Unit 1: FOUNDATIONS FOR FINANCE

Lecture on Introduction, Definition, Functions, Need; Types of Bank Deposits

Introduction:
A financial system is an important tool for a country that wants to develop economically. The
reason is that it helps in the creation of wealth by a way of investments. That is why there are
different types of financial services available to facilitate the requirement. One of the important
ways for a country to control financial transactions and services is through banks. Banking in India
has been a backbone to so many businesses in the past as well as in the present times. It started in
the 18th century and is still going strong. Different types of banks are central banks, commercial
banks, investment banks, cooperative banks, postal banks. Let us see the introduction of Banks.
Meaning:
A bank is a financial institution which performs the deposit and lending function. A bank
allows a person with excess money (Saver) to deposit his money in the bank and earns an
interest rate. Similarly, the bank lends to a person who needs money (investor/borrower) at an
interest rate. Thus, the banks act as an intermediary between the saver and the borrower.
Definition of Bank:
“ Bank is a financial intermediary institution which deals in loans and advances”--- Cairn
Cross.
“ Bank is an institution which collects idle money temporarily from the public and lends to
other people as per need.”---- R.P. Kent.
Need of Bank
 Savings and capital formation
 Channelization of savings
 Implementation of Monetary Policy
 Encouragement of Industries
 Regional Development
 Development of Agriculture and Other Neglected Sector

Functions of Banks
 Accepting of Deposit: A Bank accepts money from the people in the form of deposits
which are usually repayable on demand or after the expiry of a fixed period. It gives
safety to the deposits of its customers. It also acts as a custodian of funds.
 Giving Advances/Loans: A bank lends out money in the form of loans to those who
require it for different purposes. These loans can be in the form of retail loans or
corporate loans
 Payment and Withdrawal: A bank provides easy payment and withdrawal facility to
its customers in the form of cheques, drafts, debit cards, ATM etc. It also brings bank
money in circulation. The new age banking focuses on providing payment services
using mobile technology to enable faster transfer, using UPI etc.,
  Ever increasing functions including agency and utility services: Banking is an
evolutionary concept. There is continuous expansion and diversification as regards the
functions, services and activities of a bank, which includes wealth management
services, utility services, agency services, insurance fund advisory services etc.,
Types of Bank
Accepting of Deposits
A very basic yet important function of all the commercial banks is mobilising public funds,
providing safe custody of savings and interest on the savings to depositors. Bank accepts
different types of deposits from the public such as:

1. Saving Deposits: encourages saving habits among the public. It is suitable for salary
and wage earners. The rate of interest is low. There is no restriction on the number and
amount of withdrawals. The account for saving deposits can be opened in a single name
or in joint names. The depositors just need to maintain minimum balance which varies
across different banks. Also, Bank provides ATM cum debit card, cheque book, and
Internet banking facility.
2. Fixed Deposits: Also known as Term Deposits. Money is deposited for a fixed tenure.
No withdrawal money during this period allowed. In case depositors withdraw before
maturity, banks levy a penalty for premature withdrawal. As a lump-sum amount is paid
at one time for a specific period, the rate of interest is high but varies with the period of
deposit.
3. Current Deposits: They are opened by businessmen. The account holders get an
overdraft facility on this account. These deposits act as a short term loan to meet urgent
needs. Bank charges a high-interest rate along with the charges for overdraft facility in
order to maintain a reserve for unknown demands for the overdraft.
4. Recurring Deposits: A certain sum of money is deposited in the bank at a regular
interval. Money can be withdrawn only after the expiry of a certain period. A higher
rate of interest is paid on recurring deposits as it provides a benefit of compounded rate
of interest and enables depositors to collect a big sum of money. This type of account
is operated by salaried persons and petty traders.

Deposit Insurance (PMJDY)

Pradhan Mantri Jan-Dhan Yojana (PMJDY) is National Mission for Financial Inclusion to
ensure access to financial services, namely, a basic savings & deposit accounts, remittance,
credit, insurance, pension in an affordable manner. Under the scheme, a basic savings bank
deposit (BSBD) account can be opened in any bank branch or Business Correspondent (Bank
Mitra) outlet, by persons not having any other account.

Benefits under PMJDY

 One basic savings bank account is opened for unbanked person.
 There is no requirement to maintain any minimum balance in PMJDY accounts.
 Interest is earned on the deposit in PMJDY accounts.
 Rupay Debit card is provided to PMJDY account holder.
 Accident Insurance Cover of Rs.1 lakh (enhanced to Rs. 2 lakh to new PMJDY accounts
opened after 28.8.2018) is available with RuPay card issued to the PMJDY account
holders.
 An overdraft (OD) facility up to Rs. 10,000 to eligible account holders is available.
 PMJDY accounts are eligible for Direct Benefit Transfer (DBT), Pradhan Mantri
Jeevan Jyoti Bima Yojana (PMJJBY), Pradhan Mantri Suraksha Bima Yojana
(PMSBY), Atal Pension Yojana (APY), Micro Units Development & Refinance
Agency Bank (MUDRA) scheme.