SOME BASICS ON BANKING

The primary difference in these different bank accounts lies in the account balance to
be maintained and the segment of patronage. While most of the bank accounts now
operative, like the Savings Bank Account, cater to individuals, some like the Current
Account, are designed to meet the exclusive needs of the business community. The
accounts are all financial transactions between the customer or business entity and the
bank. Both, Savings Bank Accounts as well as Current Accounts, earn a positive
(debit) balance or a negative (credit) balance throughout the life of the account. While
in the former the bank owes money to the client, in the latter, it is the other way
around.

Savings Bank Account:

These bank accounts are maintained by private individuals as well as retail financial
institutions. The amount saved earns interest and is subject to the issue of checks, only
if there is a clause permitting the same in the regulations supervising the transactions
of the bank in question. The Savings Account enables the customers to repeatedly
save liquid assets and subsequently earn monetary return in the form of interest.
Savings Accounts are now offered by most credit unions, commercial banks, loan
associations and mutual savings banks. The account has little or no scope to obtain
additional funds, but the money set aside and interest earned may be accessed via any
ATM or bank branch. These accounts also come with a debit card facility to enable
quick transference of funds. A Savings Account, makes it mandatory to maintain a
certain amount of fund-balance for a minimum period of time. There are no
restrictions on access to funds via withdrawals, payments or transfers. Savings
Accounts offer the customer an itemized list or balance sheet of all financial
transactions conducted via a passbook or bank statement generated at the end of every
month.

Current Bank Account:

A Current Bank Account is a transactional account designed specially for the business
community. The account enables businessmen and entities to access flexible payment
methods and directly distribute money to vendors and suppliers from the account. This
is achieved via the check book facility, and special arrangements made to
accommodate standing orders, debit card payments and direct debits into the account.
A Current Account also comes along with an overdraft facility that enables the
businessman to borrow money from the bank to meet any urgent business
commitment. Current Accounts also come along with the 'offset mortgage' facility that
allows the business entity to purchase property and benefit from the reduction in the
rate of interest. This 'offsetting' of a credit balance is basically offered against the
incurred mortgage debt. Current Accounts attract a higher rate of interest, both earned
and payable, since the volume of transactions and savings are on the higher side.
These accounts are designed to make business transactions free of personal-handling
of liquid funds and ensure the availability of funds when most necessary via exclusive
Internet banking. The account is run with the primary aim of ensuring that profitable
business transactions do not run into deficit due to non-availability of funds.

The differences of the Current Accounts and Savings Accounts have been discussed as
below:
Basic Objective:
The basic objective of a Savings Bank Account is to enable the customer save his / her
liquid assets and also earn money on that saving. The Savings banks Accounts are
preferred by individuals and provide liquidity for private and small businesses
sometimes. On the other hand the current account is basically a transactional
account which is preferred by business people. The basic objective of the current
accounts is to provide flexible payment methods to the business people and entities.
These payment methods include special arrangements such a overdraft facility,
accommodation of standing orders, direct debits, offset mortgage facility.

Transactions:
Usually saving accounts have low transactions while current accounts have large
transactions.

Handling:
Savings accounts involve personal handling of assets, while current accounts are
aimed to make the account holder free of personal handling of liquid funds. The
current account facility helps the business to run without hurdles due to non
availability of funds and short term deficits.

Interest Income:
Usually the current accounts don't earn interests. The saving accounts earn 3.5%
interest at present in India. The interest is compounded half yearly. (Please note that in
case of death of the current account holder his legal heirs are paid interest at the rates
applicable to Savings bank deposit from the date of death till the date of settlement)

Overdrafts:
As discussed above saving accounts have no overdraft facility, current accounts have.
The money can be borrowed for short term and to be paid back with interest.

Minimum Balance:
Usually saving accounts need a minimum balance in the banks to keep the account
active (however No Frill accounts require either nil or low minimum balance to be
maintained). In current accounts there are no minimum balance requirements.

Definitions of Correspondent banking on the Web:

 A correspondent account is an account (often called a nostro or vostro account)

established by a domestic banking institution to receive deposits from, make
payments on behalf of, or handle other financial transactions for a foreign financial
institution. ...

Types of Rates
What is Bank rate?   Bank Rate is the rate at which central bank of the country  (in India it
is RBI)  allows finance to commercial banks. Bank Rate is a tool, which central bank  uses
for short-term purposes. Any upward revision in Bank Rate by central bank is an indication
that banks should also increase deposit rates as well as Prime Lending Rate. This any revision
in the Bank rate indicates could mean more or less interest on your deposits and also an
increase or decrease in your EMI.

