Unit III: Types of Accounts and Customer Identification

1. Introduction to Bank Accounts

Bank accounts are the foundation of banking operations, serving as a secure place for individuals and businesses to store, manage, and transact money. They are essential financial tools that facilitate savings, investment, and payments. Banks offer a variety of account types, each designed to meet different customer needs and financial goals. Understanding these types is crucial for making informed decisions about managing personal or business finances.

2. Savings Accounts

A savings account is the most common type of bank account. Its primary purpose is to encourage saving money by offering a modest interest rate on the deposited funds. These accounts are characterized by their liquidity, meaning funds can be withdrawn easily, though there might be limits on the number of withdrawals per month. They are ideal for everyday savings, emergency funds, and short-term financial goals.

Features of Savings Accounts:

• Interest Earning: Deposits earn a fixed rate of interest, typically calculated daily and credited quarterly or semi-annually.
• Liquidity: Funds are readily accessible for withdrawals and transfers.
• Withdrawal Limits: Often subject to a maximum number of free withdrawals per period (e.g., 4-6 per month).
• Minimum Balance: Some accounts may require a minimum average quarterly balance to avoid charges.
• Transaction Passbook/Statement: Provides a record of all deposits and withdrawals.
• ATM/Debit Card Facility: Enables easy cash withdrawal and point-of-sale transactions.

Example:

Sarah wants to save money for a down payment on a car within the next two years. She opens a savings account to deposit a portion of her salary each month. The interest earned will help her savings grow, and she can easily access the funds when she's ready to buy the car.

3. Recurring Deposit (RD) Accounts

A Recurring Deposit account is a term deposit scheme that allows individuals to deposit a fixed sum of money at regular intervals (usually monthly) for a specified period. This type of account is designed for disciplined savers who wish to accumulate a specific sum over time. The interest rate is usually higher than that of a savings account and is fixed for the entire tenure.

Features of Recurring Deposit Accounts:

• Fixed Installments: A fixed amount is deposited on a monthly basis.
• Fixed Tenure: The deposit period can range from a few months to several years.
• Fixed Interest Rate: The interest rate is predetermined and remains constant throughout the tenure.
• Compounding Interest: Interest is typically compounded quarterly, leading to better returns over time.
• Premature Withdrawal: Allowed, but usually with a penalty and a lower interest rate.
• Loan Facility: Banks often provide loans against RD balances.

Example:

Ravi wants to save ₹1,00,000 for his daughter's education in five years. He opens an RD account and decides to deposit ₹1,500 every month. The bank offers an interest rate of 6% compounded quarterly. This disciplined saving ensures he meets his financial goal.

4. Fixed Deposit (FD) Accounts

A Fixed Deposit account, also known as a Term Deposit, is a financial product offered by banks that provides investors with a higher rate of interest than a savings account, especially for the amount deposited over a fixed period. The depositor is required to deposit a lump sum amount for a predetermined duration. Funds in an FD are generally not meant for frequent withdrawal, as premature withdrawal often incurs penalties.

Features of Fixed Deposit Accounts:

• Lump Sum Deposit: A single, larger sum is deposited at the beginning.
• Fixed Tenure: The deposit duration can range from a few days to several years.
• Higher Interest Rate: Generally offers higher interest rates compared to savings and RD accounts.
• Interest Payout Options: Interest can be paid out periodically (monthly, quarterly, annually) or accumulated and paid at maturity.
• Premature Withdrawal: Permitted, but usually with a penalty (reduction in interest rate).
• Liquidity: Lower liquidity as funds are locked in for the tenure.
• Loan Against FD: Loans can be secured against the FD balance.

Example:

Priya received a bonus of ₹2,00,000. She doesn't need this money immediately and wants to earn a good return. She opens a 3-year FD account with her bank, earning an interest rate of 7% per annum. This allows her money to grow steadily without the temptation of spending it.

5. Current Account

A Current Account is primarily designed for businesses, traders, and entrepreneurs who have a high volume of frequent financial transactions. Unlike savings accounts, current accounts typically do not earn interest on the deposited balance. They offer unlimited transactions and provide overdraft facilities, making them suitable for managing day-to-day business cash flow.

Features of Current Accounts:

• Unlimited Transactions: No restrictions on the number of deposits and withdrawals.
• No Interest: Generally, no interest is paid on the account balance.
• Overdraft Facility: Allows account holders to withdraw more money than they have in their account, up to a pre-approved limit.
• Minimum Balance Requirement: Often requires a higher minimum balance compared to savings accounts.
• Cheque Book Facility: Extensive cheque book issuance.
• Suitable for Businesses: Ideal for frequent and large transactions.

