (“agent” or “attorney-in-fact”) the power to act on behalf of another person, who is also known as the principal.

The agent can have widespread legal authority or a limited one depends on the power provided to him/her.

Power of Attorney is usually given if the Principal is invalid or medically unable to discharge a set of activities or if he/she is absent to sign legal documents

There are two types of Power of Attorneys:

General Power of attorney: This provides the peon to act on behalf of the principal on general matters like management of the estate, litigations, Sale of property, etc.

Special power of attorney: A special power of attorney is meant for specific tasks. In such cases, the attorney holder has to report to the principal.

Banker’s Lien

A lien is defined as the right to retain goods in possession until the debt is paid.

A banker’s lien is defined as the right of the bank, in the absence of a contract to the contrary, to hold in its possession, the goods, as security. This right is automatic and no agreement is required. Hence, it is called a general lien. A general lien is also called the “implied pledge”. That would mean the bank also has the right to sell.

However, there is a limitation to such a right. The bank can only hold goods and securities which have been got through the normal course of business and not as a trustee or as an agent.

There, however, may be lien over particular goods as per specific contract or even a negative lien. A negative lien is an undertaking of not alienating security without the consent of the bank.

Right of Set-Off

Bank has the right to combine two or more accounts:

However, if one of the accounts is in debit of the customer, with the same name and rights, then the following needs to be taken care of:

• An account in the individual capacity of the customer showing debits balance cannot be combined with one in a fiduciary capacity (i.e. trustee etc.) showing credit balance.
• Accounts really belonging to identical persons, but dissimilar names can be combined. Thus an account of a sole proprietorship concern may be combined with that in his/her name.
• Two accounts, of a solicitor, one in his name and other marked as client account will not be combined.
• Two accounts one belonging to an individual and other jointly with someone, will not be combined.
• The right can be implemented only when the debt is due.
• The right should be implemented after giving due notice unless a contract to the contrary exists.
• The right may be exercised before the garnishee order is made effective

Garnishee Order and Attachment order

When the debtor fails to pay the debt, the creditor has the right to approach the court to issue a garnishee order on the bank of the debtor.

A garnishee order is an order issued under by the court under the provision of order 21 rules 46 of the civil procedure 1908.

The order is divided into two parts:

Order nisi

Order nisi directs the bank to stop payment in the account of the judgment debtor to explain is to why not the deposit of the particular person is attached.

The reason for the same is because the banker’s right to set off takes precedence over the garnishee order and hence the bank too requires to avail the same.

Order Absolute

This is issued later. Through this order the entire balance in the account is attached, but only after the court is dissatisfied with the explanation provided by the bank regarding Order nisi. Also to remember, that an order served to the Head Office of a bank is applicable to all its branches, after a reasonable period in time.

Let us look at the difference between the garnishee order and the Attachment order:

Pertinent to note that:

• Unauthorized or undrawn balance in overdraft cannot be attached in both cases.
• Both the instances apply to debts due or accruing due or repayable at a fixed future date

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In this article we will have a look at the different banking instruments which help us in our banking transactions:

• Pay-in-Slip
• Cheque Book
• Pass Book
• ATM cum Debit Card
• Credit Card

Pay-in-Slip

It is a blank document that has to be filled by the customer whilst depositing Cash or a cheque. The longer part of the pay-in-slip is called the counterfoil. The shorter part is to be kept with the depositor as the proof of deposit.

Cheque Book

It is a book of cheque which is used to either make a payment or a deposit.

“Cheque is an instrument in writing containing an unconditional order, addressed to a banker, signed by the person who has deposited money with the banker, requiring him to pay on demand a certain sum of money only to or to the order of a certain person or to the bearer of the instrument.”

The Negotiable Instruments Act, 1881 defines a cheque as: “a bill of exchange drawn on a specified banker and not expressed to be payable otherwise than on demand.”

Passbook

A Passbook is a book provided by the bank which helps a customer to keep a record of all his banking transactions. This book has to be updated regularly. It consists of all the transaction history related to a particular account. The first page of the passbook has the credentials of the account holder, as provided by the bank.

ATM cum Debit Card

With greater mobility, ease of banking too has increased manifold. Now, we do not always have to visit a bank to withdraw or deposit money. This can be through ATM kiosks. ATM or Automatic Teller Machine, are cash vending machines. They dispense cash in selected denominations. Some ATMs may even dispense coins.

Most banks have also installed ATMs that can allow the user to deposit cash and a cheque. An ATM is accessed by an ATM cum Debit Card. This ATM cum Debit card is a card that will not only allow cash withdrawal or deposit at an ATM kiosk but also allow the user to make payments, either through online payment gateways or at retail counters. These cards are a handy appendage since it reduces the need to carry cash.

Credit Card

A Credit Card is similar to a debit card but with a major difference. A debit card works on the principle of a direct debit from the account, only when there is cash available in the account.

A credit card, as the name suggests, works on the principle of credit. That is, you can buy now and pay later. Credit card companies levy an annual charge. They also do levy penalties in case of late payment of outstanding balances.

