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3.1 BANKING SYSTEM

Banks are those institutions where one can keep money in the form of deposits and
can also borrow money on payment of interest with certain conditions that assure
recovery of the borrowed money. In other words, a bank is a concern which carries
on the business of money-lending and deposit-taking. Banks not only provide
security to the money of a depositor but also pay some interest on the money
deposited. The rate of interest charged by a bank from its borrowers is usually
higher than what it pays to the depositors. In addition to deposit-taking and money-
lending a bank also helps the people in many kinds of money transactions. In brief,
the main functions of a bank are:
(i) Receiving money from the depositors.
(ii) Lending money on demand.
(iii) Transferring money from one place to another.
(iv) Receiving payments for public utility services such as electricity and water
bills, telephone bills, house tax, income tax, etc.
(v) Renting safe deposit lockers for the safe custody of valuables.
(vi) Issuing travellers cheque.
(vii) Providing foreign currency to tourists and travellers.

3.2 DIFFERENT TYPES OF BANK ACCOUNTS

As the main aim of banks is to provide maximum facilities to maximum number of
persons. Therefore, there are different types of bank accounts according to the needs
of different types of customer. In this section, we shall discuss various types of
accounts (deposits) provided by banks. There are mainly four types of accounts:
(i) Savings Bank Account.
(ii) Current Account.
(iii) Fixed Deposit Account.
(iv) Recurring (or Cumulative) Deposit Account.
Let us now know about these accounts.
SAVING BANK ACCOUNT As the name suggests, this account is meant for savings. It
is most popular savings schemes offered by the banks. The main purpose of this
accoun t is to encourage the habit of saving among the people.
Any person can open this account in a bank even with a small amount of money, say,
five hund red rupees only. After ope.r ung the account, the account holder can go on
depositing the money in his/her account at his/her own convenience. The account
 ICSE /MATHE
3.2 MA1'tc:s
•.:; •1ecount whenever he/she 11
holder can withdr,n,\1 t. he money fr~ll1 1u. '. 111 bnlnncc of Rs 500 T!e~ds it, l
,,_ . .
b atl.l\. 1 . ot n n11n1n1u . . l1s ,
msists on t ,e maintenance . . . . on mnintaining minim ' <11110 1
. fr b k l k S .. i.. ks ins1:,t up un, b<1J i
vanes om an - to )an ·.~ome L)an · 't l'l nn the requisite amou t ' <111,e
Rs 5000. In case. minimum bnlt\nCe.f:1 lls !-hlJI _, ..t rest for the money thn soine bt1 11 1
. some u, e · · . at an
also charge penalty on it. The bank pay~· ·t· r ·ate of interest for a ·. <1cco 11
h o. lder k·eeps
. . l. Tl -~ prevn1tng t, saving b ,
m t 11s account. l t: ,ad , or half-yearly. The rate . <11 1
account -~s 5% per am:um ~omp~und~cl y1:c }serve Bank of India. of 111tere.
changes trom time to time atthe d1scret10n ofR .
. not operate his/her sav·
CURRENT ACCOUNT An account holder cnn . f · ·i·t i·n cur t ings bt1 1, 1

'd• this ac1 1 y ren acco 11

account many times in a dav.1 Banks provi e llpa . Unt. 1'h 1·,•
• •
account is usuallv •naintained by u in
b 5· essmen cO1 , mes gov
't f d. ern111e11
organisations, etc. ,~he, have to do a number of money ransac ions at1Ydue toth
nature ot• their. work. There 1s . no rest!.-1ct'IOI1 on the amount • •
or on the nu rn 6er l
·
withdrawals •m the current account 'N l11·1e 5t1l·h restnctlons .
are
.
there in C<1se 0
0
Savings Bank Account. The bank does not pay ~ny int~res_t m thi~ account. In fact, i~
some cases , bank charges some monev.1 in the lonn of mcidenta expenses fro111 tl1e
account holder.
FIXED DEPOSIT ACCOUNT To provide maximum facilities t~ the people, banks also
deposit money for a fixed period. In this scheme, money 1s depos_1ted for a fixed
period. In such deposits, money can be withdrawn after the expiry of the fixed
period which is specified at the time of opening the account. The account holder can
take loan against such deposits by paying interest to the bank. Since the bank can
utilize the money kept in terms of deposits more freely than money kept in the
Savings Bank Account. Therefore, higher rates of interest are offered by the bank 011
such deposits, depending on the period of deposits.
RECURRING DEPOSITS To encourage the habit of saving among the people
belonging to s~1all and middle in~~me groups, banks also allow to open an account
where a de_Pos1tor chooses a specified amount_(normally a multiple of Rs 5 or Rs 10)
and deposits that amount every month for a ftxed period chosen by him /h t tl
. f . th t Th' . d er a ,e
tirnfte othope~ng f ehi~cco~nd. h1sdpeno_ may vary from six months to ten years
A er e expiry o t s per10 , t e epos1tor gets the amount de · t d b h' ·
interest compounded quarterly at a fixed rate The rate of. t pos~e Y im plus
. . · ' m erest 0 11 th d ·
are nearly same as m the case of fixed deposits Thi's rat f . ese epo sits
time to time. Usually bank publishes tables· showi e oti mteres·t is · d f rom
· revise
1
instalment, number of months and the maturity value. ng e amount of monthly

