Banking 

is an industry that handles cash, credit, and other financial

transactions. Banks provide a Safe place to Store extra cash and
credit.They offer savings accounts, Certificates of Deposit, and
checking accounts. Banks use these deposits to make loans. These
loans include home mortgages, business loans, and car loans.

A Bank is a financial institution licensed to receive deposits and make

loans. Two of the most common types of banks are commercial/retail
and investment banks. Depending on type, a bank may also provide
various financial services ranging from providing safe deposit boxes
and currency exchange to retirement and wealth management.

Definition
Banking is defined as “Accepting of deposits of money from public for
the purpose of Lending or Investment, repayable on demand or
otherwise and withdrawable by cheque, draft, or otherwise”

Banking can be defined as the business activity of accepting and

safeguarding money owned by other individuals and entities, and then
lending out this money in order to earn a profit. However, with the
passage of time, the activities covered by banking business have
widened and now various other services are also offered by banks. The
banking services these days include issuance of debit and credit cards,
providing safe custody of valuable items, lockers, ATM services and
online transfer of funds across the country / world.
Objective of Bank
 Business objectives.

 Social objectives.

Business objectives

 Making profits.

 Providing services.

 Currency issue.

 Creation of transaction media.

 Receiving deposit.
 Making loan.

 Ensuring safety.

 Investment.

Social objectives

 Creating savings.

 Capital formation.

 Industrialization.

 Employment.

 Developing living standard.

 Economic development

 Banks operating in India fall under four categories: private banks, public
sector banks or nationalized banks, foreign banks and cooperative banks. All
four of these categories of banks allow citizens to open a bank account in
India. 
 To understand how to select a bank account that suits your requirements,
you need to know the kinds of bank accounts that all four types of banks
offer. 
 There are six kinds of bank accounts from which you can choose:

 1. Savings Account

 These are deposit accounts meant to help consumers save their money. A
savings account can be opened by any individual in India who holds an
 Aadhaar card and a PAN card, both of which are mandatory to open a bank
account in India. 

 Key Features of a Savings Account

 Limit. There is no limit to the amount of money that can be saved in a

savings account. The number of transactions may be capped in some cases,
depending on your bank. 
 Balance. A consumer is expected to maintain a mandatory minimum balance
in most cases to maintain a savings account. 
 Exception to minimum balance requirements is for select accounts, such as
savings accounts that have been opened under the Indian federal
government’s financial inclusion plan called the Pradhan Mantri Jan Dhan
Yojana (PMJDY). 
 Under PMJDY, one savings account with zero balance is opened per person.
These accounts fall under the Basic Savings Bank Deposit Accounts, which
limit the number and value of deposits that can be made, and withdrawals
are capped at four per month, including ATM withdrawals. 
 Interest. A consumer earns interest on the deposits made in a savings
account. This interest rate varies from one bank to another. For
example, interest rate for savings bank deposit is 2.70% for account balance of
up to INR 1 lakh at India’s largest public sector bank, State Bank of India.
While, interest rate for savings bank deposit is 3% for account balance below
INR 50 lakh at India’s largest private sector bank, HDFC Bank. 
 Benefit. Savings accounts serve as the easiest way to earn interest on idle
money lying in banks. 

 2. Current Account
 Current accounts are mostly business accounts where money is frequently
transferred between financial accounts. These accounts are best suited for
transactions by corporations and business owners for daily business
activities. 

 Key Features of a Current Account

 Limit. There is no limit to how much money can be put in a current account.

Current accounts also do not have a transaction limit. 
 Balance. A current account has a higher minimum balance requirement than
savings accounts. 
 Interest. Consumers do not earn any interest on current accounts. 
 Benefit. These accounts allow an overdraft facility, which permits consumers
to withdraw more money from the account that there is actually in the
account. 

 3. Salary Account

 These accounts are opened by banks upon the request of big corporations
and businesses that pay their employees through banks. Each employee is
eligible to maintain a salary account in which the company they are
employed with credits a monthly salary. 

 Key Features of a Salary Account

 Limit. There is no limit to how much money can be put in a salary account.