One can think credit card payments to be short term loans. Here, you pay using the credit card issuer’s money and then pay him back with an interest added. Since credit card activities are reported to the credit bureaus, it is imperative for the owner of the card to use it responsibly. Also, responsible credit card usage can lead to a good credit score.

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Corporate banking represents a plethora of banking and financial services provided for domestic and international operations of big local corporates and to the local operations of multinational organizations.

Corporate banking refers to banking products and services that are offered especially to corporate clients such as lending services that could be in the form of a secured or unsecured loan, financing, underwriting, cash management, issuing of stocks and bonds, etc.

Corporate Banking Services

Services of corporate banking are as follows:

• Providing access to commercial banking products, including facilities for working capital like domestic and international trade operations and funding
• Channel financing and overdrafts,
• Letters of guarantee
• Structured solutions for both onshore and offshore operations of organizations
• Term loans
• Domestic and international payments
• Providing Support to client’s international operations, ensuring full consideration of the company’s business and financial needs.

Corporate Clientele

Banks may categorize their corporate clienteles into three sections on the basis of capital invested and the sales volume:

• Large corporations,
• Mid-size companies, and Small
• Medium business Enterprises (SMEs).

Corporate customers can be further segmented into verticals of the industry, such as automobiles, aviation, tourism, etc. Banks develop lasting relationships with their corporate customers as a part of their promotion efforts. In a market so full of competition, building strong relationships with the clients help to retain customers and increase profitability.

The communications and associations between the banks and their corporate clients are influenced by three factors

• the external environment
• the outcome of the interactions
• and the interaction process.

The ‘Partnership Relationship Lifecycle Model’ describes the evolution of the bank-corporate customer relationship, beginning at an early stage where a ‘customer’ shows interest in the bank’s offerings, and growing to become a mutually beneficial ‘partnership relationship’ between the client and the bank.

Corporate Banking Products and Pricing

Banks need to constantly deal with the evolving requirements of their clients through better product development. However, financial products can be easily replicated. The pricing of these banking products has a direct influence on customer acquirement and their retention, in addition to profitability and sustainability.

The pricing is influenced by many factors such as cost, competition, customers, etc. With the advent of deregulation and the instantaneous rise in competition, many of the banks have developed a competitive pricing policy. The Reserve Bank of India has relaxed the pricing mechanism for both asset and liability products. Every bank now has to set its own Benchmark Prime Lending Rate (BPLR) to put a value to its asset products.

Corporate banking products are dispersed mainly through direct sales or the ubiquitous bank branches, enhanced by phone banking and internet banking. Relationship officers are based at several branches of banks from where they make client visits to cultivate relationships and identify fresh business opportunities. Banks attempt to develop an ideal distribution mix in order to accomplish various purposes such as greater customer service, operational efficiency, and profitability. Core Banking Solutions (CBS) — are essential to the real-time management of the transactions that happen through the diverse means of distribution.

Banks have Global Relationship Management teams who try to understand the needs of international customers and create products and services suited to their needs.

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A loan is one of the most profitable instrument of a bank since it helps the bank to increase its earnings and make profits. The efficient management of loans and advances assumes a greater significance as it is also the largest asset for any bank. However, with the tightening of financial regulations and credit norms, increased competition, and the emergence of newer forms of risk, it becomes imperative that the credit functions of the financial establishments are further strengthened. RBI has been continuously working with commercial banks to help them evolve relevant guidelines to meet the demand of a rising market as well as control credit risks.

Classification of loans

Classification of Loans can be done into two types:

• On the basis of activity
• On the basis of purpose

Classification of loans on the basis of activity

• Priority Sector Lending
• Commercial Lending

Priority Sector Lending

Priority Sector lending or Directed credit is one of the types of lending which the Government of India through the RBI has allowed the banks to offer.

The RBI allows the banks to offer loans to certain sectors who, the Central Bank thinks, will not be able to pay the interest at the commercial rates or will not have access to the organized lending market. Small scale industry, small businesses, agricultural activities, and exports fall under this sector. It is also called directed credit. Financing of these priority sectors are done at concessional rates.

Through this, the banks influence the economic development of the country, by subsidizing the business efforts of small businesses and help them flourish.

Commercial Lending

Commercial Lending is the mainstay of Indian Banking.

In the beginning, it was the priority lending that had kept the banks afloat. However, with the evolving economic landscape and rise of income and the widening of the Indian middle class, commercial lending has become the main focus.

Commercial loans are for both short term and long term. They can be further divided into Corporate Loan and Retail Loan based on the type of customer.

Classification of Loans Based on the type of customer

Corporate Loan

These types of loans are provided to corporate houses, proprietorships, partnerships, and HUFs engaged in any legal business activity, with the objective of earning profit.

The loans are disbursed on the basis of:

• The balance Sheet’s strength
• The Cash Cycle
• Products offered by the banks

Balance Sheet’s strength

Balance sheets are audited and the banks try to analyze the profitability of the said entity. This is done to check the ability of the entity to fully utilize the loan as well as be able to pay it back.

Customers who are interested in availing loans need to furnish the balance sheets of their companies along with their application of a request for the loan. The overall line of credit is segmented into various facilities. Each facility has its own limits within the line of credit, though it is dependent on the needs of the customer.