3.3 OPENING AN ACCOUNT

As we have discussed that there are different types f b
and operated by different types of customers. Howevo . ~nk accounts to be opened
account in all different types of accounts is almost id er,~ e procedure of O .
1 . enticat T penmg an
bank a ,person has to app y on a prescnbed appli t· ' · o Open ""'1 a .
' . . -1 bl f f ca 1011 fo·1 'u ccount ma
bank. This form 1s ava1 a e ree o cost on the bank c m, availabl .
open an account has to affi x his/ her photograph ounter. The p e fi om the
her specimen signatures. These specimen signatur~n th is forn1 and e· rson Willing to
· d uced e1'ther b y an emplosarevery 1mpo
· 11as tog· h ' /
has to get himsel f intro t 1ve 1s
ount holder. The specimen signatures given 0Yee of the ban{ ant. The person
~cc ortant because whenever the account holden the applicar or by any other
imp from his / her account he/ she will have to~-~oes to ·th; ~on forrn are ven.'
money · 1. up a f
0
ank to . ·;
rn1, c:an Withdraw
ed 'Nith.drawal
 bA}U}C~: -
A bQt)1li -to ct +~01YJ_r./al ,~~Ji" futt~<}Y1 .t h <I.
. ~K0'VYL i\rLL puJ1lc_ OtYJ d w oA0.6 CJlO dtt " ).,P d,,
~J ffl

I O -L-..l.- ,, I ,1 -.JJ J ~

BANKING

fo~ and ~e bank officials will tally the signature on withdrawal form with the
speomen signatures. In case the signatures do not tally, the bank may refuse to make
the payment.
The completed form is submitted to the bank. The bank officials scrutinise the
particulars given in the form and, if satisfied, issue different books viz. Pass book,
Cheque book etc. Abrief description of these books is given below.
PASS BOOK A pass book is nothing but the statement of the account of an account
holder. It consists of datewise entries of deposits and withdrawals. The entries of the
interest, that is paid by the bank from time to time, are also made in the pass book: In
fact, from the books of the bank, all the particulars of transactions are copied in the
pass book and given to the account holder. From time to time the customer. is
supposed to deposit the pass book to the bank to up-to-date the transactions made
byhim
The general format of a bank pass book is given below:

Date Particulars Amount Amount Balance Initials

withdrawn Deposited
(withdrawals) (Deposits)

. Rs. P. Rs. P. Rs. P.

- --- - - - - - - -

- --- - - - - - - -

CHEQUE BOOK A cheque book is issued to the depositor subject to the condition that
he/ she will keep a minimum balance with the bank in accordance with its rules. At
esent in most of the banks, this minimum balance is Rs 500. Usually a cheque
h:ok c;ntains 10, 20, 25 or 100 cheques. Acheque is a printed proforma issue~ by a
bank to withdraw money from the bank. In other words, a cheque 1s an
........................... 19 ........ .

PAY........................................................... .. ...........:....................... 111 IIITT! 'Ill OR BEARER

m RUPEES .............................
....................................
.. ....................:::·.::: : ;.. ~1 lRs. I
...--,...--,,'--r-,.-v
,~:;.1

.-s 1.'iS0 s~ 1i 1.00 21 301. 21:. .___.--___,1.0

CHEQUE NO BRANCH NO ACCOUNT NO AMOUNT

uncond1.ti.ona1order to the bank and is always. payable on demand.

