Deposits: The Types, the Terms and What the Bank Owes

Where a deposit is recorded carries the rest of the argument. On a bank's own accounts a deposit sits on the side that lists what the bank owes, alongside everything else it has to pay back one day. The owing side is the opposite of where most people file it. Most people file a bank balance beside the notes in a drawer: the same money, in a safer place.

Once a deposit is read as an obligation of the bank rather than as a container with the holder's money in it, every other feature of a deposit follows from that one reading. The price follows, because somebody who has the holder's money and is using it will pay something for the use of it. The term follows, because how long the bank can keep it changes what that use is worth. Because an obligation is only as good as the party carrying it, what happens if the bank cannot pay follows as well. And the reason anything needs to stand behind deposits at all follows, because nothing needs to stand behind a box.

Whose money is it once it has been paid in?

The money is the bank's. Money paid into a bank account stops being the holder's money and becomes the bank's money, against which the holder holds a claim for the amount. The obligation and the entitlement are not two events but one fact seen from its two ends: on the bank's books the deposit is an obligation, on the holder's side it is an entitlement to be paid, and there is no third place where the money is also sitting.

Here is the everyday version. A coat handed to a cloakroom earns a ticket. Because a cloakroom holds coats, the ticket entitles the holder to a coat, and on returning they get the same coat. A bank account entitles the holder to an amount, and on returning they get the amount but not the same notes. A bank does not hold notes on the holder's behalf. The bank holds an obligation to pay. The ticket and the account look alike and only one of them is a receipt for an object that is still where it was left.

Say it once more from the bank's side. The bank's direction is the one that makes the arithmetic further down read properly. When Suvarna Commercial Bank Limited, an invented bank, takes in Rs 10,000/-, its balance sheet does not gain a box. The balance sheet gains a rupee of something the bank holds on the deploying side and a rupee of something it owes on the funding side, at the same instant. Nothing about that is unusual and nothing about it is hidden. The entry is written plainly on the bank's own accounts, in the ordinary way, and has been there the whole time.

Demand Deposit: what does repayable on demand actually buy?

A demand deposit is a deposit repayable whenever the holder asks for it, with no notice to serve and no date to wait for. Repayable on demand is the entire definition, and every other property of a demand deposit is downstream of that one property.

Look at what falls out of it. Because the money can leave at any moment, it can be used to pay for things, and a demand deposit is therefore the account ordinary life runs through. And because the money can leave at any moment, it is also the least predictable funding a bank holds: nothing on the bank's side tells it how much of that balance will still be there on Friday.

The trade runs in both directions at once: the holder gets immediate access and accepts whatever rate goes with it, and the bank gets money it can be asked for at any moment and pays less for it precisely because of that. Neither side is being generous and neither side is being clever. The price is lower because the certainty is lower, and that is the same sentence read from two chairs.

Term Deposit: what has been agreed to once the date is fixed?

A term deposit is a deposit placed for a fixed period at a rate fixed when it was placed, repayable on a stated date. The shape is the mirror of the demand deposit, criterion for criterion.

The holder gives up immediate access and gets a rate fixed for the whole term, and the bank gets money with a known date attached and pays more for that certainty. The bank now knows something it did not know about the demand balance: it knows when this money leaves. Knowing the date is worth paying for, and the price of that knowledge is the difference between the two schedules.

Now the property people forget, and it is the one worth holding on to. The rate on a term deposit is fixed at placement and does not follow anything afterwards. It does not track a published reference, it does not reset, and it does not move when the bank changes what it offers to somebody placing a deposit next week. The rate is a promise the bank made on the day, and the bank cannot revisit it, whichever way rates go next. The promise cuts in both directions: the holder who placed a deposit before rates fell has done well out of exactly the same clause that disappoints the holder who placed one before rates rose. The clause did not change. The world moved around it.

Taking the money back before the maturity dateThe stated day on which an amount placed for a fixed period falls due and becomes payable. is a term of the deposit itself, sitting inside conditions the Reserve Bank of India sets. The conditions move, and the Reserve Bank of India publishes them at rbi.org.in.

Savings vs Current Account: what really separates the two?

Both a savings account and a current account are demand deposits. Both being demand deposits is why they belong in one comparison rather than in two separate definitions: they sit on the same side of the demand and term divide, and the difference between them is a different difference altogether.

Run four criteria across the pair. Who typically holds one and for what. Whether a rate on the balance belongs to the account at all. Whether the account is built to hold money or to move it. And what it costs the bank to run.

The property that separates them structurally rather than by convention is this: a current account is built for a high number of movements and a savings account is built for a balance that mostly sits. Everything else follows. A business paying suppliers and collecting from customers generates movements all day, and movement is what costs a bank money to service, so the charges attach where the movement is. A household balance between one salary and the next generates very few movements, sits still most of the month, and a rate on the balance is a sensible part of what that account is.

Picture two containers in one shop. There is the till at the front, flying open three hundred times between morning and closing and rarely holding much at any single moment. And there is a locked box at the back, opened twice a year, holding whatever has been put by since the last time. Money sits in both. Nobody would run them the same way, price them the same way, or expect the same things of them.