The borrower will then proceed to complete the formalities and complete filling the other documents, as deemed necessary by the bank. The security or title to the security has to be surrendered to the bank and suitable accounts opened. Thereafter, after the formalities are completed the borrower can operate this account within the line of credit.

The cash cycle

A cash cycle is the time taken by the company to convert cash into goods and then sell the goods to earn cash or if provided on credit, retrieve the debt.

The products offered by banks

Banks are awash with financial offerings and the business community is spoilt for choices. The loans are also modeled to cater to the needs of the customer.

Retail Loans

Retail loans are meant for small traders and businesses. It is given to them on strength of their earnings keeping an eye on their returning capacity.

Classification of Loans-Purpose wise

Personal loans

These are also called consumer loans. They vary from medical loans, education loans, loans to buy a refrigerator, vacations, etc. These are personal loans, as in loans meant for individuals as opposed to corporate loans. They are also taken to consolidate debts and the amount is amortized over a fixed time period and a combination of principal and interest is paid. Such loans are either unsecured or secured by the purchase of an asset or consigned by a guarantor.

Unsecured loans are those which are offered based on the credit history of the borrower and his ability to repay the loan. Repayment is ideally done through fixed amount installments over a fixed period of time. They are also called consumer loans.

Loans for purchase of Automobiles and consumer durables

Banks provide a large number of loans to individuals for the purchase of durables and automobiles. The amount of loan is usually dependent on the repayment capacity of the borrower.

The loan provided is equated into Monthly Instalments also called EMI. It is calculated taking into consideration the maximum limit afforded by the customer. The banks look into the following to decide whether the borrower must be given a load or not –

• Latest salary certificate from the employer
• The previous year’s income tax returns

While taking the loan, it is important for the borrower to be aware of the following points:

• To check whether the interest is payable on the entire loan or just the outstanding amount
• Check all the details
• Look out for hidden charges
• The documents need to be read carefully and every clause and statement understood clearly.

Auto Loans: It is a personal loan to buy a car. Most banks offer car loans. It is one of the fastest-selling banking product in the market now. Banks sanction up to 85% of the ex-showroom price. A processing fee is also charged along with some paperwork.

Loan against shares: This is a kind of a liquid guarantee.

Home loan: This is a personal loan for buying a house. This is also one of the fastest-selling banking products as well as one of the most profitable ones.

Education Loans: With the rising cost of education, banks saw an opportunity to finance education for the students who wish to pursue higher education. This also made higher education affordable. This also led to a larger group of individuals attaining skills and join the job market.

Despite scholarships, the number of students were far greater than the available seats. The boom in the banking sector led to the glut in money and hence education became a sector of focus. With this move, the banks were able to create more demand in the education domain as well as become the driver for economic growth.

Both Nationalised as well as private banks offer a variety of schemes which cater to a larger number of students. Most banks start attracting students who clear the national level competitive exams.

The education loans are provided to cover the following:

• The college fee along with the hostel fee
• Expenses related to books, uniform, instruments, etc
• Laboratory fee
• Expenses related to buying a laptop for those pursuing engineering-related courses
• Travel and lodging expenses
• Caution deposit and the refundable deposit
• Costs borne out of any other activity essential to the completion of the course

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The term KYC or Know your customer is used to/for customer identification which involves efforts to identify an individual or an entity by verifying the personal credentials, like sources of funds, the fairness of business and its operations, the nature of the business, personal documents of the customer, like PAN, AADHAR, Birth Certificates, and address proof.

Objectives of the KYC

The primary objective is to cover the bank from future risks. Risks may arise from improper conduct of the customer or an entity, criminal elements taking advantage of the banking facility. With the KYC in place, the bank will be able to create better controls, as well as be vigilant against inappropriate conduct by the account holder and take cognizance as per the legal framework.

A KYC has two parts:

• Identity
• Address

The identity that needs to be verified are:

• Named account holder
• Beneficial owner
• Signatories to an account
• Intermediary parties.

The stages at which the Identification will have to commence:

• At the onset of establishing a banking relationship
• At the insistence of the bank, when it deems fit, based on the conduct of the account

The usual Documents that are required for the identification of the name:

• Passport
• PAN card
• Voter identity card
• Driving license with photograph
• Identity card/Adhaar Card
• A letter from an authorized public authority confirming the identity and residence of the customer to the fulfillment of the branch official sanctioned to open the account
• Authorization/ letter from employer/other banks (subject to the approval of the branch official authorized to open the bank account).

Documents to verify the address are:

• Telephone Bill,
• Bank account Statement
• Electricity bill
• Ration Card
• Letter from employer to the approval of the bank

There may be periodic requests made by the bank for updating the above credentials.

Elements of KYC

KYC basically incorporates the following elements:

• Customer Acceptance Policy
• Procedures for Customer Identification
• Transaction monitoring mechanisms
• Risk Management

Customer Acceptance Policy

• Risk perception is created as per the customer profile and categorized. Based on risk profiling, the acceptance criteria is decided.
• Accept the individual as a customer after verifying the identity as per the laid down Identification of Customer
• No accounts will be allowed to open in the name of Anonymous/fictitious and Benami holders.
• Care needs to be taken that in the process of due diligence, the banking service should not leave out the socially and economically backward sections of the society.

