Nature of Accounts Opened in a Bank

After reading this article you will learn about the nature of account opened in a bank.

Joint Accounts:

A joint account is a banking account maintained by two or more people. All must sign on any relevant documents unless the mandate provides otherwise. All are jointly liable for any overdraft unless mandate establishes joint and several liability. On the death of one party to a joint account, any credit balance on the banking account normally becomes the property of the survivors.

In some cases, however, particularly where a husband -and-wife joint account is in question, the appropriation of the balance of the survivor on the death of one may depend upon the intention of the party who opened the account in the first place.

The banker shall always guard against any embarrassment arising from a claim on the bank by the personal representative of the deceased party by including in the mandate a specific clause authorizing him to pay the balance to the survivor.

A Joint Account can be of following types:

1. Operation jointly by all,

2. Operation jointly by any two or more,

3. Operation by either or survivor, and 

4. Operation by Former or Survivor.

In the case of (1) and (2) above operation in the account is likely to be stopped by the Bank on the death of any of the joint account holders and the balance amount in the account is sealed. Now there remain two parties one the surviving party and on second hand the legal representatives of the deceased party.

In such circumstances the account is treated as a claim case unless and until both the survivors and the legal representatives of the deceased party give a joint mandate to the bank for disposal of the amount held in a joint account.

So far operation in any account is either or survivor the account can be operated by any of two persons. In case of death of any joint account holder and mandate being Either or Survivor the living person has full rights to operate the account but in case of an account opened with the mandated of former or survivor, the former is first person to operate the account.

In case the Second person says the former has died the survivor the second person is authorized to operate the account. In case of the death of survivor in such type of accounts only the former i.e. the first named persons or his/her legal heirs are to take charge of the account as per bank rules.

HUF Account (Hindu Undivided family):

Hindus can open a HUF account only. Families of other religions like Muslims, Christians and parsis etc., cannot form HUF.

What is definition of HUF?

HUF is mainly considered for assessment of Income Tax of joint Hindu family. But HUF has not been defined under the INCOME TAX ACT. It is defined under the Hindu Law as a family that consists of all persons lineally descended from a common ancestor, including wives and unmarried daughters. Members into a HUF do not come from a contract but from status. A HUF cannot be formed by a group of people who do not constitute a family, lineal descendents with a common ancestor is a must.

However in Maharashtra, unlike other states, even married daughters are recognized as HUF members.

HINDU LAW DOES NOT GOVERN JAINS AND SIKH FAMILIES BUT THEY CAN STILL BE TREATED AS A HUF.

A HUF consists of:

Karta:

The karta has to be the oldest male in the family. If he passes away, his wife cannot become the karta. His eldest son will take his place. If he chooses not to, he can give up his right and the next son in line can take his place.

Coparceners:

All the male members of an undivided Hindu Family are coparceners.

Hindu coparceners include the sons, grandsons and great-grandsons of the holder of the joint family property. By virtue of their birth, they acquire an interest in the property.

Members:

The female members are simply called member.

Under the Income Tax Act, a FIUF is treated as a separate entity for the purpose of assessment.

However, the income of a joint Hindu family can be assessed as the income of a HUF Hindu only if the following two conditions are satisfied:

1. There should be coparcenaries.

2. There should be joint family ancestral property.

3. Other investments too can take place under the broad head of HUF.

For instance, a HUF can open a bank account in its name. The karta must open a HUF bank account in any bank by giving an undertaking on a stamp paper of Rs 100. The bank will supply the format.

The Hindu Law governs a Hindu undivided family, which is nothing but a compilation of Hindu practices, customs and traditions. HUF has ancestral property also it has ancestral different form of business also in which individual member might be engaged. As per Hindu Law the son conceived has the same right as a son born. Also as per Hindu Law, the Hindus, Sikhs, Janis are the communities who can form HUF.

Joint owners of HUF are known as:

Coparceners:

The eldest member of the family is known as ‘KARTA’. All other members (males- coparceners and Female-members) are coparceners. The right to manage the business and property of HUF vests with KARTA.

Now, the Parliament has amended Hindu Succession Act 1956, as per the new provision Daughters get the equal rights in the property and assets. So, the HUF for legal purposes compromise of all the major male and female co-parceners. The HUF account is operated upon by the Karta and his all banking transactions are binding on all the coparceners of HUF.

a. Sole Proprietor,

b. Partnership,

c. Joint Stock Companies,

d. Company Accounts like,

e. Public Limited Company,

f. Private Limited Company,

g. Government Companies,

h. Clubs and Societies,

i. Religious Institutions,

j. School and Colleges,

k. Trusts, and 

l. Charitable trusts.

All such accounts have different type of operating rules.

Loan Accounts:

Loan Account are different than the deposit accounts. However the KYC norms as explained are applicable in Loan accounts also. Loan accounts are basically of two types 1) Term Loan and 2) Demand Loan

Loan is an act of lending (Money). A banking account where upon approval a loan account is opened the money as per sanction is allowed by the bank for the use of borrower according to pre-decided purpose and withdrawal is allowed as per terms and conditions of the loan agreement.

1) Term Loans:

The word Loan is used for loans granted for long Term and whereas the word Advances is used for loans of short term. A term loan is sanctioned for specific purpose like purchasing a House, Car or some other capital goods, In manufacturing units for creating necessary infrastructure required by the borrowing unit, For financing projects, development of business, Farm development, Agriculture, Personal Loan etc.

