Customer’s account with Banker

Chapter - 2

Topics Covered in this chapter

OPENING WORDS

WHAT IS BANK ACCOUNT?

WHO CAN OPEN AN ACCOUNT?

OPENING OF A NEW ACCOUNT

DIFFERENT TYPES OF DEPOSITS ACCOUNTS

SOME SPECIAL TYPES OF ACCOUNTS

CLOSING OF A BANK ACCOUNT

CLASSIFICATION OF DEPOSITS: DEMAND DEPOSITS AND TIME DEPOSITS

NOSTRO ACCOUNT, VOSTRO ACCOUNTD, & LORO ACCOUNT

CORRESPONDENT
OPENING WORDS:
Typically, commercial bank is an organization that purchases money from the community in
the form of deposit at a price and sell the money in the form of loans, advances and
investments at a higher price thereby register profit in monetary form. The relationship
between banker and customer begins with the opening of an account by the customer.
Initially all the accounts are opened with a deposit of money by the customer and hence
these accounts are called deposit accounts. Accepting of deposits of money from the public
is one of the essential functions of a banker according to the definition of banking given in
the Banking Companies Act, 1991. We can classify deposits according to ownership (Private
& Public), Location (Rural and Urban deposits), Liquidity (Time deposits/Term deposits and
Demand deposits), and according to Origin (Primary/Cash Deposit and derivatives).

WHAT IS BANK ACCOUNT?

Bank account is an arrangement with a bank that allows the customers to pay in and take out
money, settle bills, etc. The bank keeps a record of all the payments (transaction) in the
customer’s name. It binds the banker and the customer into a contractual relationship.
Using an account, a customer may deposits and withdrawals of money from his/her own
account. It is also called the primary and fiduciary relationship between Bank and Customer.

WHO CAN OPEN AN ACCOUNT?

Every person, who is competent to contract can open an account with a bank provided the
bank is satisfied regarding his bonafides and is willing to enter into necessary business
relations with him.

OPENING OF A NEW ACCOUNT

An account is the formal relationship with the client and precisely this is a contract
between bank and its customers. To provide smooth services bank has to open either
Deposit Account or Business account and Auxiliary Account. Opening customer account is
the first step in selecting and categorizing bank’s client. Customers may be of various types
determined by profession, by age, by mental status, by ownership status, by formation of
the organization etc.

Concern officials have to ascertain the status and type of customer and his need for
account through interview & discussions with the intended client and decide the service to
be offered after identifying the requirement, formulating the procedure for this then go
for execution of documents from the client. Special care to be taken that required
signatures from the client was obtained in proper place and papers.

Any resident Bangladeshi above 18 years of age is eligible to open an account. To open an
account a person has to go through a certain process. The following procedures are
maintained to open an account:

 Application Form: Banks provide separate application forms for different types of
accounts. The prospective customer is first of all asked to sign an application form
prescribed for that purpose after furnishing all particulars (name, occupation,

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 address, etc.). Different banks have different application forms. It contains the
rules and regulations of the bank along with the terms and conditions of the deposit.

 Introduction or reference: The introduction is the initial reference about a

prospective customer that ensures genuineness of his identity, occupation, address
etc. taken from a person deemed fit and acceptable to the bank. Usually three types
of person can give his/her introduction for a client. To the banks most preferred
introductions are existing customers. Respectable persons are also preferred when
necessitates whereas employees of the bank is acceptable if other references were
not available. To open a current deposit account, it requires another current deposit
holder’s reference.

 Submission of Photograph & Interview: A new customer has to submit two or more
copies of his recent passport size photographs duly attested by a person acceptable
to the bank & a passport size photograph of nominee attested by him. At the time
of opening of new accounts, it is always advisable to have an interview invariably with
the prospective customer so as to obviate the chances of perpetration of any fraud
at a later stage.

 Mandate in writing: If a new party wants its account to be operated by somebody

else, the banker should demand a mandate from his customer in writing. The
mandate contains the agreement between the two regarding the operation of the
account, the specimen signatures of the authorized person and the powers
delegated to the authorized person.

