Introduction to Banks

Types of Banks (By RBI)

Scheduled Banks:

These are banks that are included in the Second Schedule of the Reserve Bank of India Act, 1934.

These banks must meet certain criteria set by the Reserve Bank of India.

• The bank must be registered with the RBI.
• It must have a paid-up capital and reserves of at least ₹5 lakhs (this limit may vary).
• They are eligible to borrow money from the RBI at the bank rate.
• It must be financially sound

Examples:

Commercial Banks (Public, Private, and Foreign Banks).
Cooperative Banks (Urban and Rural).
Small Finance Banks
Regional Rural Banks (RRBs).
Development Banks (e.g., SIDBI, NABARD).

Non-Scheduled Banks

These are banks that are not included in the Second Schedule of the RBI Act. These banks do not meet the criteria laid out by the RBI for inclusion in the list of scheduled banks.

• These banks are not eligible to borrow money from the RBI at the bank rate.
• They do not have the same level of trust and financial backing as scheduled banks.

Examples:

Local Area Banks
Non-Banking Financial Companies (NBFCs)
Certain Cooperative Banks

Key Concepts

Deposit Insurance and Credit Guarantee Corporation (DICGC)

It is a wholly owned subsidiary of the Reserve Bank of India (RBI). It was established in 1978 with the primary objective of providing insurance cover to depositors in Indian banks and to offer credit guarantee to financial institutions.

• The maximum coverage per depositor in case of a bank failure is ₹5 lakh (as of now). This means that if a bank fails, a depositor will receive a maximum of ₹5 lakhs, including both principal and interest, from DICGC.
• It covers all types of deposits, including savings, current accounts, fixed deposits, recurring deposits, and even term deposits.
• It insures the deposits of account holders in commercial banks, regional rural banks, cooperative banks, and foreign banks that are authorized to operate in India.

Non-Performing Asset (NPA)

It is a loan or debt instrument where the borrower has stopped making interest or principal payments for a certain period of time.

Overdraft

• It is a financial facility provided by banks that allows individuals or businesses to withdraw more money from their account than the available balance, up to a pre-approved limit.
• The bank sets a limit on how much a customer can overdraft based on their creditworthiness, income, or collateral provided.
• Interest is charged only on the amount withdrawn and for the duration it is used, not on the full limit.

Loan Against Deposit (LOD)

• This is a facility provided by banks or financial institutions, where you can take a loan by pledging your Fixed Deposit as collateral.
• Instead of breaking your FD to access the funds, you can get a loan against the FD without any penalty or loss of interest.

Non-Banking Financial Company (NBFC)

• These are financial institutions that provide a variety of financial services but do not have a banking license.
• DIGBC is not applicable for this

Examples:

Bajaj Finance
Muthoot Finance
HDFC Ltd. (Housing Finance)
Mahindra Finance

Types of Accounts:

Current Account:

• Designed for businesses or individuals who need to make frequent and large transactions.
• Does not offer interest on the balance
• The minimum balance requirement for current accounts is usually higher, ranging from ₹5,000 to ₹25,000 or more.
• There are no transaction limits, and it is typically used by businesses for daily cash flow.
• It may come with benefits such as free chequebooks, unlimited withdrawals, and overdraft facilities.
• The overdraft limit is usually higher than a savings account, especially for businesses.
• Banks typically charge higher fees for current accounts, especially for features such as cheque leaves, cash deposits, or for not maintaining the minimum balance.

Savings Account:

• Designed for individuals who want to save money and earn interest on their balance.
• Offers interest on the balance, usually ranging from 3% to 4% per annum credited quarterly.
• The minimum balance varies from bank to bank and can range from ₹1,000 to ₹10,000.
• It has limits on withdrawals/number of free transactions per month (usually limited to 3–5 withdrawals per month depending on the bank).
• Typically, ATM withdrawals are free up to a certain limit; beyond that, fees apply.
• Some savings accounts offer a small overdraft facility, but it is usually limited
• Banks may charge monthly maintenance fees if the minimum balance is not maintained, or if there are frequent withdrawals exceeding the limit.
• Interest earned on a savings account is taxable under Income from Other Sources.

Salary Account

• Designed for employees to receive their monthly salary directly from their employers.
• No minimum balance requirement, as most salary accounts are zero-balance accounts.
• Typically, comes with higher transaction limits and free ATM withdrawals across multiple networks.
• Offers features like free cheque books, internet banking, and mobile banking services.
• Some banks provide added benefits like complimentary insurance, discounts on loans, and exclusive offers for salary account holders.
• Salary accounts may offer overdraft facilities, allowing short-term borrowing against the credited salary.
• If the account does not receive a salary credit for a specified period (usually 3-6 months), it may be converted into a regular savings account with a minimum balance requirement.
• Generally free of monthly maintenance charges, provided it remains active with regular salary credits.
• Suitable for hassle-free salary management and additional perks tailored to employees' financial needs.

Dormant Account

• It is a bank account that has remained inactive or has had no transactions for a specific period, usually 12-24 months, depending on the bank's policies.
• Withdrawals, fund transfers, or usage of internet banking services may be blocked.

Banking Instruments

1) Demand Draft (DD)

• It is a pre-paid financial instrument issued by a bank, guaranteeing payment to a specified person or entity. It is widely used for secure, non-cash transactions.
• It cannot bounce like cheques, as the amount is debited from the payer's account upfront.
• It can be used in regions where digital or online payment methods are not accepted.
• It reduces risk of theft compared to cash.

2) Cheque

• It is a written, dated, and signed order by the account holder, instructing their bank to pay a specific sum of money to the person or entity named on it.
• Cheque dishonouring is when a bank refuses to process a cheque payment due to reasons like insufficient funds, signature mismatch, or invalid cheque details.

3) Savings Account Passbook

It is a small book issued by a bank to a savings account holder, recording all transactions (deposits, withdrawals, interest credits).

Fund Transfer Systems

NEFT (National Electronic Funds Transfer)

• It is a nationwide payment system that allows individuals and businesses to transfer funds electronically from one bank account to another.
• It operates in batch processing mode, meaning transactions are processed in batches at specific intervals throughout the day.
• Charges are generally low, with banks offering free or minimal fees for NEFT transactions.
• It is a delayed settlement system, meaning it does not settle payments in real time but in batches.
• Transferring funds from one account to another across different banks in India for any purpose (e.g., bill payments, remittances).

RTGS (Real-Time Gross Settlement)

• It is a real-time settlement system that allows for high-value transactions to be settled immediately, meaning it is suitable for urgent or large transactions.
• RTGS transactions are processed individually
• Minimum of ₹2 lakh per transaction, with no upper limit for transfers.

IMPS (Immediate Payment Service)

• It is a fast, real-time payment system developed by NPCI (National Payments Corporation of India) that allows money transfer from one bank account to another instantly, 24/7.
• IMPS can be used for both online and mobile banking, making it a convenient option for immediate money transfers.
• The transaction limit for IMPS may vary from ₹1,00,000 to ₹2,00,000 depending on the bank and type of account.

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