The purpose may differ from borrower to borrower. But the repayment of Term Loan usually does not exceed 7 years but can be more in cases where project completion and generation of funds requires more time.

The term Loan is reduced at agreed intervals by an installment which is to be paid by the customers. Normally such installments are taken from the current accounts maintained by the borrowers. Normally installments are recovered on monthly basis but it can be quarterly and half yearly also. In case of Agriculture Loans the installments are recovered on half yearly basis keeping in view the harvest time.

Where term loan is sectioned for construction of some building like factory, house or other business premises the time taken in completion of construction is treated as moratorium and usually no installments is recovered during moratorium period.

However where borrower is willing to pay the installments during these periods he is allowed.

In case of Term Loans the interest is charged on monthly basis on reducing balance. Here some banks provide facility of daily reducing balance and others on monthly or quarterly basis.

In order to recover the loan amount along with interest the bank provides a repayment schedule to the borrowers which includes both repayment of Principal amount and Interest Amount. In case installment is not paid in time the amount of installment is treated as interest amount and the interest is also compounded accordingly.

2) Advances:

Advances are those type of Loans which are given for a short period normally for one year within in which these are required to be paid back in instalments along with interest amount. Such type of loans are mostly used for Working Capitals for business purposes.

These loans can be of various types:

a) Cash Credit:

As is clear by name this type of loan account provides financial assistance for day to requirement of the business (business can be of any type like trading, manufacturing, self-employment, professional concern, any other concern, firm, Commercial, institutional, industrial etc.)

A maximum limit of amount is fixed by the bank on the basis of requirement of business which is decided keeping in view of past tract record of the borrowers performance as shown in their balance sheets, Income-Tax, Sales-Tax, Service-Tax and Vat returns submitted with govt. departments by the borrowers.

Once a Limit is decided, fixed and approved a Current Account is opened in the name of borrower (may be individual, partnership concern, sole proprietor or a company etc.) and cheque book is issued to him for using the amount of loan within fixed limits.

Such limits are reviewed by the bank every year by scrutiny the financial data and turnover of the business. In case of progress in business and increase in the earnings or profit of borrowers this limit can be enhanced also and on the contrary if performance is found unsatisfactory the bank may reduce the limit also and on utterly bad performance such limits can be recalled also.

While using such limits bank allows withdrawals from the Cash Credit accounts for the purpose of only that business for which loan has been sanctioned and not for any other business.

For example a manufacturing unit can use the funds of this loan for purchasing raw material or some other material required by the unit for its day to day working but this fund cannot be used for purchasing capital goods or cannot be used for repayment of some other loan taken from a source other than the bank which has sanctioned the Cash Credit Limit. The purpose is to ensure the end use of bank’s money so that it is used only for productive purposes and not for purposes which have no connection or utility for the business.

Cash Credit Limits are also of different types:

1. Advance Against Bills:

Sometimes the borrower requires to sell its products on credit basis and product is supplied to the purchaser. In this condition the borrower do not receive the payment of the products sold by him instantly. The payment is received by him after some time.

In the meantime the borrower needs fund to purchase more raw material for production. The bank also provides funds against such bills up to certain limit and and receives back the loan amount on realization of bills. Here bank takes extra care to ascertain the geneouness of the bill.

2. Advance against Orders:

This is a type of loan where a borrower is already enjoying Cash Credit limit with the bank. He is manufacturing goods and selling to its customers. All of sudden he receives some big order where he has to supply his produce in bulk quantity for which he needs extra money.

In order to meet his requirement bank provides loan for short period and on case to case basis. Before allowing such funds bank takes extra care to ascertain the authenticity of the bulk orders.

3. Bills Purchased Loans:

Sometime a person is not enjoying any credit facility from the bank and is managing his business by his own funds. For one or the other reason he needs certain funds immediately or may incur a loss in his business. Such persons can get their bills purchased by the bank.

The bank after purchasing the bills provides immediate cash after deducting its prescribed commission and gets the bill realized through the bankers of the drawer of the bill. A cheque is also a Bill.

Sometimes an individual having a deposit account with the bank may also get his cheque discounted by the bank. The bank provides immediate cash to the customer after deducting its discount and collects the proceeds of the cheque from the bank of the drawer of the cheque.

4. Demand Loans:

These are such type of loan which are recovered over a period but are liable to be paid back the entire amount of the loan along with interest if bank demand repayment of the loan. Mostly Demand Loans are given against some liquid assets like Gold, National Saving Certificates issued by Post Offices, RBI Bonds, Life Insurance Policies (other than Money back policies) or Fixed Deposits kept with the bank.

Since all these assets are self-liquidating no tenure is fixed for paying the installments by the Borrower. The bank takes due care in deciding the amount of loan in view of the maturity amount of securities held for sanction such loans so that as and when the security matures bank is able to recover both the principal as well as interest amount.

Demand Loans can be used in two ways:

1) Immediate requirement. Bank allows the entire amount of the approved loan in one go and transfers the loan amount to any deposit account of the customer wherefrom the customer can withdraw the money of loan amount.

2) In another case where the entire loan amount is not needed by the borrower a Current Account is opened in his name and the approved limit is allowed. The borrower can withdraw the required amount within the sanctioned limit any time and may also deposit back the loan money back into this account if becomes available with him.

This way he saves interest because bank charges interest on daily reducing balance and there borrower is charged interest for that number of days for which he had withdrawn the money. After depositing back no interest is charged. These type of accounts are known as OVER DRAFT ACCOUNTS.