 Transaction Profile: Money Laundering act, 2002 and subsequent procedures

developed by Bangladesh Bank to comply the Act indicates/demands that banks must
obtain a “Transaction Profile” from all existing and future customer wherein the
customer will clearly declare what kind and volume of transaction may be conducted
in the account(s) he opened/will open.

 Verification of documents: The applicant must submit a valid identification proof

through copy of passport/driving license/voter I.D, etc. Submission of the copy of
phone bill/current bill/gas bill/water bill is required to prove the address. If the
new party happens to be a corporate body, it is essential that the banker should
verify some of the important documents like Memorandum and Articles of
Association, bye-law copy etc. In other cases, the verification of certain other
documents like Trust Deed, Probate, Letter of Administration etc., may be
necessary.

 Specimen signature: Every new customer is expected to give three or more

specimen signatures. Usually they are obtained on cards which are filed
alphabetically for ready reference. Each bank maintains a Signature Book for this
purpose.

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  Opening the account: After completing the above mentioned steps successfully,
the banker may open an account in the name of the applicant. Then the applicant
should deposit a minimum amount mentioned by the bank to the account by a pay slip.

 Pay-in-slip, Cheque Book and Pass Book: For operating the account, the customer
is supplied with a pay-in-slip book. The pay-in-slip is a document which is used for
depositing cash or cheque or bill into the account. It has a counter foil which is
returned to the customer for making necessary entries in his books. The customer is
also supplied with a cheque book which normally contains 10 to 20 blank forms. A
cheque leaf is used for the purpose of withdrawing money. A withdrawal form should
be accompanied by the pass book. Every cheque book contains a requisition slip
attached to it at the end.

A customer is usually given a pass book which reflects the customer’s account in the
Bank’s ledger. But, now-a-days computer generated sheet is provided to the
customer to inform his/her balance in the account along with transactions as and
when required by a customer. Thus, the tradition of pass book system has become
almost obsolete.

DIFFERENT TYPES OF DEPOSITS ACCOUNTS:

This is an era of keen competition among banks. Most of the commercial banks compete with
one another in appearing the savings of the public by means of different kinds of deposits.
Generally, banks provide the following kinds of accounts for the customers:

1. Savings deposit account

2. Current deposit account

3. Fixed deposit account

4. Short term deposit account

5. Recurring Deposit Accounts

6. Foreign Currency Account

7. Different deposit Schemes

1. Savings deposit account: A savings bank account is meant for the people of the lower
and middle classes who wish to save a part of their current incomes to meet their future
needs and also intend to earn an income from their savings. That is, these deposits are
mostly of small amounts and are accepted by banks to encourage person of small means to
make savings. The savings bank deposits are subject to the restrictions regarding the
number and the amount of withdrawals within a specified period. That means, frequent
withdrawals are not allowed. One can deposit money on this account in every working day but
can not withdraw money more than two days a week. Heavy withdrawals are permitted only
against prior notice. Interest is given on savings deposit if it full fills certain conditions.
Interest may be counted on the account balances at yearly basis, half-yearly basis, monthly

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basis, or daily basis. The cheque facility is also available in this account. It is an interest
bearing account.

The need of keeping cash reserves against such deposits is comparatively larger vis-à-vis
the fixed deposits but smaller as against the current deposits, because of the restrictions
on the number of withdrawals.

2. Current deposit account: Current deposit account or current account is an account,

which is generally opened by business community for their convenience. Money can be
deposited and withdrawn at any time of the working hour of bank. As the banker is under an
obligation to repay these deposits on demand they are also called Demand Deposit. Money
can be withdrawn only by means of cheque. Usually, a bank does not allow any interest on
this account though recently a few banks have started to give interest on current account.
Even then, people come forward to deposit money on current account because of two
important privileges, which they can enjoy in a current account, namely (i) overdraft facility,
and (ii) other facilities like collection of cheque, transfer of money and rendering agency
and general utility services. The current is a running account and therefore, it never
becomes time barred.

