Question

Define explain the following concepts.
1. Fixed deposits
2. Cash credit
3. Safe deposit vault
4. Discounting of bills

Answer 1

1. Fixed deposits: Fixed account deposits (also known as time deposits) refer to those deposits that are held for a fixed (specific) period of time (called maturity period). These deposits cannot be withdrawn before the maturity period. Hence, these are not payable on demand. Also, these deposits are non-cheque able deposits. However, due to the longer lock-in period involved in the fixed account deposits, these deposits involve a higher rate of interest than that earned on the savings account deposits.

2. Cash credit: In the system of cash credit, the banks first estimate the value of the assets held by the borrower. Based on this estimation, a credit limit is then decided by the bank for the borrower. The credit limit decided by the bank is the upper limit for the borrowings by the borrower. However, the actual utilization of credit by the borrower depends on his/her withdrawing power. The borrower is liable to pay interest only on the withdrawn portion of the credit.

3. Safe deposit vault: Safe deposit vault facility is the general utility service offered by commercial banks. Under this service, consumers are allowed to retain their valuables such as shares, bonds, gold and silver ornaments etc. in the lockers at a payment of a fixed rent. This service provides the customers with privacy and easy access to their valuables.

4. Discounting of bills: The commercial banks provide financial assistance to the business community by discounting bills of exchange. A bill of exchange is a document that acknowledges the amount of money that is owed by the debtors as against the goods and services received by them. The banks purchase these bills produced by the customers after deducting interest on the face-value of the bill.