Each employee receives salaries based on disbursal from their employees.
Independent transactions can be made by employees to transact between
this kind of bank account with another. 
 Balance. A salary account is a zero balance account and employees can
withdraw all the money credited in the account at any point. 
 Interest. Employees do not earn any interest on salary accounts. 
 Benefit. These accounts can be converted into savings accounts at any point
in time. Upon inactivity for more than three months, banks hold the rights to
convert these accounts into savings accounts, the regulation for which is
different. 

 4. NRI Account

 These accounts are opened by non-resident Indians who wish to maintain a

financial bank account in India. There are three kinds of NRI accounts that
can be opened:

 Non-Residential Ordinary Account (NRO)

 These accounts hold deposits in Indian rupee denomination. The money

deposited is from proceeds earned in India. 

 Key Features of an NRO

 Limit. There is no limit to how much money can be put in an NRO account. 

 Balance. Any amount of balance can be maintained. 
 Interest. The principal and the interest earned on that principal fall under the
taxable category. 
 Benefit. These accounts are unaffected by the rate of conversion. An NRI
can open a current account, a savings account or a fixed deposit account via
the NRO account. 

 Non-Residential External Account (NRE)

 These accounts hold deposits in Indian rupee denomination. The money

deposited, however, is not from proceeds earned in India; in other words, the
 money deposited is earnings or savings from the country where the non-
resident Indian lives.

 Key Features of an NRE

 Limit: There is no limit to how much money can be put in an NRE account. 

 Balance: Any amount of balance can be maintained. 
 Interest: The principal and the interest earned on that principal do not fall
under the taxable category. 
 Benefit: These accounts bear the impact of a prospective change in the rate
of conversion. An NRI can open a current account, a savings account or a
fixed deposit account via the NRE account. 

 Foreign Currency Non-Residential Account (FCNR)

 These accounts hold deposits in the currency approved by the central bank
of India, the Reserve Bank of India. Any NRI or a person of Indian origin can
hold deposits in an approved currency in which they earn their income. If the
income is earned in a currency other than the approved list of currencies,
then an approved currency is chosen for the conversion of the earnings or
the proceeds to be deposited. FCNR accounts are often called FCNR (B)
accounts where the (B) stands for banks. 

 Key Features of an FCNR

 Limit. There is no limit to how much money can be put in an FCNR account. 

 Balance. Any amount of balance can be maintained.  
 Interest. The principal and the interest earned on that principal do not fall
under the taxable category. 
 Benefit. These accounts bear the impact of a prospective change in the rate
of conversion. An NRI can open only a fixed deposit account with a minimum
maturity of one year via the FCNR account. 

 5. Recurring Deposit (RD) Accounts

 These accounts are opened as deposit accounts by consumers who are

interested in earning interest on their money. Commonly known as RDs,
these accounts are the easiest ways to earn an income higher than that
offered by savings accounts. 

 Key Features of a Recurring Deposit

 Limit. The minimum limit to open an RD differs from one bank to another.

Consumers can opt for a minimum limit as low as INR 1,000 per month and
open an RD account with any bank of their choice. 
 Balance. RDs are deposit accounts that allow consumers to collect a monthly
amount set at the beginning of the tenure of the account.
 Interest. A fixed amount is deducted every month and collected in the RD
account, where it earns interest month-on-month. This interest is often higher
than savings accounts. 
 Benefit. The flexible tenure of the RD makes it a consumer-friendly financial
decision. Consumers can opt for anywhere from six months to up to 10 years
to deposit their money in an RD and earn interest on the deposited amount.
RD accounts can be discontinued before the end of the tenure without losing
the interest earned. 

 6. Fixed Deposit (FD) Accounts

  These accounts are opened to earn interest on  deposits for a fixed period of
time until maturity. Fixed deposits are among the safest financial instruments
to save and earn interest on idle money. 

 Key Features of a Fixed Deposit

 Limit. There is no limit to how much money can be put in a fixed deposit

account. The higher the money allocation, the more interest is paid at the end
of the account’s tenure.
 Balance. An FD account holds a lump sum amount as investment. 
 Interest. The bank pays an interest on this deposit. This interest is paid once
the tenure of the FD is complete. Upon breaking the FD in the middle of its
tenure, consumers risk losing out on the interest and often receive only the
principal amount. 
 Benefit. FDs are risk-free investments with high returns. Most banks in India
offer an FD interest rate higher than savings accounts’ interest rates and
RDs’ interest rates, owing to the fixed tenure benefit a bank enjoys in the
case of FDs. Banks can hold big sums for a fixed period and consumers can
make higher volatility-free returns, turning the financial instrument into a win-
win for banks and consumers. 

