A liability account in accounting refers to any account representing an obligation owed by a business—such as a bank—to a third party. In the context of banking, the most common liabilities include:
- Deposits made by customers
- Loans availed from the central bank
- Trading liabilities
This article provides a detailed overview of the deposit and liability products in banks, categorized as follows:
1. Deposit Products (Liability Products)
In the banking system, deposit accounts are financial accounts where customers can deposit and withdraw funds. From the bank’s perspective, these accounts constitute liabilities, as the funds deposited are owed to the customers. The major types of deposit products include:
- Savings Deposits
- Current Deposits
- Term Deposits
- Certificates of Deposit (CDs)
Time Liabilities vs. Demand Liabilities
- Time Liabilities: These refer to obligations repayable by the bank after a predetermined period. Term deposits fall under this category.
- Demand Liabilities: These are obligations payable on demand, such as balances held in current accounts, the demand component of savings accounts, and demand drafts.
As per the Reserve Bank of India (RBI) regulations, banks are required to apportion balances in savings bank accounts into demand and time liabilities for the purpose of computing reserve requirements like the Cash Reserve Ratio (CRR).
Method of Apportioning Savings Account Balances
- The average of the minimum balances maintained in each account during each month of the half-year period is treated as the time liability portion.
- The difference between this and the average of the actual balances maintained during the same period is considered the demand liability.
- These proportions are then applied to savings bank deposits during all reporting fortnights in the subsequent half-year.
2. Current Deposit Accounts
The following entities are eligible to open current deposit accounts with banks:
- Individuals/Proprietorship Concerns
- Hindu Undivided Families (HUFs)
- Partnership Firms/Limited Liability Partnerships (LLPs)
- Private and Public Limited Companies
- Trusts
- Clubs, Societies, Co-operative Societies, and Educational Institutions
- Government and Semi-Government Departments
- Hospitals, Nursing Homes, and Pathological Laboratories
- Administrators and Executors
- Liquidators
3. Term Deposit Accounts
A term deposit involves placing a fixed sum with the bank for a specified tenure, during which the funds earn either fixed or floating interest. Withdrawals before the end of the tenure may be subject to penalties or reduced interest rates. These deposits are ideal for investors seeking disciplined, long-term savings options.
4. Certificates of Deposit (CDs)
Certificates of Deposit are negotiable money market instruments issued by banks and financial institutions to meet short-term liquidity needs. They offer fixed interest returns and are usually issued in dematerialised (Demat) form. Eligible investors include:
- Individuals
- Corporations and Companies
- Trusts and Funds
- Associations
- Non-Resident Indians (NRIs)
5. Borrowings from the Central Bank
Banks in India may borrow funds from the Reserve Bank of India (RBI) through various mechanisms, including:
a. Liquidity Management
In times of fund shortages or increased credit demand, banks may approach the RBI to ensure smooth operations and meet customer requirements.
b. Marginal Standing Facility (MSF)
This facility enables banks to borrow overnight from the RBI against government securities. It acts as a quick liquidity source when interbank funding is unavailable.
c. Borrowing Against Government Securities
Banks may pledge government securities to borrow funds from the RBI, thereby managing short-term liquidity while maintaining system stability.
d. Borrowing Limits
The RBI stipulates borrowing limits as follows:
- The outstanding borrowings on a fortnightly average basis should not exceed 100% of the bank’s capital funds (Tier I and Tier II).
- On any given day, banks may borrow up to 125% of their capital funds.
e. Purpose of Borrowings
Funds borrowed from the RBI are typically used for:
- Managing liquidity mismatches
- Meeting reserve requirements
- Fulfilling customer withdrawal demands
The RBI effectively functions as a lender of last resort, ensuring the overall stability of the Indian banking system.
6. Trading Liabilities
Trading liabilities arise from short-term trading operations, primarily in derivatives and short positions. These are marked to market and recorded in current earnings, reflecting their fair value.
a. Derivative Liabilities
Banks may engage in derivative contracts—such as options and forwards—for hedging or speculative purposes. These create liabilities when banks are obliged to deliver assets or make payments under adverse market conditions.
b. Short Positions
When banks sell assets they do not own (short selling), they incur liabilities to deliver those assets at a future date, which are classified as trading liabilities.
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