Procedure for Customer identification

A prospective customer is someone who they claim to be. Sufficient information needs to be obtained before the bank is absolutely satisfied with the establishment of the identity. The nature of business and predictable patterns of the transactions, proof of identity and address are some of the information that may be gathered.

Transaction Monitoring Mechanism

The monitoring of the transaction will only take place if the customer falls in the category of the appropriate risk profile.  Special attention is given to complex and unusual transactions. They may be large or belong to a pre-decided pattern. Any transaction effort which does not fit the profile of the customer will be looked into and detailed scrutiny will be undertaken.

After all, the relevant checks have been made and an inappropriate motive has been established, will the bank notify the relevant authorities and the account be placed under PML Act, 2002. The records of such an account will be preserved and kept for further discussion and detailed scrutiny.

Branches will also be responsible for the maintenance of vigilance on any transaction of INR 10 lakhs and more. The branches will also have to be reporting the same to their controlling offices with account statements.  This has to be every fortnight.

 The controlling offices will be further scrutinizing them and if they find merit in the reports will make additional queries to the branch. If the controlling office finds that the transactions are in consonance with the profile, then they would request the branch to close the case. The Branch would then direct the relevant officer to close the report.

Risk Management

The Board of Directors of the bank have to ensure that the KYC procedure is in place and followed diligently. In order to that, the following activities need to be in place:

• Roles and responsibilities need to be effectively defined
• Proper supervision of the management
• Training of the staff
• Effective usage of Systems and Controls
• Segregation of training processes for staff

The rigorous implementation of the KYC policies goes a long way in ensuring a better banking environment. It is also beneficial if the frontline banking staff to understand the efficacy of the KYC policies and the underlying premise for implementing the same.

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Most of us have the experience of having to go to a bank and opening a bank account for the first time. At first, it might seem to be a cumbersome effort, but when seen through steps, you will realize the efficacy of each one.

Step 1:

Decide the type of account you would want to have. If it’s to save a part of your salary, then a Savings deposit account it is. If you are a company or an organization, and you would need an account with no withdrawal limits, then it has to be a Current Deposit Account, if it’s for the long term, then opt for the fixed deposit account and if a monthly deposit is your scheme of things, then the recurring deposit account.

Step 2:

Approach the bank. You can research a bit about the bank you might deposit your money with. All of them provide a standard level of service and have online facilities too.

Meet the officer designated for account openings. A proposal form will be provided to you. A Know Your Customer (KYC) form too would have to be filled out. This is mandatory.

Step 3:

Fill the form out as well as pin the duplicates of the credentials asked for. Proof for address, date of birth, etc. needs to be provided. A few specimen signatures need to be provided. If it is a joint account, then both the holders have to be present and the signature done jointly.

The latest photograph of the account holder/s needs to be provided too.

Step 4:

A Reference is usually asked by the bank as additional information. This is usually done to safeguard the bank from any wrongdoing. A reference can be your friends, relatives, or peers.

Step 5:

Now submit the filled out form after checking all the information provided thoroughly. In case, of a current account, a joint declaration of the board needs to be provided.

Step 6:

A verification process will now be undertaken by the officer. He/she will go through all the information and update the same on to their central database. Once fully satisfied with all the information, the officer will clear the form and a new account will be formed.

Step 7:

Once that is done, the depositor is asked to deposit the initial amount. Once that is done, a Cheque Book, a passbook, and a pay-in-slip book are provided if it’s a Savings Bank Account.

In case it is a recurring deposit account a passbook and a pay-in-slip book are provided.

For a Current deposit account, a checkbook and a pay-in-slip book is provided.

For a Fixed Deposit Account, a fixed deposit receipt is provided.

The above 7 step process is all one needs to get a bank account opened in any Indian Bank.

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Banking is a part of our lives. It has been around for times immemorial. With such a vast spread of the banking infrastructure, it is a surprise if one does not have an account in a bank. There are various types of bank accounts under any banking system some of them are explained in this article.

When it comes to banking, of course, money cannot be left behind. We use the bank to deposit our savings, usually in the form of cash. The account in which we deposit is called a deposit account because our money is deposited there or stored there.

To identify such an account, we are given a number, usually a long one. It can be a numeric or even an alphanumeric one. This set of numbers is called the Account number. The account number is the identification number of our deposit account. The same place we had deposited our money.

Why do we deposit?

One of the prime reasons we do is to save or accumulate money for the future. At times, we use that account to pay off our bills and to manage expenditures. Different types of accounts accrue different interest rates. It helps an average person to grow their money and beat inflation.

Types of Bank Accounts

Different financial institutions offer different types of bank accounts with varying interest rates like:

• Savings Bank Account
• Current Deposit Account
• Fixed Deposit Account
• Recurring Deposit Account
• No Frills Account

Savings Bank Account

A savings Bank Account is the most common type of bank account. This is a bank account, as the name suggests help one save the extra cash in hand. This account is beneficial to the ones who are salaried or earn wages. They would need a place to safely deposit their money. A savings bank account does that for them. A savings deposit account may be opened singly, jointly or by a minor under 10 with a guardian.

