Bank deposits

Bank deposits

Subject: Economy

Context:

The flow of financial assets of households witnessed a decline with bank deposits registering a fall in growth, even as their holdings in mutual funds, equity and small savings showed a significant rise during fiscal 2021-22.

Details:

• Bank deposits recorded a decline in 48% as interest rates declined to decadal lows in the banking system during covid as per RBI.
• The total financial assets of households fell to 10.8 percent of the GDP, from 16 per cent in the previous year.
• Components where financial assets of households rose:
  • Households’ direct investment in stock markets
  • Mutual funds through systematic investment plans (SIPs)
  • Investment in small savings
• Causes:
  • Post-Covid low the repo rate regime
  • Households include Small & Marginal Enterprises which closed down and had little ability to save during pandemic.
  • High inflation level of 7 per cent-making real deposit rate negative.

Concept:

Bank deposit: 

• It consists of money placed into banking institutions for safekeeping. These deposits are made to deposit accounts such as savings accounts, current accounts, and money market accounts.
• The account holder has the right to withdraw deposited funds, as set forth in the terms and conditions governing the account agreement.
• Mainly, there are two types of deposits viz. Time Deposits and Demand Deposits.
  • If the funds deposited can be withdrawn by the customer (depositor / account holder) at any time without any advanced notice to banks; it is called demand deposit. 
  • When money is deposited with a “tenure” , it cannot be withdrawn before its maturity is fixed at a particular time. Such deposits are called “Time deposits” or “Term deposits”. 
• Bank Deposits in India: In India there are four major types of Bank Deposits
  • Current Account:
    • A current account is a special type of account that has lower restrictions than a savings account when it comes to withdrawals and transactions.
    • It is also known as a demand deposit account and it is meant for businessmen to conduct their business transactions smoothly.
    • Banks also offer overdraft facilities on these, i.e., they let account-holders withdraw more money than there is in the account.
  • Savings Accounts:
    • It offers high liquidity and is very popular among the masses. It does, however, have cash withdrawal and transaction limits to promote digital payments.
    • Banks provide an interest rate which is only slightly higher than inflation, so it is not very optimal for investment.
  • Recurring Deposits:
    • It is a special type of term deposit where you do not need to deposit a lump sum savings, rather a person has to deposit a fixed sum of money every month.
    • There are no premature withdrawals allowed in the account, but for a penalty, you can close the account before the maturity date of the deposit.
  • Fixed Deposits:
    • It is an investment avenue offered by banks, financial institutes and Non-Banking Financial Companies (NBFCs) that offers guaranteed returns.
    • It gives a higher interest than a regular savings account and offers a wide range of tenures ranging from 7 days to 10 years.