That is why, current accountholders do not mind a banker charging some commission for
services rendered and incidental charges for maintaining the account-whether it is in debit
or in credit. Even though a bank does not allow any interest, it charges interest on
overdraft on a day-to-day basis. The bank sends a ‘statement of account’ to the customers
every month. As these deposits are repayable on demand, the bank should keep a large cash
reserve. This may be one of the reasons why a bank does not pay any interest on current
deposit. In addition, a bank should observe all the general precautions in opening the
account.

The special characteristics of such an account are as follows:

 The primary objective of current account is to save big customers as big

businessman, joint stock companies, public authorities, etc. from the risk of handling
cash themselves.

 The cost of providing current account facilities is considerable to the bank since
they undertake to make payments and collect the bills, drafts, and cheques for any
number of times daily. The banks, therefore, do not pay interest on current deposits
while on the other hand some banks charge for incidental charges on such accounts.

 The current deposit account holders enjoy certain additional privileges in

comparison to a saving bank deposit holders:

o The banks collect third party cheques and cheques with endorsement for

their current account holders.

o The banks give overdraft facilities also in certain cases

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 o The loans and advances are granted by the banks through current accounts.

They are not given in cash but are credited to the current accounts.

3. Fixed deposit account: A fixed deposit is one which is payable after the expiry of a
predetermined period fixed by the customer himself. The period varies from 3 months to 3
years. As usual, the prospective fixed deposit holder is expected to fill up an application
form prescribed for the purpose, stating the amount and the period of deposit. The
application itself contains the rules and regulations of the deposit in addition to the space
for specimen signature. At the time of opening the deposit account, the bank issues a
receipt acknowledging the receipt of money on deposit account. It is popularly known as
Fixed Deposit Receipt (FDR). It contains the amount of deposit, the name of the holder of
the deposit, the rate of interest, due date etc.

Fixed Deposit Accounts are also known as time liabilities or Term Deposits. Higher rate of
interest is given on this type of deposit. Fixed deposits generally constitute more than half
of the total deposits with the bank.

The banks do not maintain cash reserves against these deposits, and therefore, can utilize
such amount more profitably. The bank offers higher rates of interest on such deposits.
People get loans against the Fixed deposit up to a certain percentage from the bank.

FEATURES OF A FIXED DEPOSIT RECEIPT (FDR):

 Name of issuing bank and branch

 Fixed Deposit Receipt Number

 Issue date and maturity date

 Period fixed for the deposit

 Interest on overdue interest is allowed according to Bank’s practice

 Auto-renewal system is available as per Bank’s practice

 FDR is not a negotiable instrument

OPENING A FIXED DEPOSIT ACCOUNT:

 The depositor has to fill in an application form wherein he mentions the amount of

deposit.

 The period for which deposit is to be made and the name(s) in which the fixed

deposit receipt is to be issued.

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  In case of a deposit in joint name, the banker also takes the instructions

regarding payment of money on maturity of deposit, i.e., whether payable jointly or

payable to either or survivor, etc.

 The banker also takes the specimen signatures of the depositor(s)

 A fixed deposit Receipt is then issued to the depositor acknowledging receipt of

the sum of money mentioned therein.

 It also contains the rate of interest and the date on which the deposit will fall due

for payment.

4. Short Term Deposit Account (STD Account): STD account or Special Notice Account
is an account, which is generally opened by club, societies, trusts, corporations, business
houses and individuals. It is an interest bearing account. The nature of this account is
almost like savings account. There are some restrictions in terms of amount and frequency
of withdrawals of money. This restriction varies from bank to bank. Money can be withdrawn
by cheque under earlier notifications. Banks offer low rate of interest on this account on
daily product basis. The rate of interest in this account differs to various types of client.
Transactions can be carried in this account without any limitations and bank charges service
fees etc. as like the current deposit account but official make a reading before opening
such account that substantial residual balance can be expected after every day’s
transaction. This type of account mainly opened to perform a specified course of action.

Example: Mother Account (IPO) opened in this type of account.

5. Recurring Deposit Accounts: A variant of the savings bank account is the recurring
deposit or Cumulative Deposit Account. The schemes of recurring deposits are very popular
towards people. The objective of the scheme is to develop a regular habit of savings in the
depositor and it is offered in the form of comparatively higher rate of interest. The rate of
interest varies according to the period for which deposit has been made. It is almost equal
to that of the fixed deposits.