What is 'Interest rate'

Interest Rates
A charge on profits is not always welcomed, but all appreciate income in any form.
Interest is income earned on the funds utilized by the person holding the same.

What is Interest Rate?

Interest rate is the amount charged over and above the principal amount by the
lender from the borrower. In terms of the receiver, a person who deposits money to
any bank or financial institution also earns additional income considering the time
value of money, termed as interest received by the depositor.

Interest rates on borrowings and deposits may defer considering the purpose and to
whom the amount is given.

Interest Rate on Borrowings

Borrowing has become prevalent in terms of the smooth functioning of trade
practices and proper regulation of money in the economy, and the process of
borrowing money has also been relaxed to help businesses grow.

Borrowings not only ease money problems but also helps the borrower in planning
the finances better.

Interest rates on borrowings are fixed depending on the type of borrower and the
credit rating associated with him. Suppose the borrower has a low credit rating. In
that case, it might be possible that banks might not lend money at all or by
charging extreme interest rates or keeping the double amount of collateral security.

Private lenders also provide loans to borrowers, but their terms and conditions
might differ from the conventional loans obtained from banks or financial
institutions. They might charge hefty interest on the sum lent with certain other
additional conditions.

In the event of default, banks or financial institutions stop charging interest and
reclassify the assets in their books. In the event of pre-payment, a penalty and
interest are charged from the borrower to avoid the loss of regular income
considering the time value of money.

Interest rates on deposits

People deposit excess money in banks and financial institutions to earn additional
income as interest depending on the time value of money and the compounding
effect.
Interest can be earned as simple interest and compound interest.
Simple Interest
It is a simpler form of computing interest on the principal amount as the term of
the loan is considered for that year only, and interest is charged or provided every
year on the same original sum deposited or lent, as applicable.

It is easier to calculate, and a layman can also understand its calculation.

For example, if the original principal amount is $100 and the interest rate is 10%
per annum for one year, then the interest will be computed as under-

= $ 100 * 10% * 1

= $ 10

I.e. Principal Amount * Interest Rate * Time (Duration of loan/deposit)

So, as per the above calculation, $110 will be paid or received by the borrower or
depositor at the end of one year.

Compound Interest
Compounding, as defined in the dictionary, refers to “reckoning interest on
previously accumulated interest”. A layman might not well receive it as it might
sound a bit complicated compared to simple interest computation.

Let’s have a look at the formula by which compound interest is computed-

= Principal Amount * [(1 + Interest Rate) n – 1]

Where n= number of compounding periods

It might still not be clear to many. But by closely analyzing the formula and the
definition of compounding, one can ascertain the meaning.

Interest rates are useful when compounded as it considers the time value of money
as interest is also provided or charged on the amount already received as well as on
the principal amount, so there is no loss of interest on the deposited sum.
Interest on interest is the main benefit of compounding and can be beneficial for
the depositors as interest rates on deposits are generally lower than interest on
borrowings.

Certain lenders also tend to charge interest on a compounding basis depending on

their policy or the borrower's credit rating.

Debt vs Equity
Equity is the owned funds of the company, and the company is not liable to its
owners for such funds. Debt is the borrowed funds of the company on which the
company pays interest mandatorily on the pre-defined interest rates.

Companies should not rely a lot on borrowed funds as it puts significant doubt on
the company's ownership. Debt-equity ratio ranging between 0.5-1.5 is considered
ideal in the industry, but it can change depending on other factors.

What are APR and APY? Are they both the same?
APR stands for annual percentage rate, which is used for interest rates on consumer
loans that the lenders demand from the borrowers. APY stands for annual
percentage yield, which is used when interest is earned from funds deposited in
banks.

What are the factors affecting interest rates?

Interest rates are affected based on the credit score of the borrower, income ratio,
market factors, inflation, etc.

What is the main difference between simple and compound interest?

Simple interest differs from compound interest mainly in terms of charging interest
on the accumulated funds that are done in compounding and are ignored in simple
interest calculation.