Two things in the paragraphs above are somebody else's to decide. Which charges an account may carry, and what a holder has to be shown about them, is one. The arithmetic behind savings interest, together with the rhythm on which it lands in the account, is the other. Both are set by the Reserve Bank of India, at rbi.org.in.

What has the bank agreed to, and what does it do with the money meanwhile?

The bank has agreed to two things and only two. The bank has agreed to repay the amount, either on demand or on a stated date, and it has agreed to pay the agreed price for holding it. Read the list again and notice what is not on it. The bank has not agreed to keep the money still, and it never said it would.

Work the division rather than taking the claim. Suvarna Commercial Bank Limited reports advancesWhat a lender has lent out, taken together, as those loans sit on its own books. of Rs 1,44,000 crore for the stated year against deposits of Rs 1,92,000 crore. Dividing the first by the second gives 75.00 per cent, with deposits as the base. So about seventy five paise of every rupee of deposits is out on loan, and the remaining Rs 48,000 crore, 25.0 per cent of deposits, is not. Dividing advances by deposits gives the credit to deposit ratioWhat a lender has out on loan, set against what it owes depositors, with the second of those two named as the base underneath., and doing that division in front of yourself keeps the base visible. Quoting the finished ratio hides it.

Most of what a bank owes its depositors is out on loan at any moment, and nothing has gone wrong. Lending most of the deposits out is the arrangement itself. It is also the reason a deposit earns anything at all. Nobody pays a depositor for the privilege of storing notes. The bank pays because it is putting the money to work, and what reaches the depositor is a share of what that work is worth.

Now turn it round. The other side of this is the half that never gets said. A depositor has effectively lent to the bank. The promise runs in both directions, even though only one direction of it is printed on a statement. Few depositors would describe themselves as lenders to a bank, and there is no reason they would: nothing in the language of a savings account suggests it. But the position is the same position, and that is exactly why a bank that cannot pay is a serious matter for a depositor and not merely an inconvenience.

How Banks Price Loans and Deposits: where does the gap come from?

A bank works with two prices, and it sets them in two quite different ways.

On the lending side, a price is built rather than picked. A lending price begins at a reference somebody else publishes, on a cycle the lender does not set and cannot bring forward, and the lender fixes its own spreadThe part of a lending rate added on top of a published reference. Where it comes from and how it is worked out is covered separately. on top of it. Which loans must be benchmarked to what published reference, and how often the reference is allowed to be passed through, are set by the Reserve Bank of India at rbi.org.in.

On the deposit side, a price is a schedule. The bank publishes what it will pay, revises it when it wants to, and shapes it by term: higher where it wants the money for longer, lower where the money can walk out at any moment. The shape is not a preference. The shape is the demand and term trade, printed as a table.

A bank is paid on one side and pays on the other, and the gap between the two is what it keeps. The whole of the business fits into that sentence. Everything else a bank does is a variation on standing between two prices.

And now the discipline, immediately. Deposits and loans are exactly where the subject goes wrong. The two prices are struck on different bases, so the two published figures cannot simply be subtracted. A rate paid is worked over what the bank owes. A rate earned is worked over what the bank has put to work. Deposits and earning assets are different quantities of different sizes, and the difference between two percentages taken on two different bases is a number that belongs to neither of them. Doing it properly means putting both limbs over one named base, and that is covered separately.

What does one bank's balance sheet look like from the depositor's side of the counter?

Suvarna Commercial Bank Limited reports deposits of Rs 1,92,000 crore against total assets of Rs 2,40,000 crore for the stated year. Divide and that is 80.0 per cent of total assets. Four fifths of everything this bank holds is money it owes to depositors. Read as a depositor rather than as an analyst, that says something plain: the institution is mostly made of promises to ordinary account holders.

Split those deposits by type. Current and savings balances are 42.0 per cent of deposits, or Rs 80,640 crore, and the rest is Rs 1,11,360 crore, or 58.0 per cent. Adding the two back gives Rs 1,92,000 crore again, and the check is worth doing every time a split appears.

Two of those rows need a warning attached rather than a footnote underneath. The 5.81 per cent figure is interest expendedThe whole interest bill a bank paid out over a period, on everything it owes, taken as one line. over deposits, and it is not the cost of deposits alone. The bank's accounts do not split the interest bill between deposits and its other borrowings, so the figure covers a bill that partly belongs elsewhere while being divided by deposits only. Naming that absence is the honest thing to do with it; filling the gap with a plausible split would not be. The 9.12 per cent figure is interest earned over earning assetsThe part of a lender's balance sheet that carries interest, being its advances and its investments taken together., being advances of Rs 1,44,000 crore plus investments of Rs 60,000 crore.