One can withdraw cash from the Savings Bank Account either through a cheque, a withdrawal from, or through the ATM.

Usually, there is no restriction for cheque withdrawals, however, withdrawals from the ATM is limited to a certain number of times, since the Automated teller machines need to be refilled and they do have a limited amount of cash stored.

A savings account also attracts interest and it varies from bank to bank. Most banks also levy a penalty if a minimum balance is not maintained as per the bank’s charter. Many banks also provide facilities for zero balance accounts, which are savings bank accounts, but with no minimum balance restrictions.

The primary objective of a Savings Deposit Account is to encourage savings. The main features of a Savings Deposit Bank Account are:

• The number of withdrawals are restricted. Different banks have different withdrawal limitations. This is to promote the basic idea of the savings bank account. Also, the minimum amount that can be withdrawn through withdrawal form is INR and through a cheque is INR 5.
• There are restrictions placed for deposits too. No third party cheques or documents will be entertained for the purpose of deposits in the savings deposit account
• There is a minimum balance for every savings bank account and that has to be maintained. The bank may levy a penalty for the non-maintenance of such an account.
• There is an interest that is paid by the bank, on the deposits maintained in the account. This rate of interest is decided by the Reserve Bank of India. The interest may be computed on a quarterly basis.
• Cheque facility is provided to the depositor on the maintenance of the minimum balance.

However, there are few prohibitions that are placed on the bank account. These prohibitions are placed by the RBI and are based on the type of entities that may not open a savings bank account. They are:

• Trading or business concern
• A company or an association
• Government departments
• Municipal corporations
• Panchayats
• State Housing boards
• Gram Panchayats
• Water and Sewerage and Drainage Boards
• Housing Corporations and societies
• State Book Publishing Corporations
• Industrial Development Boards
• State Electricity Boards
• Metropolitan Development Authority
• Any type of bank including land development banks

Current Deposit Account

 A Current Deposit Account is usually meant for businesses, organizations, and institutions. One of the reasons why businesses use a current account is that they don’t have withdrawal limits.

Current accounts are primarily used to pay salaries and other business expenses. The bank does not pay any interest on the balance in a Current account. However, a minimum balance has to be maintained.

One of the main features of a Current Account is the overdraft facility. This facility helps businesses to withdraw even beyond what is available in their balance. The overdraft facility is, however, no given to all and is based on the initial agreement between the bank and the entity. The overdraft amount differs from bank to bank.

A current account is usually operated for the purpose of salary withdrawal and corporate-related activities. This is the reason why there is no limit to the number of withdrawal. The deposits are also to be provided on demand to parties for payment. This is the reason why they are called deemed deposits.

There are certain privileges that are offered to holders of the Current Account:

• Third-party cheques and endorsed cheques are allowed to be deposited into the current account for collection and credit
• Overdraft facilities are provided to current account holders only
• The loans that are offered to banks are routed through the current account only. In such a scenario the current account earns an interest 

Prime differences between the Current Deposit Account and the Savings Deposit Account:

Both the Savings and The Current Deposit Account fall under the Demand Deposit Account

Fixed Deposit Account

Fixed Deposit Account is, as the name suggests, an account that comes with a locking period. There are customers who would want to lock their money for a longer period to earn more interest than a typical savings account. Banks also provide a higher interest rate for longer periods.

The period of deposit can range from 30 days to 3 years or even more. A customer can withdraw the fixed amount before the date of maturity, but only on request. In such an eventuality, the bank will lower the interest rate and release the amount. Otherwise, the banks allow the withdrawal of the interest on the fixed deposits at certain intervals only. At the end of the period, the amount can be withdrawn in full or renewed. Many banks also have the policy of providing loans on the basis of fixed deposits.

The features of a Fixed deposit account are:

• The rate of interest of a Fixed Deposit is higher than the other accounts. This is because the account holder has to part away from the liquidity for a certain period in time. The longer the period, the higher will the rate of interest be.
• There are special schemes for senior citizens. Fixed Deposit for senior citizens offers higher as well as a fixed rate of interest.
• A fixed Deposit can also be opened in joint names. This will be done as either or survivor basis. However, the problems faced by the bank, in such cases are: Request for refund untimely by one of the depositor, Loan against the Fixed Deposit Receipt by one of the Depositors, Request for duplicate receipt by one of the Depositor
• A Fixed deposit is usually payable after the maturity date. However, there are provisions that allow the bank to make a full payment even before the day of maturity. As per the RBI directive, banks have been advised not to charge a penalty in case of premature withdrawal of the Fixed Deposit, if the reason is another reinvestment in a Fixed Deposit, for a longer period.
• If a Fixed Deposit is not encashed at the date of maturity, the rate of interest will cease to exist for the deposit. Only if it is renewed, will the rate of interest will be allowed.

The Recurring and Fixed Deposit accounts are called the Time deposit accounts.