Example:

'Global Traders Ltd.' has a high volume of daily sales receipts and supplier payments. They maintain a current account with their bank. This allows them to deposit all incoming cash and cheques and issue multiple cheques to vendors daily without worrying about transaction limits. They also utilize the overdraft facility during periods of tight cash flow.

6. CASA Accounts

CASA is an acronym that stands for Current Account and Savings Account. These are non-interest-bearing or low-interest-bearing deposit accounts. Banks refer to CASA deposits as "cheap funds" because they do not have to pay significant interest on them, unlike term deposits (like FDs and RDs). CASA deposits form a substantial portion of a bank's total deposits and are crucial for a bank's profitability and lending capacity.

Significance of CASA for Banks:

• Low Cost of Funds: Banks pay minimal or no interest on these deposits.
• Stable Funding Base: Savings accounts, in particular, tend to be sticky, providing a stable source of funds.
• Customer Relationship: Encourages a long-term relationship with customers, potentially leading to cross-selling of other banking products.
• Liquidity Management: Provides banks with readily available funds for lending.

Example:

A bank's total deposits are ₹10,000 crore. If ₹7,000 crore of this comes from savings and current accounts (CASA), and ₹3,000 crore comes from fixed deposits, the bank has a high CASA ratio (70%). This means the bank has a significant portion of its funds at a low cost, enhancing its profitability.

7. Pradhan Mantri Jan Dhan Yojana (PMJDY)

The Pradhan Mantri Jan Dhan Yojana (PMJDY) is a national mission for financial inclusion that ensures access to financial services, namely banking/savings & deposit accounts, remittance, credit, insurance, and pension, in an affordable manner. Launched on August 28, 2014, it aims to provide every citizen with access to a bank account.

Key Features of PMJDY Accounts:

• Zero Balance Account: Accounts can be opened with zero balance.
• Rupay Debit Card: All account holders are provided with a Rupay Debit Card.
• Accidental Insurance Cover: A free personal accident insurance cover of ₹1 lakh is provided with Rupay Debit Card issued on the PMJDY platform. This was later enhanced to ₹2 lakh for accounts opened after August 28, 2018.
• Life Cover: Eligible beneficiaries receive a life cover of ₹30,000.
• Overdraft Facility: An overdraft facility of up to ₹10,000 is available for eligible account holders after satisfactory operation of the account for six months.
• Direct Benefit Transfer (DBT): Facilitates the receipt of government subsidies and benefits directly into the account.
• Pension and Insurance Products: Access to micro-pension and micro-insurance products.

Eligibility:

Any resident Indian citizen who does not have any existing bank account can open a PMJDY account.

Example:

A daily wage earner living in a remote village, who previously had no access to formal banking, opens a PMJDY account. This allows them to receive their wages directly, save small amounts safely, access government benefits like subsidies without intermediaries, and obtain a small loan if needed for emergencies.

8. Know Your Customer (KYC) Norms

Know Your Customer (KYC) refers to the process of a business verifying the identity of its clients. In the banking sector, KYC norms are mandatory regulations set by the Reserve Bank of India (RBI) to prevent banks from being used for illegal activities like money laundering, terrorism financing, and fraud. These norms require banks to collect and verify specific information and documents from their customers.

Objectives of KYC:

• Customer Identification: To ensure the bank knows who its customers are.
• Risk Assessment: To assess the risk associated with a customer (e.g., risk of money laundering).
• Preventing Financial Crimes: To deter and detect financial crimes.
• Compliance: To comply with regulatory requirements.

Mandatory Documents for KYC:

Customers are required to submit proof of identity and proof of address.

Simplified KYC (KYC Lite):

For certain low-risk accounts, like basic savings bank deposit accounts (BSBDA) or accounts opened under PMJDY, a simplified KYC process might be allowed, often using Aadhaar authentication.

Periodic Updation of KYC:

Banks are required to periodically update KYC details of their customers (e.g., every 2 years for high-risk customers, 8 years for medium-risk, and 10 years for low-risk customers).

Example:

When Mr. Sharma wants to open a new savings account, the bank asks him to submit his PAN card (as proof of identity and for tax purposes) and his Aadhaar card (as proof of identity and address). The bank verifies these documents and records the details to comply with KYC norms. If he later moves, he needs to update his address proof.