. . Cheques are
also used for making payments to others. Aspecimen of a cheque 1s given below.
Making payments through cheques has many advantage~over the payment in cash.
 3.4 ICSE/MATHH1 ATics - x

't h lder is to write the name of the

O make payments through cheques, the ac~ount ~ 1. to fill the amount to be paid
person or firm or company in the space provided an tshe cheque as shown abov ·
The account holder is to put his /her sig · natures . on sed out the cheque is callede.
Un1ess, the word 'bearer ' prmte
. d on the cheque . is crostive of the
, name wntten
. on thea
bearer cheque and can be encashed by any one irres1:ec rossed out, then it becomes an
cheque. If the word 'bearer' printed on the che~ue is ~e only to the person in whose
order cheque. The payment of an order che1ue 15 ~aminimize the risk, cheques are
name the cheque has been issue~- Some:;:~:ft:and upper comer of the cheque
crossed by drawing two parallel Imes on lin as shown above. The amount of
,, . b tween the es . th h
and writing" A/ c payee on1y m e f th person in whose name e c eque
O
a crossed cheque is deposited in the accoundt oenally
.1s issued.
. t
Such cheques canno e b encashe pers .

3.4 OPERATING AN ACCOUNT . d withdrawing mone

d positing money man y
Operating a bank account means e d . a large number of persons operate
5
from the account accord"mg to one's nee . mce
h 11 discuss how to operat e a Savmgs
.
generally Savings Bank Accounts. So, we s a .
Bank Account only. .. ne in a bank, a customer has to fill up a form
DEPOSITING MON_EY For d~positing m~ J This slip has two parts, a foil and a
called 'Pay-in-slip' supplied b~ the d~- · The customer has to submit this duly
counterfoil, separated by a per orate m;· the cash counter of the bank. The bank
filled in pay-in-slip along with ~e n:oni o a -in-slip and counts the money. If
employee verifies all the entries m e y Ji
everything is found in order, he/ she puts e sea1o
f the bank on both the foil and
. .
• · d th mount deposited and puts his/her signatures on both
counterf01l, wntes own ea kn 1 d t fth

r the arts. The counter foil is returned to the customer _as an a~ ow e grnen o e
I: f th d
receipt o e eposi ·
·t The amount thus deposited is credited to the customers
. . d th
account and its entry is also made in the pass ~ook issue to e customer as and
1

when he/ she deposits the pass book for completion.

If the customer wants to deposit a cheque received from another person, then also,
he/ she is to fill in the same pay-in-ship. The customer has to submit this duly filled
in pay-in-ship along with t~e ch~que at the bank counter. '!11e. bank e1:1ployee
verifies the entries of the pay-m-ship and the cheque. If everything 1s found m order,
he/ she returns the counter foil duly signed and stamped to the customer. The
amount written on the cheque is credited in the customer's account on receipt of the
credit fi:om the bank to which the cheque is issued.
WITHDRAWING MONEY For withdrawing money, either withdrawal form ·or thr
cheque is used. The customer fills in a withdrawal form or cheque ·and puts hi:
signatures on it. This withdrawal or cheque is presented at the bank counter. Th
concerned bank official tallies the customer's signat:ures on the withdrawal
cheque with the specimen signatures kept in the bank records. If the signatures tall
the withdrawal form/ cheque is passed for payment and the customer can recei,
payment from the cashier by submitting the token issued to him while depositir
theform. ·

3.5 COMPUTATION OF INTEREST ON SAVINGS BANK ACCOUNT

We have discussed in section 3.2 that the money deposited in a bank by accot:
holders is utilized by the bank. So, it pays interest to the account holder wh·
 ---r- - - - - - - -- --- - -

CI:o bANXE):-
5\ b~ 1 Q rOM1.,dol ~t1 ~ ~crt ~~
~ _mQ_ public.. ()!'()_cl Q.N_~ CAO d}t, . UM J;~1 o.cUv,
BANKING J •~n 0 1t~ 0'(. ~dJ.r4 ~~ r
• . ,. , C
credited in his /h
from time to timer account either half
di e as pe th yearly o 1
scuss the procedure f r e directions of R r year y. The rate of interest changes
I vi

