Question

Explain clearly three methods adopted by Commercial Banks to borrow money from the public.

How do Commercial Banks mobilise deposit (or borrow) from the public?

The main functions of a commercial bank are to accept deposits and advance loans. Explain two types of deposits accepted by commercial banks.

Answer 1

Mobilisation of Deposits of Commercial Banks from the Public Commercial banks mobilise deposits from the public by accepting deposits. They accept three kinds of deposits: 

1. Current Deposits: Current deposits refer to deposits held in current account. A current account is a non-interest bearing bank account. It is operated by businessmen for conducting their day to day transactions. There is no limit on the number of transactions from this account in one day. The overdraft facility is also offered by the banks to its account holders (This means a current holder can withdraw more money than it has in the account.) These deposits can be withdrawn by the depositor at any time by means of cheques.
2. Savings Deposits: A saving account is a deposit account that allows you to deposit your money that you don’t plan to spend immediately. Savings deposit accounts are generally held by households who have idle or surplus money for a short period. A low rate of interest is paid on them. The bank places certain restrictions on the depositor in withdrawing his deposit. For instance, a bank may allow its savings depositors only five cheques a month.

3. Fixed Deposits: Fixed deposits (or time deposits) are those deposits which can be withdrawn only after the expiry of a certain fixed period. Money is deposited for a fixed period of time, which generally ranges between 7 days and 10 years. These deposits carry the highest rate of interest, The longer the period, the higher will be the rate of interest.