In finance, a deposit is a financial term for keeping money at a bank. It is a transaction whereby money is transferred to another third party for safekeeping. The deposit also has two types: one deposit that gives you a fixed return over some time and a second where the deposit is nothing but an amount of money that is used as security, also known as collateral, in case of delivery of a good.
Did you know? Individuals and HUF can avail of a deduction of up to ₹ 10,000 thousand on the total interest income earned in a savings account.
The Concept of Demand Deposit
When you deposit your money in a financial institution like a bank and have the freedom to withdraw on-demand without the need to intimate them with prior notice, the deposit is called a demand deposit. In simple terms, Demand deposits are the deposits of your funds that you put in a bank account, allowing you to withdraw the money as and when needed. The financial institution pays you little to no interest on the funds kept by you in the account.
How does Demand Deposit Account work?
A Demand Deposit Account is a bank account that offers unlimited access to various services like withdrawing money at any time as you please from your nearby ATMs using plastic money, also known as Debit and credit cards. Usually, people make such withdrawals to meet their daily fund's requirements for purposes like paying bills and buying essential goods.
There are also certain requirements in almost every financial institution for you to maintain a minimum account balance as per their prescribed limits. Such limits can be maintained yearly, quarterly, or even monthly.
Current Accounts or Saving Accounts are common examples of Demand deposits. It is imperative to note that demand deposits do not include fixed or term Deposits.
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Types of Demand Deposit
A demand deposit account (DDA) is a bank account from which deposited funds can be withdrawn at any time, without advance notice.They act as one of the most liquid assets that exist because you can access the money in a demand deposit account on demand.
1. Savings Account:
Such a type of demand deposit account is interest-bearing, meaning the financial institution, such as a bank in which there is a savings account, will provide you with interest calculated on the funds kept in the savings bank account. In India, most people hold a savings bank account, thanks to the Pradhan Mantri Jan-Dhan Yojana that instilled a habit of savings among various other Indians.
It is one of the most common forms of Demand Deposit Account. There’s little risk involved with long-term stability and promise. There’s no upper or maximum limit to keeping funds in such demand deposit accounts. The more funds there are, the larger the amount of interest gets. Although, if your minimum limit on demand deposit account is breached, then it may attract a penalty.
2. Current Account:
If you are someone who has to do banking every day, then the current account is made just for you. It is generally used by people doing business as they are continuously doing daily transactions throughout the day. It does not have various transaction or withdrawal limits like a typical saving Account. The businessman can withdraw and deposit money as often as their business requires. These accounts are additionally useful as they provide various other facilities like Overdraft Facility that enables you to withdraw excess money over your account balance subject to a certain limit.
A current Account provides you with high liquidity, enabling you to withdraw money anytime. However, it provides you with no interest rate.
3. Non-resident ordinary deposit account:
- It is also called an NRO account. A Non-Resident Indian can open this account to manage his/her income earned or received in India.
- This account enables the account holder ( depositor) to completely repatriate the income earned in the form of Interest with specific limits on Principal amount repatriation.
Non-Resident External deposit account:
- This type of account is also known as NRE Account. A Non-Resident Indian can open this account to transfer his income earned in a foreign country to India.
- This account helps such Non-Resident Indians with conversion by depositing foreign currency and withdrawing in Indian Currency.
Now that we’ve broadly understood the types of Demand Deposits, let’s know why it is crucial and their relevance.
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Importance of Demand Deposits
DDA helps the account holder to withdraw the deposit anytime. Whenever there is a need for funds, the account holder can access funds immediately.
Easy Withdrawal
- Demand Deposits are very liquid, making it very easy for customers to use them for their day-to-day spending. Expenses include groceries, monthly bills, cosmetics, cost of transportation, etcetera.
- Since its model is on-demand, consumers have the flexibility and convenience of withdrawing their funds from the account anytime, anywhere, through an ATM using a debit card.
Bank reserves:
- Demand deposits are significant for banking institutions, as the bank reserves consist of the total amount held in the banks. There are certain limits of bank reserves that a bank must keep in case some customer makes a large quantum of withdrawals.
- The more money is kept as demand deposits in a bank, and the more money is required to be set aside for reserves. When the demand Deposits are far more than the prescribed limit of bank reserves, the difference between the money held by the bank and the money kept in bank reserves is known as excess reserves. It helps contribute to the creation of the money process.
Money Supply:
Demand Deposits are defined within M1 money and are considered an essential part of the money supply of any country.
M1 = Currency Demand Deposits
When in a financial crisis, people tend to make huge withdrawals from their respective accounts. Such withdrawals reduce the demand deposits leading to a decrease in the money supply. The depositor will typically use demand deposit funds to pay for everyday expenses. The money supply is all the currency and other liquid instruments for a country's economy on the date measured. The money supply roughly comprises both cash and deposits that can be used almost as easily as cash.
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Conclusion
To conclude, Demand Deposits are an excellent way for you to safely park your funds and withdraw funds “on-demand” immediately. Demand deposits make up a large part of the M1 money supply. It’s great for people who believe in not carrying massive cash in their wallets.
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