..9.
In th s . 0 computin • eserve Bank of Indi u,
e avings Bank A g interest on S . a. vve shall now ....
10th and the 1 ccount the int . avmgs Bank Account. .._
b ast day (" erestis p ·d
f etween 10th and the l~~c~usive both days) : t~n the minimum balance between
or the particular mo s ay of a month is e month. The minimum balance
minimum b 1 . nth. The qualify· generally called the qualifyin
·
a ance 1s Rs 455 mg amount is tak . g amount
more than Rs 455 or less, then th . . en m multiples of Rs 10. If the
Rs 460~If the mini and less than or equal t e qRsuahfymg amount is Rs 450, but if it is
O
mum balan · Rs 460, then the q alifyin"
Following algor. thm ce is 5 or less then n . t . u . g amount is
Bank Ac i explains the om erest is paid for that month.
count. procedure for computin .
ALGORITHM g interest on Savings

~ Obtain the minimum b l

• multiple of Rs 10. a ance between 10th and the last date of each m th .
STEP II -ddd all these b l on , m a
STEP m C a ances to obtain p . . l
-~--= ompute the simple int t rmczpa amount for one month.
the formula: . eres on the sum obtained in step II for one month by using

PxRx__!.__
Interest == 12 _ P x R
100 -
1200 ,
where
. p == Sum obtained in step II, R == Rate ofinterest
Followmg examples will illustrate the above algorithm.
~~"n~~-1: If the total interest in a savings bank account is less than Re 1, it is neglected or
I
~~rtlt_RK 2: If the minimum balance in a month is Rs s or less, no interest is paid for that II

ILLUSTRATIVE EXAMPLES
Type l ON_!SIHDINGTHE INTEREST EARNED
I
EXAMP¢" A page from the pass book of Mrs. Rama Bhalla is given below:
Date ofyear 2004 Particulars Withdrawls Deposit Balance
Janua,ry 1 B/F - - 2000.00
January9 ByCash - 200.00 2200 .00
FebruarylO To Cheque 500.00 - 1700.00
February24 "J?yCheque - 300.00 2000.00
July29 ToCheque 200.00 - 1800.00
November7 By Cash - 300.00 2100.00
December8 By Cash - 200.00 2300.00

Calculate the interest due to Mrs . Bhalla for the period from January 2004 to December
2004, at the rate of5% per annum. [ICSE 2005]
 3.6 ICSE1t,,1 ll
Al'J ir-~ /,·'
, . ·I Ir
. 11·f ing amoun t (mm1mum bal
SOLUTION Computation of qua Y ance fr
0trq 1
to last day) of each month· ltr1,
1
Qualifying amount
Month
(Minimum Balance)
Rs. P.

January
February
2200.00
1700.00
2000.00
----
March
2000.00
April
2000.00
May
2000.00
June
1800.00
July
August 1800.00
September 1800.00
October 1800.00
November 2100.00
December 2300.00
Total 23,500.00
I Thus, we have
.
f
P = Principal for one month= Rs 23500, R= Rate of interest= 5% per annum
I

I
'
Interest = Rs -
PR
1200
23500 x5
=Rs--- =Rs 98
1200
Hence, interest due to Mrs. Rama Bhalla for the period from January 200•1 to
December 2004 is Rs 98.
EXAMPLV' The entries in a Savings Bank pass bookareas given bt·luw:

Dates Particulars Withdrawls Deposit Balance

01.01.03 B/F - - Rs 14000.00
01.02.03 ByCash - Rs 11500 Rs 25500.00
12.02.03 To Cheque Rs 5000 - Rs 20500.00 I
05.04-.03 By Cash - Rs 3750 Rs 24250.00
15.04.03 To Cheque Rs 4250 - Rs 20000.00
09.05.03 By Cash - Rs 1500 Rs 21500.00
04.06.03 By Cash - Rs 1500 Rs 23000.00
Calculate the interest fo r six months (January to June) at 4% per ann 11 m0111 h . .
e m111wn1111
balance on or after the tenth day ofeach month. [ICSE
20041
SOLUTION Computation of minimum balance from 10th day to the la td
. s ayuf each
month is as given below:
 · •• 1\1
/,, I Ir.

k of India. The follo-wing

3.12 .
·on Ban
the lJ n1
~f)l
r1i ..
countU1
· hasanac D ·t
15. Mr.Dhon1 book. Withdrawals eposz s Balan~r
troro.hispass . 11lars ) (in Rs) (in RsJ.
partic~ (in Rs
2642.0()