A depositor opening a recurring deposit account has to deposit a fixed amount (usually in
multiples of Tk. 100 or Tk. 500) every month for a period selected by him. The period
ranges from 1 to 10 years. The Recurring Deposit Account can be opened by any person,
more than one person jointly or severally, by a guardian in the name of a minor and even by a
minor. While opening the account, the depositor is given a Pass Book which is to be
presented to the bank at the time of monthly deposits and repayment of amount.
Installments for each month should be paid before the last working day of that month.
Accumulated amount with interest will be payable after a month of the payment of the last
installment.

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6. Foreign Currency Account: Accounts are opened in various currencies by the foreign
nationals and organizations including banks or own nationals staying abroad or 100% export
making companies.

Authorized Dealer branches of bank open foreign currency account of both own nationals
and foreigners. Usual types of FC accounts are NFCD (Non-Resident Foreign Currency
Account) and RFCD (Resident Foreign currency Account) and there are provisions of opening
both interest bearing and non-interest account foreign currency. However, an wage earner
while going abroad to join the job (s) he is allowed to open FC account without deposit of any
cash amount producing copies of all re3levant papers and passport etc. Opening of any FC
account should be strictly as per rules and regulations set by Bangladesh Bank through the
Exchange Control Manual and other instruction letters/circulars etc.

7. Different deposit Schemes: Recently Banks invite various types of attractive deposit
schemes, those are:

 Investment Scheme for doctors

 Small Business Investment Scheme

 Housing Investment Scheme

 Small Transport Scheme

 Car Loan Scheme

 Transport Investment Scheme

 Agriculture Implements Investment Scheme

 Rural Development Scheme

 Monthly Savings Scheme (MSS)

 Education Savings Scheme (ESS)

 Marriage Savings Scheme (MSS)

 Double Benefit Scheme (DBS) etc.

SOME SPECIAL TYPES OF ACCOUNTS

 Minor Accounts

 Dormant Account

 Executors Accounts

 Private Foreign Currency Accounts

 Non-Resident Foreign Currency Deposit (NFCD) Account

 Resident Foreign Currency Deposit (RFCD) Accounts, etc.

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 CLOSING OF A BANK ACCOUNT

A customer’s account with a banker may be closed in the following circumstances:

 By the Customer

 By the banker

A customer may close his/her account any time by submitting an application to the branch.
The customer should be asked to draw the final cheque for the amount standing to the
credit of his/her account less the amount of closing and other incidental charges. The
account should be debited for the account closing charge, and the authorized officer of the
bank should destroy unused cheque leaves. In case of joint account the application for
closing the account should be signed by the joint account holder. In the following ways a
customer can close his/her account:

 The customer may inform the banker in writing of his intention to close the account.

The banker can not ask for his reasons of such closure. It immediately asks the

customer to return the unused cheques, ATM card and close the account.

 The banker may itself ask the customer to close his account when the banker finds

that the account has not been operated for a long time. An intimation to that effect

can be given to the customer.

 In case the banker finds that the customer is not desirable e.g., customer is found

guilty of having forged cheques or bills of exchange etc. or flouting rules of

operating the account, the banker may by notice in writing inform the customer of

its intention to close the account.

 In the following cases, the banker should suspend all payments from the customer’s

account till the matters are finally settled:

o When the banker receives notice of customer’s death or insanity

o When the customer becomes insolvent or in case of a company, it goes into

liquidation. In such cases the money standing to the credit of the customer

will be transferred to the official receiver or the official liquidator as the

case may be.

o When the banker receives a Garnishee Order

o When the banker receives notice from the customer regarding assignment

of the balance standing to the credit of his account by him to a third party.

The banker in such a case is bound to pay the money to the third party.

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 CLASSIFICATION OF DEPOSITS:DEMAND DEPOSITS AND TIME DEPOSITS

DEMAND DEPOSIT: Demand Deposit is an account from which deposited funds can be
withdrawn at any time without any notice to the depository institution. This account allows
you to “demand” your money at any time, unlike a term deposit, which cannot be accessed
for a predetermined. Demand Deposit includes (i) Current Deposits, (ii) Demand liabilities
portion of savings bank deposits, (iii) margins held against letter of credit/guarantees (if
payable on demand) (iv) balances in overdue fixed deposits, cash certificates and recurring
deposits, etc.