Recurring Deposit Account

Recurring Deposit Account is, as the name suggests is a kind of account that has to have a deposit in a said interval. The interval is usually every month. The customer can withdraw the amount before the date of maturity and the bank will release the amount along with the interest accrued till such period.

A recurring account can be opened jointly, as well as an individual account. A guardian can also have a recurring account opened in the name of a minor. Later that account can be transformed into an adult account.

The rate of Interest on a Recurring deposit account is higher than that of a savings bank account but lower than that of a Fixed deposit account.

The primary objective of the recurring account is similar to the savings bank account. It promotes regular or recurring savings. A recurring account also provides the holder with a higher rate of interest than a Savings Bank Account.

A recurring bank account is a temporary bank account with a maturity range of 1 year to 10 years. Account-holders can deposit money on a monthly basis, quarterly, half-yearly or yearly.

Certain Features of the Recurring Account:

• A recurring Account can be opened by a guardian representing a minor, a peon, jointly by a peon, individually and even by a minor. A passbook is provided at the time of the opening of the account and has to be periodically updated. At the time of maturity, the same has to be presented to the bank. The periodic deposit of money will reflect on the passbook.
• The rate of interest is decided by the RBI and should be in accordance with the rate of interest for various term deposits. Hence, the rate of interest for Recurring Accounts is almost at par with that of a fixed deposit.

No frills Account

The No-frills account is an account with a zero balance. It is primarily aimed at the poor or the lower strata of the economic class. It was implemented under the supervision of the RBI aimed at greater financial inclusion.

There are certain features though –

• There is a maximum ceiling up to which this account can hold. Depositing beyond this would transform this account into a Savings Bank Account.
• There is a requirement of minimum balance.
• The services provided with respect to such an account will be similar to that of a Savings Bank Account.
• While there have been no restrictions placed on the number of deposits, the number of withdrawals is limited to four withdrawals a month. This also includes ATM withdrawals.
• There would be no charges levied on this account. All penalties pertaining to non-operation or activation of inoperative accounts will be non-existent.
• This account is also called the basic savings bank deposit account and holders of this account shall not be operating any other type of account in that bank. If one is, then it has to be closed within 30 days of the opening of the basic account.

All types of bank accounts are banking products that serve different needs of a customer. A customer must evaluate their financial needs and goals to choose the best type of bank account. The rule of thumb is to choose an option that offers maximum return with minimum fees and convenience in money management.

Why do we need a bank account?

This is a pertinent question that needs to be asked, as we entering the 21^st century. A bank account, as we have seen is a repository of cash, and can be used as per the needs of the owner.

Let us look at all the advantages one can get by having a bank account:

• Savings: A savings bank account helps the owner of the account in saving extra cash in hand. It creates a habit which will hold in good stead. The various types of bank accounts provide different benefits. A savings bank account will not only provide the account holder with the option of saving money but give him an interest, for allowing the bank to invest that money somewhere else.
• Liquidity: Liquidity is one of the concerns most of us face at some point in time. The availability of a ready pool of cash is always a great advantage. One can withdraw and deposit cash as per their needs. This works as a great psychological advantage too.
• Identity: Since opening a bank account requires due diligence on the part of the bank, the credentials of the holder are already verified. Hence banking documents are the best way to establish the identity of any individual.
• Transparency: Banking transactions are one of the most transparent forms of monetary exchange. There are multiple records of transactions that are present across the virtual world as well as the one on the account holder’s passbook.
• Safety: Money in the bank is one of the safest ways to save. A bank account is not just secure but well regulated too. Some part of the deposited money is insured too. So no matter what happens to the branch, the money in the account is safe.
• Ease of payment: One can integrate regular online payments with the account and one will not have the headache of having to remember due dates. Utility bills can be directly paid from the account. A lot of time and effort is saved by the account holder. Many banks also allow direct deposit, whereas paycheques go directly into their accounts.
• Accessibility: A bank account is always accessible to the account holder. Even if the branch is closed, the ATM kiosks will always be open. Hence, withdrawing money or depositing them will never be an issue. Hence, it is also to handy have an ATM cum Debit Card.

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The Reserve Bank of India – RBI is the Central Bank of the country. It has the task of overseeing the economic as well as the monetary policy of the country.

History of RBI

The Royal Commission on Indian Currency and Finance, which was also known as the Hilton-Young Commission, recommended the creation of a Central Bank. The recommendation was based on the principle of separation of control of currency and credit from the other functions of the Government and to facilitate the growth of the banking sector. The Reserve Bank of India Act, 1934 paved way for the creation of the Reserve Bank and operations started from the year 1935.  Since, then the Reserve Bank of India has undergone numerous transformations, reflecting the growing aspirations of the country.

