Banking is the primary step for any Investment as any investment can be made from a bank account only except for few small savings and Bank deposits are the most popular investment avenue in India.
Banks are Financial Intermediaries. Banks intermediates between the savers and the borrowers. The savers do not want to give their money to the borrowers directly because they do not know the borrowers and are not sure whether the money will come back or not. So, banks come in between, take money from savers as deposit, giving them a reward of interest. Banks afterwards lend the money to borrowers at a higher interest rate earning a profit.
The main Function of the bank is accepting deposits from the public for the purpose of lending and making investments.
70 % of Financial Investments in India consist of Bank deposits. People keep their money with banks because they have Trust in banks and banks offer liquidity. Banks follow certain basic Principles as to maintain the Public Trust.
Features: Banking needs no introduction and all are aware of the features. All above 18 are eligible to open bank accounts. Minor’s accounts can be opened by guardian. Deposit accounts can be opened by all types of entities such as Proprietary firms, Partnerships, Companies, Trusts etc. Banks also allow those below 18 also to open savings accounts in the form of student accounts and other types with a condition that cheque book will not be issued to them. This is because Minors are not capable of entering into a contract. Apart from individuals proprietary firms partnership firms, HUF, Limited companies and Trusts are all eligible for opening bank accounts. NRIs can also open bank accounts .
Banks offer facility of saving and current accounts: Savings account enable people to deposit their saving or earnings with banks at any time and withdraw the same as per need. In short, they get liquidity though they do not keep cash with them. Current accounts are operated by companies for managing their day to day operations.
Also, Banks Offer many Deposit products for investment like: –
Fixed Deposits: – where money is kept in lumpsum for a predetermined period of time and the interest rate is also predetermined at the time of deposit. Interest varies as per the tenure of the deposit and is always higher than the Savings bank deposits. Banks normally accept Fixed deposits for 1 year to 10 year periods . Banks also accept short term deposits for period less than 1 year. The interest is paid out periodically either quarterly or half yearly. Banks also pay interest on monthly basis also if customer so desires.
Recurring Deposits: As the name indicates people invest in this type of deposits every month a predetermined sum for a definite period of time which is more than a year. The interest rate applicable will be that of the Fixed deposits. The principal deposited along with the accrued interest is paid out at the end of the tenure.
Reinvestment plans: These deposits are also called Cumulative deposits by some banks. They are similar to Fixed deposits with a difference that the interest will not be paid periodically but will be added to the principal. This gives the compounding effect to deposits.
Banks play very important role in the economy and in the development of the country. So, they enjoy certain privileges. Banks alone can open checking accounts like saving and Current accounts and issue cheque books to customers. Issuing of cheque books is a prerogative of banks