TIME DEPOSIT: A saving bank account meant for the people of all class of people. To open
a saving account customer have fulfill some requirements. The banks therefore impose
certain restrictions on the savings bank account. And also offer reasonable rate of interest.
It includes (i) Fixed Deposits, (ii) Cash certificates, recurring deposits, (iii) time liabilities
portion of savings bank deposits, (iv) staff security deposits (v) margins held against Letter
of Credit if not payable on demand, etc.

It is to be noted that the savings deposits are apportioned in both of the above categories.
The portion which can be withdrawn without notice is treated as Demand Deposits and the
rest as Time Deposits.

NOSTRO, VOSTRO, & LORO ACCOUNT

NOSTRO ACCOUNT: Nostro is derived from the Latin term "ours." It is a bank account
that a bank holds with a foreign bank established in a foreign country for the purpose of
holding that countries currency and making/receiving international payments. This allows for
easy cash management because currency doesn't need to be converted. It is usually held in
the local currency of the account-holding administration but can be held in other currencies
also.

Suppose, a US bank purchases GBP. That currency has to be delivered somewhere, but US
banks are only set up to maintain accounts in USD. The bank establishes a nostro account at
a British bank and instructs its counterparty to deliver the GBP to that account.

VOSTRO ACCOUNT: The counterpart to nostro account; vostro (Latin, 'yours') describes
the record of an account held by a bank as correspondent usually U.S. or UK, on behalf of an
overseas bank. It is also known as a loro account. Vostro Account is a demand deposit
account , deposited by a foreign bank with the domestic bank , and is nominated in the
currency of the domestic country. It is also called "Your account" and is used primarily to
arrange foreign exchange transfers between the respective banks.

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NOSTRO & VOSTRO Account

A vostro (your) account is another bank’s account with a reporting bank, while a nostro (our)
account is a reporting bank’s account with another bank. That is, a single deposit account is
a Nostro account from the perspective of one bank and a Vostro account from the
perspective of another. The bank that owns a correspondent account at a bank in another
jurisdiction refers to such account as a Nostro account ("our account with your bank"). The
correspondent bank will refer to the same account as a Vostro account ("your account with
us").

If you maintain a nostro account for a foreign entity, you call it a Vostro account. Vostro
accounts are local accounts holding local currency serving as nostro accounts for foreign
entities.

For example, DBS Bank Singapore holds its US dollars with Bank of New York, New
York(BONY). DBS will refer to its account at BONY as its USD Nostro account, while BONY
will consider it to be DBS Bank's Vostro account.

Again, an Australian bank with an account in New York will call the record in its own books
of its New York account a 'nostro account'. The same account in the New York bank's books
would be a 'vostro account' (from the Latin, 'ours' and 'yours').

CASE Study: This stuff came into play in 1974 with the infamous failure of Germany’s bank
Herstatt. On the day Germany regulators forced the bank into liquidation; it had
commitments with US banks to deliver USD against DEM. The US banks delivered DEM
from their German nostro accounts to Herstatt during German business hours. They had to
wait for US banks to open before Herstatt could pay USD from its US nostro accounts. In
the interim, German regulators shut down Herstatt, and the US banks didn’t receive their
USD payments.

LORO ACCOUNT: Loro account (Latin, "their") is a banking term used in Eurocheque
clearing to describe a bank account held by one bank for another bank. It is “their account
with them”.For instance, if bank ABC holds an account for bank Y, when ABC talks to Y, ABC
refers to the account that they hold for Y as a Loro account.

CORRESPONDENT

The name given to a bank, broker, dealer, or financial institution that acts on behalf of
another financial institution with limited or restricted access to the financial markets
where a transaction must occur. Commonly done by smaller financial corporations that don't
necessarily have the capital to enter into foreign markets and set up new operations. This is
a cheaper method of providing international services to clients through agreements and
partnerships.

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