Functions of RBI – Reserve Bank of India

The functions of the Reserve Bank of India is broken up into three heads:

• Traditional Functions
• Development Functions
• Supervisory Functions

Tradition Functions

• Primary Banker to the other banks within the country
• Banker to the Central and State Governments 
• Management of foreign exchange reserves 
• Foreign exchange management—current and capital account management
• Overlooking the Monetary policy of the country
• Regulation of money, forex and government securities markets as also certain financial derivatives
• Debt and cash management for Central and State Governments
• Oversight of the payment and settlement systems

Development Functions

• Promoter and the key driver for Developmental role
• Agricultural development
• Industrial Finance
• Promotion of Export
• Research and statistics and Technical advisory to the government

Supervisory Functions

• In charge of the Currency management mechanism
• Regulation and supervision of the banking and non-banking financial institutions, including credit information companies
• License provider to banks
• Supervision of Banking performance

Management Structure of RBI – Reserve Bank of India

Central Board of Directors

They are the top bosses of the organization and hence are located at the top of the heap. The post was created through the Reserve Bank of India Act, 1934, and has the responsibility to oversee the functioning of the central bank. It is also in charge of delegating roles and responsibilities to the others ie. Local boards and the other committees.

Governor, Deputy Governor, and Executive Directors

The Governor is the Chief Executive of the Reserve Bank. His/her role is to supervise the working of the bank and be a part of its daily operations. His management team consists of the Deputy Governors and Executive Directors.

The Central Government has the responsibility of nominating fourteen Directors on the Central Board. This includes at least one director from each of the local boards.

The remaining ten directors represent the different sectors of the country, namely, Trade, industry, agriculture, etc. The appointees are scheduled to chair their positions for a maximum period of four years.

The Central Government also nominates a Government official in the post of a Director. This official will be representing the government. The Finance secretary is usually selected as the member of the board and its term is fixed as per the requirement of the Central Government. The Governor, as well as a maximum of four other members, are the ex officio Directors of the Central Board.

The Local Boards

The Central Government has constituted four local boards each representing the four major areas of the country: North, South, East, and West.

The respective headquarters are:

• North: New Delhi
• South: Chennai
• East: Kolkata
• West: Mumbai

Each of these local boards has 5 members each, nominated by the Central Board, having a term of 4 years. These individual boards represent the territorial area they have been assigned to and advise the Central Board on issues related to the local economy and financial structures. The Central Board delegates other functions to the Local Boards too.

Offices and Branches

The RBI has offices and branches spread across the length and breadth of the country. The 4 main offices are the ones operating from the four main metros: New Delhi, Chennai, Kolkata, and Mumbai. There are 27 other offices and branches. The larger offices and the branches are headed by a senior officer designated as the Chief General Manager. They also act as the Regional Director. The smaller branches are headed by a senior officer designated as the General Manager.

The Reserve Bank of India has over the years kept transforming itself as per the demands of a growing economy. It has added departments, merged few, even closed a few down. The below list is of the departments which are in existence now:

Central Office Departments 

• Department of External Investments and Operations
• Financial Markets Department
• Financial Stability Unit Internal Debt Management Department
• Monetary Policy Department

Regulation and Supervision

• Department of Banking Operations and Development
• Department of Banking Supervision
• Department of Non-Banking Supervision
• Foreign Exchange Department
• Rural Planning and Credit Department
• Urban Banks Department

Research

• Department of Economic Analysis and Policy
• Department of Statistics and Information Management

Services

• Customer Service Department
• Department of Currency Management
• Department of Government and Bank Accounts
• Department of Payment and Settlement Systems

Support

• Department of Administration and Personnel Management
• Department of Communication
• Department of Expenditure and Budgetary Control
• Department of Information Technology
• Human Resources Development Department
• Inspection Department
• Legal Department
• Premises Department
• Rajbhasha Department
• Secretary’s Department

Other than these departments, the Central Board also has the task of overseeing various other financial activities through its myriad boards and committees.

 Board for Financial Supervision (BFS)

This Board formed through Section 58 of the RBI ACT and came into being in the year 1994. It was formed to be a committee of the Central Board whose primary focus was to undertake supervision of all the different sectors of the financial system, in an integrated manner. The entities which are part of this sector are:

• Banks
• Financial Institutions
• NBFC

The Chairman of the BFS is the Governor himself/herself, while the Deputy Governors are the ex-officio members. The Vice-Chairperson is usually a nominated post and is held by the Deputy Governor in-charge of banking regulation and supervision. Four Directors from the Central Board are nominated as members of the board. The nomination is done by the Governor himself/herself.

It is mandatory for the board to meet at least once a month and deliberate on issues ranging from regulatory controls to supervisory reports. These supervisory reports are a result of the surveillance carried out by the Supervisory departments of the Reserve Bank of India. These reports help in giving directions for the formulation of policy.

Hence, the board plays a critical part in helping the Reserve Bank of India discharge its role in regulating and formulating monetary policies.

Audit Sub Committee

An audit subcommittee has been created under the BFS to oversee activities that will continuously improve the audit-related exercises undertaken by the Reserve Bank of India. The Audit subcommittee overlooks both internal and external audits.  This subcommittee is headed by the Deputy Governor in charge of regulation and supervision. The other members of this unit are two Directors from the Central Board.

Board for Regulation and Supervision of Payment and Settlement Systems (BPSS)

Any policy initiatives on payments and settlements are overseen by this unit. It is headed by the Governor of the Reserve Bank while its members consist of two Deputy Governors, three Directors from the Central Board, and members on invite who are domain experts.