What is Bank Rate ? (For Non Bankers)  : This is the rate at which central bank (RBI) 
lends money to other banks or financial institutions.   If the bank rate goes up, long-term interest
rates also tend to move up, and vice-versa. Thus, it can said that in case bank rate  is hiked,  in all
likelihood banks will hikes their own lending rates to ensure and they continue to make a profit.

What is CRR?    The Reserve Bank of India (Amendment) Bill, 2006 has been enacted and
has come into force with its gazette notification. Consequent upon amendment to sub-Section
42(1), the Reserve Bank, having regard to the needs of securing the monetary stability in the
country, can prescribe Cash Reserve Ratio (CRR) for scheduled banks without any floor rate
or ceiling rate.  [Before the enactment of this amendment, in terms of Section 42(1) of the
RBI Act, the Reserve Bank could prescribe CRR for scheduled banks between 3 per cent and
20 per cent of total of their demand and time liabilities].

RBI uses CRR either to drain excess liquidity or to release funds needed for the economy
from time to time. Increase in CRR means that banks have less funds available and money is
sucked out of circulation. Thus we can say that this serves duel purposes i.e. it not only ensures
that a portion of bank deposits is totally risk-free, but also enables RBI to  control liquidity in the
system, and thereby, inflation by tying the  hands of the banks in lending money.

What is CRR (For Non Bankers)  : CRR means Cash Reserve Ratio.  Banks in India are
required to hold a certain proportion of their deposits in the form of  cash.  However,
actually Banks  don’t hold these as cash with themselves, but deposit such case with
Reserve Bank of India (RBI) / currency chests, which is considered as  equivlanet to
holding cash with themselves.. This minimum ratio (that is the part of the total deposits  to
be held as cash) is stipulated by the RBI and is known as the CRR or  Cash Reserve
Ratio.  Thus, When a bank’s deposits increase by Rs100, and if the cash reserve ratio is
9%, the banks will have to hold additional Rs 9 with  RBI and Bank will be able to use
only Rs 91 for investments and lending / credit purpose. Therefore,  higher the  ratio (i.e.
CRR), the lower is the amount that banks will be able to  use for lending and investment. 
This power of RBI to reduce the lendable amount by increasing the CRR,  makes it an
instrument in the hands of a central bank through which it can control the amount that
banks lend.  Thus, it is a tool used by RBI to control liquidity in the banking system.

What is SLR? Every bank is required to maintain at the close of business every day, a
minimum proportion of their Net Demand and Time Liabilities as liquid assets in the form of
cash, gold and un-encumbered approved securities. The ratio of liquid assets to demand and
time liabilities is known as Statutory Liquidity Ratio (SLR). Present SLR is 24%. (reduced
w.e.f. 8/11/208,  from earlier 25%) RBI is empowered to increase this ratio up to 40%.  An
increase in SLR  also restrict the bank’s leverage position to pump more money into the economy.

What is SLR ? (For Non Bankers)  : SLR stands for Statutory Liquidity Ratio. This
term is used by bankers and indicates  the minimum percentage of deposits that the bank
has to maintain in form of gold, cash or other approved securities.  Thus, we can say that it
is ratio of cash and some other approved to liabilities (deposits) It regulates the credit
growth in India. 

What are Repo rate and Reverse Repo rate?

Repo (Repurchase) rate is the rate at which the RBI lends shot-term money to the banks.
When the repo rate increases borrowing from RBI becomes more expensive.  Therefore, we
can say that in case,  RBI wants to make it more expensive for the banks to borrow money, it
increases the repo rate; similarly, if it wants to make it cheaper for banks to borrow money, it reduces
the repo rate

Reverse Repo rate is the rate at which banks park their short-term excess liquidity with the
RBI.  The RBI uses this tool when it feels there is too much money floating in the banking system. 
An increase in the reverse repo rate  means that the RBI will borrow money from the banks at a
higher rate  of interest. As a result, banks would prefer to keep their money with the RBI

Thus, we can conclude that Repo Rate signifies the rate at which liquidity is
injected in the banking system by RBI, whereas Reverse repo rate signifies the rate
at which the central bank absorbs liquidity from the banks .

6.00% (w.e.f.
Bank Rate  
29/04/2003)

Cash Reserve Ratio (CRR) 6.00% Increased from

(w.e.f. 5.00% to 5.50% wef
24/04/2010) 13/02/2010; and
then again to 5.75%
 wef 27/02/2010; and
now to 6.00% wef
24/04/2010

25%(w.e.f. Increased from

Statutory Liquidity Ratio 24% which was
(SLR)
07/11/2009 continuing since.
) 08/11/2008

5.25% Increased from

(w.e.f. 5.00% which was
Reverse Repo Rate
02/11/2010 continuing since
) 16/09/2010

6.25% Increased from

(w.e.f. 6.00% which was
Repo Rate under LAF
02/11/2010 continuing since
) 16/09/2010