B/F 640.00 2002.ori

1an 3, 2007 To self - 850.00 2852.0(J
Jan 16, 2007 ByCash 1130.00 1722.0(J
March 5, 2007 lf 650.00 2372.00
April 10, 2007Tose ue -
1795.oo
April 25, 2007
ByCheq 577.00
June 15' 2007 By Cash 2007 ~to_J_un_e~20::0:::;7;--;t~o-;:Ju:::n
:e~2;-;0VOY?7;--:a:t-~the rat~;\
l----.h . terest from January UCSE 2oaa11
Calculate t em '
4%perannum. _ _ _ _ _ _ _ ___ ANSWERs

3. Rs 144.58 4. Rs 259.37
2. Rs 120.50
1. Rs 221.50
7. Rs 118 8. Rs 177.91
5. Rs 13.33 6. Rs 111.45
11. Rs 124.50 12. Rs 132.08
9. Rs 22.92 10. Rs 98.50
13. Rs 110.83 14. 6%perannum.
15. Rs 42.43

3.6 RECURRING (OR CUMULATIVE) DEPOSIT ACCOUNT . .

· ·
In order to encourage saving habits amongs owe t l r and middle
. income groups
. . in
society, banks and post offices have introduced recurring (or cu_mulahve) hme
deposit schemes. Under a recurring deposit scheme an account 1s o pened for a
specified number of months and the depositor deposits a fixed amount (in multiples
of Rs 5) every month. The number of months is chosen by the account holder (or
depositor) at the time of opening of the account. Generally, the number of m onths is a
multiple of 3. The period of account may vary from 3 months to 10 years i.e. 120
mon~. On ~he exi:iry of this period the depositor gets the amount deposited b the
depositor with the interest compounded quarterly at a fixed rate Th t · f yd b
the Reserve Bank of India and is revised from time to time Foll · . e ra e is ixe Y
related to such accounts. · owmg are some terms
MATURITY PERIOD The fixed period for which the recurrin d .
called its maturity period. g eposzt account is opened is
MATURITY VALUE The amount received by the depositor t th
called the maturity value of the account. a e end of the maturity period is
Thus,
Maturity value= Amount deposited+ Int ·
erestcompo
Let us now discuss the method of computing m t . llnded quarter}
recurring deposit. - a urity value and int Y
Clearly, Rs P deposited in the beginning of the fir t erest on a
post office for n months. Also, Rs P deposited int; :o~t~ remains With th
month remains with the bank for (n-1) months ; dan m the b e ~ e bank/
remains with the b an k for one month only. Therefo so on. The last depgo ~f second
. ~ ~~~p
BANKING
Rs p for 11 months= Rs (n x P) for one month
[For first depo:~
Rs p for (n -1) months= Rs ( (11 - 1) x P) for one month [For second deposit]
Rs p for (11-2) months= Rs ( (n - 2) x P) for one month [For third deposit]

Rs p for 1 month = Rs (1 x P) for one month [For last deposit]

Thus, for the whole deposit, we have
Equi,·alentprincipal for one month = Rs {nxP +(n- l)xP+(n-2)xP + ... + lxP}

= Rs {11 + (n - 1) + (n - 2) + ... + 1} P

=Rs{n(n+l)p}[··l
. +2 +3 +.. .+n n(n+l)]

. l l
2 2

n (n+ l)p X R X1-

lnterest on the whole deposit at the rate of R% per annum = Rs 2 12
100

= Rs { n (n + 1) PR}
2400
Maturity value of the deposit =Principal+ Interest
= Rs nP + Rs n (n + 1) PR
2400

= Rs { 1 + (\~ R } nP

Thus, the maturity value of a recurring deposit of Rs P per month for n months at R% per

annumisgivenby Rs{l+ (n +l)R}nP

2400
This formula may be used to solve problems based on maturity value of recurring
deposits.
Following examples will illustrate the same.

ILLUSTRATIVE EXAMPLES
Type I ON Fl~NGTHE MATURITY VALUE
EXAMPL&.V"Amit deposited Rs 150 per month in a bank for 8 months under the recurring
deposit scheme. What will be the maturity value of his deposits if the rate of interest is 8%
per annum and interest is calculated at the end ofevery month. [ICSE 2001, 2007]
SOLUTION We know that the maturity value of a recurring deposit of Rs P per

. given
month for n months at R¾ per annum is . by Rs { 1 + (n + 1) R} nP •
2400
Here, P= Rsl50,n=8 and R=8 .