What is a Bank?
A bank is a financial institution that aims to make profit by collecting money from those with excess finances (deposits) and lending it to those who need it, in exchange for interest. The interest rate is influenced by the demand for money, the rate of investment, central bank directives, the amount and duration of loans, and the borrower’s creditworthiness.
Current Account
Suited to customers who want to withdraw money at any time without prior notice — the customer pays the bank for this convenience. Advantages: transmitting a cheque is easier and more secure than carrying cash, cheques serve as evidence of payment, a periodic bank statement shows all transactions, and the bank can grant overdraft facilities.
Savings Account
Money can be withdrawn but earns interest, with no cheque involved. Advantages: safety from risks like fire or theft, the bank pays interest, it encourages saving (especially with high interest rates), and it helps meet unexpected expenses.
Current vs Savings/Deposit Account
| Current Account | Deposit Account |
|---|---|
| Withdrawal by cheque | Withdrawal by passbook |
| No notification needed before withdrawal | Notification needed before withdrawal |
| Account holder pays bank charges | Account holder receives interest |
| Can obtain an overdraft | Cannot obtain an overdraft |
Credit: Overdraft vs Loan
Credit is money borrowed to be refunded in future — “buy now, pay later”. Banks extend credit through loans, discounting bills, overdrafts, and mortgaged loans (where the loan’s purpose is itself the collateral).
| Bank Overdraft | Bank Loan |
|---|---|
| Requires a current account | No account required |
| Short-term | Long-term |
| Interest charged only on the amount overdrawn | Interest charged on the entire amount |
| Higher interest rate | Lower interest rate |
| No collateral needed | Collateral required |
