Explain the following terms/concepts.
1) Bank
Ans:-
1) Bank is a financial institution that deals in money. It is an institution which accepts money as deposits and lends money in different forms. It accepts money as deposits repayable on demand with interest, through cheques, draft, and order or otherwise. Bank earns a margin of profit by the lending amount collected as deposits at a higher rate of interest to trade and industry. It is a financial institution in which those people who have surplus and idle funds deposit in it and those who need funds borrow from it.
(2) Bank is an important institution in the money market where money itself is a commodity. It provides various types of services by performing two types of functions viz. Primary functions and secondary functions. The primary function of the bank includes accepting deposits and lending funds. Section 5 (c) of the Banking Regulation Act, 1949 defines a Banking Company “as any company which transacts the business of banking in India.”
2) Demand Deposits
Ans:-
1) The deposits which are repayable on demand is called demand deposits. The demand deposits include saving deposits and current deposits. A saving deposits account aims at promoting the habit of saving among the fixed income earners. Interest at certain rates is paid on the minimum balance in this account. There are restrictions on the number of withdrawals. A passbook is issued to the depositor. E-statement issued to depositor only on demand.
2) A current deposit account is meant for businessmen and institutions. There are no restrictions on the number and amount of withdrawals from this account. Interest is not payable on the balance standing in this account. Overdraft facility is granted only to current account holders after following the prescribed procedure of the bank.
3) Time Deposits
Ans:-
1) Any deposit which is not repayable on demand is called time deposit. Time deposits are repayable after a specified period of time. Time deposits may be classified as fixed deposit and recurring deposit. Under Fixed deposit account certain amount is deposited for fixed period (minimum 45 days or more). Usually a higher rate of interest is paid depending on the period. Interest is paid either at a regular time interval or on the maturity of deposits. Fixed Deposit Receipt (FDR) is issued to the depositor. Loan is given to depositor on the security of FDR.
2) Under Recurring deposit account, depositor is required to deposit with the bank a fixed sum of money every month for 12, 24, or 60 months. To encourage saving habit among the people bank allows depositors to open this account. 0n maturity, the depositor gets the total amount deposited plus interest accrued on it. Passbook is issued to the depositor. E-statement is issued to the depositor only on demand.
4) Savings Deposits
Ans:-
A current deposit account is meant for businessmen and institutions. There are no restrictions on the number and amount of withdrawals from this account. Interest is not payable on the balance standing in this account. Overdraft facility is granted only to current accountholders after following the prescribed procedure of the bank.
5) Current Deposits
Ans:-
A current deposit account is meant for businessmen and institutions. There are no restrictions on the number and amount of withdrawals from this account. Interest is not payable on the balance standing in this account. Overdraft facility is granted only to current accountholders after following the prescribed procedure of the bank.
6) Recurring Deposits
Ans:-
1) Under Recurring deposit account, depositor is required to deposit with the bank a fixed sum of money every month for 12, 24, or 60 months.
2) To encourage saving habit among the people bank allows depositors to open this account. 0n maturity, depositor gets the total amount deposited plus interest accrued on it. Pass book is issued to the depositor. E-statement is issued to the depositor only on demand.
7) Fixed Deposits
Ans:-
1) Any deposit which is not repayable on demand is called a time deposit. Time deposits are repayable after specified period of time. Time deposits may be classified as fixed deposit and recurring deposit. Under Fixed deposit account certain amount is deposited for fixed period (minimum 45 days or more).
2) Usually higher rate of interest is paid depending on the period. Interest is paid either at regular time interval or on maturity of deposits. Fixed Deposit Receipt (FDR) is issued to the depositor. Loan is given to depositor on the security of FDR.
8) Loans
Ans:-
1) Loan is an arrangement by which the bank advances an amount against securities like shares and debentures, government bonds insurance policies or valuables like gold ornaments, jewelers, etc. This amount is either paid in one sum or is credited to a separate loan account in the name of the customer. It is granted for a fixed period. Interest is payable on the entire amount sanctioned irrespective of the amount actually withdrawn by the borrower.
