What is a bank?
A bank is a business that keeps people's money safe and lends it to others. It takes deposits (money kept with the bank) and gives loans (money lent for a time). It pays a small interest on deposits and charges a higher interest on loans. The difference is its income. Banks also give other services: cheques, drafts, lockers and online payments.
Types of bank accounts (deposits)
Savings account
For families and students who want to save. The bank pays some interest. The number of withdrawals may be limited.
Current account
For businesses that pay and receive money many times a day. No limit on transactions. Usually no interest is paid. Overdraft is allowed on this account.
Recurring deposit (RD)
You put the same amount every month for a fixed time, say ₹500 for 2 years. At the end you get the total with interest. It builds the habit of saving.
Fixed deposit (FD)
You put one lump sum for a fixed time (7 days to 10 years). You cannot take it out early without a penalty. It pays the highest interest. A loan can be taken against an FD.
Multiple option deposit
A savings account joined with an FD. Money above a set limit moves into an FD by itself and earns more. When you need cash, money comes back from the FD automatically.
Bank draft, overdraft and cash credit
Bank draft (demand draft, DD)
A written order from one branch of a bank to another branch (or another bank) to pay a named person. You pay the money plus a small fee first, so a DD cannot bounce. It is used to send money to another city or to pay fees.
Overdraft
A current-account holder may take out more than the balance, up to an agreed limit, for a short time. Interest is charged only on the extra amount used, for the days used.
Cash credit
A loan in which the bank allows a business to draw money up to a limit against security such as stock of goods. It is for a longer time and a bigger amount than an overdraft. Interest is charged only on the amount drawn.
E-banking and digital payments
E-banking (electronic banking) means using bank services through the internet, phone or ATM, without going to a branch. It works 24 × 7, saves time and keeps a record of every transaction.
Ways to pay digitally
- UPI: pay instantly from a mobile app using a UPI ID or QR code.
- NEFT: transfer money between banks in half-hourly batches.
- RTGS: real-time transfer, for big amounts (₹2 lakh and more).
- IMPS: instant transfer by phone, any time of day.
- Debit and credit cards, net banking and mobile wallets.
Benefits and care
Benefits: speed, 24-hour service, less cash to carry, fewer queues, easy records for business. Care: never share PIN, password or OTP; use only official apps; check the receiver before paying.
Key formulas and definitions
- Deposit = money kept with a bank; loan = money lent by a bank.
- Savings account: for saving, some interest, limited withdrawals.
- Current account: for business, many transactions, no interest, overdraft allowed.
- RD: fixed amount every month for a fixed time.
- FD: lump sum locked for a fixed time; highest interest.
- Multiple option deposit: savings + automatic FD sweep.
- Bank draft: prepaid order to pay a named person; cannot bounce.
- Overdraft vs cash credit: both charge interest only on the amount used.
- Simple interest = Principal × Rate × Time ÷ 100.
Worked examples
1. Riya is a Class 11 student who gets ₹2,000 pocket money a month. Which account should she open?
A savings account (or an RD of a fixed amount each month). It keeps money safe, pays interest and builds the saving habit.
2. A wholesale trader deposits and pays money 50 times a day. Which account suits him and why?
A current account: it has no limit on transactions and allows overdraft, which a busy business needs.
3. Find the maturity amount of an FD of ₹20,000 at 7% simple interest for 3 years.
Interest = 20,000 × 7 × 3 ÷ 100 = ₹4,200. Maturity = 20,000 + 4,200 = ₹24,200.
4. A shop has ₹10,000 in its current account and an overdraft limit of ₹50,000. It pays a bill of ₹40,000. How much is overdrawn?
40,000 − 10,000 = ₹30,000 overdrawn. Interest is charged only on ₹30,000, for the days it stays below zero.
5. Aman must pay ₹15,000 college fee in another city. The college does not accept cheques. What can he use?
A bank draft (or an online transfer through NEFT/UPI if the college accepts it). A DD is prepaid, so the college is sure to get the money.
Common mistakes
- Thinking a current account pays good interest. It usually pays none; it is for convenience.
- Mixing up overdraft and cash credit. Overdraft is on a current account for a short time; cash credit is a bigger loan against security like stock.
- Thinking a bank draft can bounce like a cheque. The money is paid in advance, so it cannot.
- Believing RD and FD are the same. RD takes a small amount every month; FD takes one lump sum at the start.