Commercial Banking Functions Overview

A Multi Option Deposit Account offers the benefits of earning higher interest rates similar to a fixed deposit account, while providing the flexibility of a savings account. This "auto-sweep" feature allows funds to seamlessly transfer between the savings and fixed deposit portions based on account balance and needs, mitigating the risk of dishonoring cheques due to insufficient funds. This combination of higher potential returns and enhanced liquidity makes it a more attractive option than a standard savings account.

Recurring Deposits (RDs) and Fixed Deposits (FDs) both offer higher interest rates than savings accounts. However, the calculation method differs. RD interest is typically calculated on the average monthly balance, while FD interest is a fixed rate on the principal amount. Interest rates for both are influenced by market conditions, bank policies, and deposit tenure. Generally, longer tenures and larger deposit amounts attract higher rates in both RDs and FDs.

Recurring Deposits are classified as "time liabilities" for the bank because the funds deposited are committed for a fixed period. This creates a reliable source of long-term funds for the bank, allowing them to invest in loans and other financial products with more stability and predictability. The bank can confidently allocate these funds for longer-term investments, knowing they won't be withdrawn suddenly, enhancing their ability to lend money to businesses and individuals.

<p>A Cash Credit facility offers a short-term loan to businesses, providing them with flexible access to working capital. This allows businesses to meet their immediate financial needs, like purchasing raw materials, paying employees, and managing day-to-day operations. This access to funds helps businesses maintain a steady cash flow, ensuring they can manage their current liabilities and avoid potential disruptions to their operations.</p> Signup and view all the answers

<p>Cash Credit is a particularly attractive option for entrepreneurs because it offers flexibility and speed. Unlike traditional loans with fixed loan amounts and repayment schedules, Cash Credit provides businesses with an overdraft facility, allowing them to withdraw funds as needed, subject to a pre-approved limit. This allows for greater adaptability to fluctuating business needs and provides quick access to funds when required. The interest is charged only on the amount withdrawn, further reducing the cost of borrowing compared to traditional loans.</p> Signup and view all the answers

<p>Fixed Deposit accounts offer higher interest rates than Current accounts because the depositor agrees to lock in their funds for a specified period, thereby reducing the bank's risk of immediate withdrawal. Conversely, Current accounts provide greater flexibility with withdrawals but earn little to no interest due to their demand deposit nature. Businesses and individuals with frequent transaction needs typically favor Current accounts, while those seeking to maximize earnings on idle funds opt for Fixed Deposits.</p> Signup and view all the answers

<p>Both Savings Deposit and Recurring Deposit accounts encourage savings, but they differ in their structure and suitability for various needs. Savings Deposit accounts offer flexibility, allowing depositors to withdraw funds as needed while earning modest interest. Recurring Deposit accounts, on the other hand, promote disciplined savings through regular, recurring deposits, potentially yielding higher returns than Savings accounts due to consistent contributions. While Savings Deposit accounts cater to individuals who prefer flexibility, Recurring Deposit accounts are ideal for those who seek a structured approach to achieving long-term savings goals.</p> Signup and view all the answers

<p>Commercial banks act as intermediaries in the financial system, facilitating the flow of funds between borrowers and lenders. Their primary functions include accepting deposits and advancing loans. By accepting deposits, banks gather funds from savers and create a pool of capital for lending. They then lend this capital to borrowers, such as individuals and businesses, enabling economic activity, investment, and growth. The interconnected nature of these functions allows banks to play a vital role in driving economic development.</p> Signup and view all the answers

<p>Current accounts are termed 'demand deposits' because depositors can withdraw funds at any time, creating a greater risk of liquidity strain for the bank. Fixed deposits, on the other hand, are considered 'time liability' as the funds remain with the bank for a fixed period, reducing the bank's immediate liquidity requirements but increasing its risk of being unable to meet obligations if depositors unexpectedly withdraw their funds.</p> Signup and view all the answers

<p>Electronic banking services encompass a broad range of banking transactions conducted remotely using electronic media. Examples include online banking, mobile banking, and ATM transactions. These services have profoundly changed customer-bank interactions by offering convenience, accessibility, and efficiency. Customers can now access account information, transfer funds, pay bills, and manage finances from anywhere with an internet connection or mobile device, eliminating the need for physical visits to bank branches.</p> Signup and view all the answers

An account where a fixed amount is deposited monthly for a set period.

The amount deposited in a recurring deposit account that the bank owes to the depositor.

A savings account that transfers excess funds to fixed deposits automatically.

A short-term business loan allowing withdrawal based on specific securities.

The money earned on amount deposited in accounts, usually higher in fixed deposits.

Financial institutions that accept deposits and provide loans.

A savings account for a fixed term, earns maximum interest, and is non-transferable.

A demand deposit account for frequent deposits and withdrawals with no interest paid.

An account to encourage small savings, allows withdrawals and earns interest.

Encourages regular savings with fixed contributions at regular intervals.