2) Short term loans are provided for the period of not more than 1 year. It is required by businessman to meet the need of working capital. Bank charges interest at the rate higher than is charged on overdraft. Medium term loans are provided for a period from 1 year up to 5 years. Interest charged on this type of loan is higher than interest rate charges on short term loan. Long term loans are provided by the bank for the period more than 5 years. It is given for growth and development of the business. Interest charged on the long term loans is higher than that is charged on Medium term loans.
9) Advances
Ans:-
(1) A credit facility provided by the bank to its customers for a shorter period is called advances. Advances are usually granted by the bank to the business to meet the day-today requirements of a business. Interest is charged only on the amount actually withdrawn and not on the amount sanctioned.
(2) The amount received by the bank by way of deposits through various accounts is utilized for granting advances or loans to trade and industry. The bank adopts the following devices to advance short term finances:
i) Bank overdraft,
(ii) Cash credit, and
(iii) Discounting Bills of Exchange.
10) Cash Credit
Ans:-
1) Under this arrangement, a banker asks the borrower to open a separate account. Then bank places sanctioned loan amount to the credit of this account. The customer is allowed to withdraw from this account as and when he needs money and is allowed to deposit in his account any surplus that he has. The customer is charged interest on the actual am0unt utilised by him.
(2) Cash credit arrangement is for a longer period than an overdraft. The customer can save interest by depositing the excess amount not needed and withdrawing the amount as and when he needs it. This system of lending is very popular only in India among traders, industrialists, etc. Bank demands some tangible securities such as stock of raw material, finished goods, etc
11) Overdraft
Ans:-
(1) A bank overdraft is an arrangement by which a customer, usually a current account holder, is allowed to overdraw, Le. Withdraw money in excess of his own balance, up to a certain limit sanctioned by the bank for a specified period.
(2) Bank charges interest on the actual amount overdrawn every day. This facility is extended on the basis of collateral security of goods, raw materials, shares, bonds, Government promissory notes. Fixed Deposit Receipt (FDR). LIC policies. etc. Businessmen meet their temporary working capital requirements by taking advantage of overdraft facility.
12) Discounting of Bill
Ans:-
(1) Banks offer financial assistance to commerce and industry through discounting bills of exchange and promissory notes. A creditor holding a bill of exchange duly accepted by his debtor can discount it at a bank. The bank pays the amount of the bills after deducting some nominal amount as a discount. This discount represents the interest on the amount for the unexpired or the remaining period of the bill.
(2) On maturity, the bank collects the proceeds of the bill from its acceptor. If the bill of exchange is dishonored, the customer of the bill of exchange along with interest expenses, etc. Sometimes, a banker who discounted the bill of exchange is liable to pay to the bank the whole amount themselves accept hundies on behalf of the customers and arrange to pay for the bill of exchange on maturity. This facility helps traders in securing ready money for their day-to-day business.
13) Letter of credit
Ans:-
(1) A Letter of Credit is ‘an undertaking given by the importer’s bank stating that the payment for the goods imported will be made to the exporter if the required documents of title are presented to the bank’. Issuing a Letter of Credit is a method of making payment to the exporter by the importer for the goods imported Under this method the importer maintains a bank account with a banker and purchases a Letter of Credit (L/C) from the banker.
(2) In the Letter of Credit, the banker of the importer writes to the banker of the exporter to make the payment of a certain amount to the exporter on the delivery of certain specified export documents by the exporter. The Letter of Credit is sent to the exporter after complying with the shipment formalities the exporter submits this letter to his bank along with necessary documents and can secure the payment in his own country and in his own currency. Thereafter, the exporter’s bank sends these documents to the importer’s bank. The importer’s bank delivers them to the importer. The importer can produce these documents to the Port authorities and get his goods.
14) Stop payment of cheque
Ans:-
(1) Businessmen and commercial organisations issue cheques to various parties in settlement of their dues or bills. These cheques may be sent by post or may be collected by hand delivery. Sometimes cheques may be lost during transit or misplaced and so cannot be traced. It is possible that the finder of such a cheque may fraudulently encase it from the bank.
(2) If any cheque issued by the company is lost or misplaced, the Company Secretary must inform the bank immediately by telephone about the loss of cheque with a request to stop payment on such lost cheque. Subsequently, he is required to write a letter to the bank giving details of the lost cheque such as cheque number, date of issue, amount of cheque, name of the party in whose favour cheque is drawn, etc. This helps the bank to stop or deny the payment on the lost cheque.