Banking Important Concepts of

Important Concepts of Banking

What is a Bank?

Ans – A Bank is a financial institution which accepts deposits from General Public, offering them some

interest and utilizing those deposits to give loans to business customers and other individual customers, at

a higher interest rate, thereby earning a net interest income.

What are functions of a Bank?

Ans – There are many functions of a Bank like:-

a) Accept Deposits from General Public

b) Giving loans to Public and Business Customers

c) Offering Credit Cards and Debit Cards

d) Providing Safe Deposit Lockers

e) Providing Payment Services in the form of RTGS/NEFT/IMPS/Drafts

f) Offering Internet Banking, Mobile Banking, ATM Services

g) Offering third party products like Mutual Funds, Life Insurance, General Insurance

What are functions of RBI?

Ans – RBI performs many functions like:-

a) RBI is the issuer of currency notes in India

b) RBI is the Banker to the Government

c) RBI is Banker of the Banks

d) RBI is the lender of the last resort for the Banks

e) RBI is the issuer of Banking and Branch license

What are the types of Deposits which a Bank can accept?

Ans– A Bank can accept 2 types of Deposits, these are:-

a) Demand Deposits

b) Time Deposits

Demand Deposits are those deposits, which a customer can withdraw from the Bank, without giving a

prior notice. Examples of Demand Deposits are:-

i) Savings Account Deposits

ii) Current Account Deposits

Time Deposits are those deposits which are placed with the Bank for a fixed time period. Examples of

Time Deposits are:-

i) Fixed Deposits

ii) Recurring Deposits

What is a Savings Account?

Ans– A Savings account is the most basic account held by an individual with the Bank, in which he keeps his

savings. The Bank offers some interest to the customer, for keeping his deposit with the Bank. The interest

offered on Savings Account Balances is calculated via Simple Interest Method. This interest is credited to

the customer’s account either quarterly or half-yearly.

A customer normally does less number of transactions in his savings account, in a month.

What is a Current Account?

Ans– A current account is that account, which is opened in the Bank for business purpose. A Bank does not

give any interest on the balances held in current account. In a current account, customers normally do

large number of transactions in a month. A current account is normally opened by Sole Proprietors,

Partnership Firms, Private Limited Companies and Public Limited Companies.

A Bank may even ask an individual to open a current account, if he/she is doing large number of

transactions in his savings account, in a month.

What is a Fixed Deposit Account?

Ans– A Fixed Deposit Account is a type of Term Deposit Account, which is held with a Bank to earn a higher

interest than a savings account. In a Fixed Deposit, a customer will place a certain amount with the Bank

for a Fixed Time Period, earning a Fixed Rate of Interest. The minimum time period of a FD for Retail

Customers is 15 days and for Corporate Customers is 7 days. The maximum time period of a FD is 10 years.

Can a FD be closed prematurely (before the maturity date).

Ans – A FD is a contract between the Bank and the Customer, which a Bank cannot break. The Bank will

have to honor the FD commitment, till the maturity date.

However, the customer is given the option to prematurely close the FD, in-case he wants his funds back,

before the maturity date. If a customer does so, then he will have to give a penalty in the form of interest

of 1-2%.

What is a Recurring Deposit?

Ans – A recurring deposit is the type of time deposit, in which, customer places the money in the bank

fixed intervals like monthly installments. The customer will select the monthly amount and the time

period of the Recurring Deposit. The minimum time period for a RD is 6 months and maximum time period

is 10 years.

The interest rate offered by the Bank in FD and RD is the same.

What is the difference between a FD and RD?

Ans – The Differences between a FD and RD are:-

i) In case of a FD the amount is placed one time whereas in case of RD the amount is placed in

installments.

ii) In case of FD the minimum time period is 7 days for corporate customers and 15 days for retail

customers whereas minimum time period of a RD is 6 months.

iii) A FD can be made for any number of days like 100 days, 200 days, 300 days etc whereas a RD will

always have to be in multiples of 3.

What is a Vault?

Ans – A Vault is a strong room in which money, important documents and customer’s valuables are kept. A

Vault is always inside the Bank’s Branch.

How many parties are involved in a cheque?

Ans – There are 3 parties involved in a cheque:-

i) Drawer – Is a person who has written the cheque, basically he is the account holder

ii) Drawee – Drawee is always the Bank, who pays the cheque amount

iii) Payee – Payee is always the beneficiary of the cheque

What is RBI’s Clean Note Policy?

Ans – RBI’s clean note policy says that clean and good quality notes should be made available to the

general public. For this RBI has issued some guidelines:-

i) Do not staple the notes

ii) Do not write anything on the note, especially on the watermark

iii) Do not put rubber stamp on the note

iv) Do not use the notes to make garlands and use them in social events

What is Bait Money?

Ans – Bait Money is a security feature used in the Bank. It is a bundle of notes which are kept at the cash

counter, whose serial numbers are already noted in a separate register or the photocopies of such notes

are taken. In case there is a robbery in the Bank and the bait money is taken by the robbers, then the

detail of those notes are forwarded to the police, for tracking of the thief’s.

The teller needs to ensure that the bait money is not given to the normal public, as this would defeat the

purpose of the bait money and in-case this is done by mistake then new bundle of notes needs to be kept

as bait money.

What is Fake Note Impounding?

Ans – Fake Note Impounding refers to the steps taken by a Teller, in case a fake note is detected at the

Bank. The various steps are:-

i) Do not return the fake note to the customer

ii) Do not give the credit of the fake note to the customer

iii) Put a “Fake Note” stamp on that note

iv) Make the entry of that note in a Fake Note Register

v) Give an Acknowledgement Receipt to the customer, specifying that a fake note has been detected from

him.

In case 5 or more Fake Notes are detected from a single customer in a day, then a FIR needs to be lodged

with the nearest Police Station.

What are the various Payment Mechanisms in India

Ans – The various payment mechanisms in India are broadly classified into 2 categories

i) Paper Based Payments

ii) Electronic Payments

Paper Based Payments types are Cheque and Draft

Electronic Payment types are RTGS, NEFT, IMPS

What is a cheque?

Ans – A cheque is a payment instrument that is issued by a bank account holder for making payments to an

individual or company or cash withdrawals from the bank.

A cheque gives an unconditional order to a bank to pay the amount mentioned on the cheque to a person,

who presents the cheque either at cash counter or via clearing.

What is a Draft?

Ans – A Draft is a paper based instrument, similar to a cheque, however a draft assures that the amount

mentioned on the instrument will always be paid, as a draft cannot bounce. A draft is issued by a Bank on

behalf of the customer, which assures payment to the beneficiary.