The BPSS has the mandate to lay down policies meant for regulation and supervision of payment and settlement systems, build standards for systems, authorize systems, and lay down rules for their membership.

There are a group of fully-owned subsidiaries under the Reserve Bank of India:

Deposit Insurance and Credit Guarantee Corporation (DICGC)

The DICGC came into being on July 15, 19978 after being established under the DICGC Act 1961. It is responsible for the insurance of all deposits such as savings, fixed, current, and recurring deposits. However, it does not have jurisdiction over the following entities:

• Deposits of foreign Governments;
• Deposits of Central/State Governments;
• Inter-bank deposits;
• Deposits of the State Land Development Banks with the State cooperative
• bank;
• Any amount due on account of any deposit received outside India;
• Any amount, which has been specifically exempted by the
• A corporation with the previous approval of the Reserve Bank of India.

The DICGC insures the deposited amount of up to INR 1,00,000 and pays out that amount in the event of the bank undergoing liquidation.

National Housing Board (NHB)

Set up on July 9, 1988, the NHB is a fully owned subsidiary of the RBI and acts as the apex institution related to housing. The responsibilities of the NHB are:

• To integrate the housing finance system with the overall financial system.
• To promote a financially sound housing financial system
• To create an affordable housing credit system
• To promote affordability by promoting augmentation of supply of land and building material
• To regulate the companies involved in housing finance

Bharatiya Reserve Bank Note Mudran Private Limited (BRBNMPL)

Established in 1995, this wholly-owned subsidiary is responsible for the production of banknotes in India. It has two presses. One at Mysore and the other at Salboni. Its registered office and corporate office are located in Bengaluru.

National Bank for Agriculture and Rural Development (NABARD)

National Bank for Agriculture and Rural Development (NABARD) is an institution whose majority stakeholder is the RBI. It is mandated to facilitate the uninterrupted flow of credit for development and promotion of agriculture, cottage, village, rural crafts, and small scale industries.  It also oversees all other economic activities, sustainable rural developments, and promote prosperity in its area of concern.

The RBI strength as of December 31, 2017, is 14,785.

Training and Development

RBI is a knowledge-based organization whose primary focus is to regulate the financial structure and system of the country and promote fair monetary policies. Hence, it has to have a rigorous training and development program.

The RBI has two training colleges and 4 zonal training centers.

The Reserve Bank Staff College, also known as the Staff Training College, was established in the year, 1963 and trains its junior and mid-level officers as well as staff from other banks. It offers courses in Broad Spectrum, Functional, Information Technology, and Human Resources Management and these are all residential programs.

The College of Agricultural Banking was set up in Pune in 1969, trains the senior and the middle-level officers about rural and cooperative credit sectors. It has also currently expanded its training expertise towards subjects as diverse as non-banking financial companies, human resource management, and information technology.

In addition to these centers, the RBI has four Zonal Training Centres located in Chennai, Kolkata, Mumbai, and New Delhi, where it trains its clerical and sub staff. These zonal training centers are also being used to train junior officers.

Other than the training and development centers the RBI has under its wing a few autonomous institutions.

National Institutions

• Institute of Bank Management (NIBM), Pune
• Indira Gandhi Institute for Development Research (IGIDR), Mumbai
• Institute for Development Research in Banking Technology (IDRBT), Hyderabad

The NIBM acts as think tank of the RBI and is engaged in research and education. It plays an important role in training senior bankers and finance administrators. It also provides consultancy to the banking and financial sectors.

The IGIDR is engaged in advanced research on development issues. It offers a Ph. D program in the field of development studies. In 1995, an M.Phil program was also launched. This is an institute that is fully funded by the RBI.

 The IDRBT was established in 1996 as an Autonomous Centre for Development and Research in Banking Technology. The primary focus of this institute is to improve banking technology in the country. Currently, it is working on areas like:

• Financial Networks and Applications
• Electronic Payments and Settlement Systems
• Security Technologies for the Financial Sector
• Technology-Based Education
• Training and Development
• Financial Information System
• Business Intelligence

The institutes are actively involved in improving various standards and systems for the banking sector in conjunction with the RBI, Indian Banks Association, Ministry of Communications and IT, GOI, and the various other committees.

Reserve Bank and its relationship with Commercial Banks

The relationship between the RBI and the Commercial Bank needs to be seen from the angle of both legal and regulatory ones. RBI gets its mandate on the basis of the RBI (Reserve Bank of India Act) ACT 1934 while the commercial banks function under the Banking Regulation Act 1949.

The Reserve Bank of India is the head of all monetary policies in India and supervises all the banks irrespective of their affiliations.

The RBI enjoys wide powers. it issues currency notes, provides liquidity to commercial banks, it regulates the money supply and liquidity (through various instruments), audits the books of commercial banks, and can suspend operations of a bank if there are serious financial irregularities to be found. It acts as the lender of the last resort to the commercial banking system.

The RBI also regulates the banking functions. That would mean it has the authority to assess the financial health of the bank through financial surveillance and surveys. This is done to safeguard investments and deposits and also to check that they work on fair principles.

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