One income, three answers, and only the denominator moved

Here is the base rule doing real damage, on one line of this bank's own accounts. Interest arriving at Suvarna Commercial Bank Limited over the year totals Rs 18,600 crore while interest leaving totals Rs 11,160 crore, so the net interest incomeWhat is left of a stretch of interest receipts once that same stretch of interest payments has been taken away. A rupee amount, not a rate. for the stated year is Rs 7,440 crore. Now divide that same Rs 7,440 crore three times. Against advances of Rs 1,44,000 crore it reads 5.17 per cent. Against earning assets of Rs 2,04,000 crore it reads 3.65 per cent. Against total assets of Rs 2,40,000 crore it reads 3.10 per cent. One income, three numbers, and the only thing that changed between them was the denominator.

One more thing, and it is the kind of shortcut that looks safe and is not. Earning assets are 85.0 per cent of total assets, an invitation to scale the middle reading down by that share to reach the last one. On the printed figures, 3.65 per cent times 85.0 per cent gives 3.1025 per cent, not 3.10 per cent. Carried to six places instead, at 3.647059 per cent, the scaling lands on 3.10 dead. Only there. Rebuilding a published figure out of rounded percentages produces a wrong answer that looks derived, and therefore looks trustworthy. Where the figure is published, divide it again from the rupee amounts instead.

What happens if the bank cannot pay?

Follow the claim to its end. A deposit is a claim on the bank, so a bank that cannot pay is a bank whose depositors hold a claim it cannot meet. Calling that a claim the bank cannot meet is not drama. The word claim taken seriously says exactly that, and it is the reason a cover exists behind deposits at all. Something has to answer the question the claim raises.

Exactly what that cover reaches, who it reaches, and where it stops are all settled by the Deposit Insurance and Credit Guarantee Corporation, at dicgc.org.in.

The cover behind a deposit is set by the Deposit Insurance and Credit Guarantee Corporation. The amount moves. A figure printed today is not merely out of date the day it is revised, it is incorrect, and a reader who trusts it is worse off than a reader who was handed nothing. The name of the corporation and its address, on the other hand, keep working through every revision that will ever be made, so the question is answered at that address rather than from a figure that has aged.

An institution that cannot meet its obligations, and the way a loss of confidence gathers in the first place, are both covered separately.

What happens when an account is frozen, dormant or closed before its date?

A freeze, a long stretch with no activity and an early closure are all far more common than a bank failing, and almost nobody explains them.

An account can be frozen on an instruction issued by a third party, with neither the bank nor the person whose account it is having asked for it. An account that has not been operated for a stated period is treated differently from one that has, and the money does not stop being owed while that is true. A term deposit closed before its date is settled on terms fixed in the deposit itself.

In every one of these the money is still owed, and what changes is the route to it. That is the shape worth carrying, and it is worth carrying because it is calming and correct at the same time. The obligation on the bank's books does not evaporate because a route to it has been altered. The obligation sits exactly where it sat.

Each of those routes has a stated form and a grievance routeA published ladder of steps, each with somewhere to go next, for a matter the counter itself has not settled. Who publishes it decides what the steps are. behind it, and both are set by the Reserve Bank of India at rbi.org.in. The steps themselves move, and they are published there.

One thing needs saying plainly rather than implied. None of these three situations is a consequence of anything the holder did or failed to do, and none of the routes out of them is obvious. The routes are not obvious to people who work in finance either. Standing at a counter and being told something incomprehensible is not a failure of preparation on the holder's part.

Where does anybody actually use any of this?

Three people read the same deposit line and read it three different ways, and each of them is using the claim idea rather than admiring it.

Somebody assessing a bank as a business reads the deposit line as the cost side of the gap. Because those two parts are not bought at the same price, such a reader wants the split between current and savings balances and everything else. A shift in the mix moves the gap without anything happening in the lending at all. On these figures that split is Rs 80,640 crore against Rs 1,11,360 crore. The effect of such a shift on a bank's margin is covered separately.

Somebody lending to a business reads the borrower's own current account rather than the bank's. The account built for movement is the account that shows movement, so the pattern of a business is visible there in a way it is not visible in a balance that sits.

And a household reads it for the plainest reason of all: to know what it actually has. A balance is an amount somebody owes the holder, so who owes it is a real question and not a technicality. That is why the cover behind deposits exists, why it has a body that sets it, and why the amount is worth ten minutes at dicgc.org.in rather than a figure copied from anywhere else.

Every number above answers to a pen. Not one of them turns up pre-divided. Four fifths comes out of Rs 1,92,000 crore set against Rs 2,40,000 crore. The deposit split is 42.0 per cent of Rs 1,92,000 crore, and the remainder is whatever survives that subtraction. Seventy five paise falls out of Rs 1,44,000 crore set against Rs 1,92,000 crore, and Rs 48,000 crore is the leftover. The interest bill is Rs 11,160 crore set against Rs 1,92,000 crore. Interest earned is Rs 18,600 crore set against Rs 1,44,000 crore added to Rs 60,000 crore. And the three readings of one income each put Rs 18,600 crore less Rs 11,160 crore over a fresh denominator.

Who decides what stands behind a deposit and what it may be charged?