Components of Demand and Time Liabilities

List of Demand and Time Liabilities:

Various items of demand and time liabilities that are reckonable for the computation of required CRR and SLR are listed below. The items listed are generic in nature and are applicable to both Conventional and Islamic banking.

Demand Liabilities:

(a) Demand Deposits (General)

                   i.            All Current Accounts except from banks

                 ii.            All Cash Credit Accounts (Credit Balances)

              iii.            Demand Portion of Savings 4 Accounts.

              iv.            Overdue fixed deposit accounts

                 v.            Call deposits account other than from  banks (On demand)

              vi.            Unclaimed balance accounts.

            vii.            Interest accrued on the above accounts.

         viii.            All other Deposits are payable to the public on demand e.g. outstanding bills, payment orders, telegraphic transfers & Mt, Outstanding drafts. Drafts payable account

              ix.            Demand drafts

                 x.            Hajj deposits

              xi.            Bonus scheme remittances payable, branch remittances payable, bills payable, certificates payable, foreign currency deposit account, unsold balance of NFCD account.

            xii.            Convertible Taka account.

 

 

 

(b) Other Demand Liabilities

                               i.            Margin of L/Cs

                             ii.            Margin of Guaranties

                          iii.            Lockers Key Security Deposits

                          iv.            Unclaimed Dividend/Dividend Payable

                             v.            Credit Balance and adjustment account

                          vi.            Security Deposit accounts

                        vii.            Sundry Deposits accounts

                     viii.            Any other miscellaneous deposits payable on demand

Time Liabilities:

(a) Time Deposits (General):

                     i.            Fixed Deposits from Customers other than from banks

                   ii.            Special Notice Deposits other than those from banks.

                iii.            The time portion of the savings bank deposits

                iv.            Short-term deposits account

                   v.            Recurring deposits

                vi.            Interest accrued on all above accounts

 

(b) Other time Liabilities:

                               i.            Employee Provident Fund Accounts

                             ii.            Staff pension Fund

                          iii.            Employees Security Deposits

                          iv.            Staff Guarantee or Security Fund

                             v.            Contribution towards Insurance Fund

                          vi.            Any other miscellaneous liabilities payable on notice or after a specified period

                        vii.            Margin account-Foreign Currency

                     viii.            Liabilities towards Foreign banks/Correspondence bank

                          ix.            Bi-lateral trade Liabilities.

Describe the two types of bank liabilities with examples

In monetary analysis only a two-fold classification of bank deposits into (a) demand deposits or demand liabilities and (b) time deposits or time liabilities are made.

a)    Demand deposits or Demand Liabilities:

A demand deposit is money deposited into a bank account with funds that can be withdrawn on demand at any time. The depositor will typically use demand deposit funds to pay for everyday expenses. For funds in the account, the bank or financial institution may pay either a low or zero interest rate on the deposit.

The maximum a person may withdraw can be up to a certain daily limit or up to the limit of their account balance. Common examples of demand deposits would be amounts in a checking account or savings account. Note that demand deposits are different from term deposits. Term deposits require depositors to wait a predetermined period before making a withdrawal.

Demand deposits include current deposits, the demand liabilities portion of savings bank deposits margins held against letters of credit/guarantees, unclaimed deposits, credit balances in the cash credit account, deposits held as security for advances that are payable on demand, and balances in past-due fixed deposits, cash certificates, and cumulative/recurring deposits.

b)    Time deposits or time Liabilities:

Time Liabilities of a bank are those which are payable otherwise than on demand. The liabilities that banks have to pay after a specific time period. Fixed deposits, cash certificates, cumulative and recurring deposits, time liabilities portion of savings bank deposits, staff security deposits, margin held against letters of credit if not payable on demand, deposits held as securities for advances which are not payable on demand, and Gold Deposits come under Time Liabilities.

What are the various methods that can be used to settle international payment?

 

There are several methods that can be used to settle international payments. Here are some of the most common methods, along with a brief description of each:

1.     Wire Transfer: This is a method where funds are electronically transferred from one bank account to another. It involves sending money directly from the sender’s bank to the recipient’s bank. Wire transfers are widely used for international payments and are relatively fast and secure.

2.     Letters of Credit: A letter of credit is a financial document issued by a bank on behalf of a buyer, guaranteeing payment to the seller. It assures the seller that they will receive payment as long as they fulfill the terms and conditions outlined in the letter of credit. This method is commonly used in international trade transactions.

3.     Bank Draft: A bank draft is a payment instrument issued by a bank that guarantees the payment of a specified amount to the recipient. It is similar to a check but is drawn by the bank and not the individual account holder. Bank drafts can be used for international payments and are generally considered a secure method.

4.     PayPal and other Online Payment Platforms: Online payment platforms such as PayPal offer a convenient way to settle international payments. These platforms allow user to send and receive funds electronically using email addresses or account numbers. They often support multiple currencies and provide a level of security and buyer/seller protection.

5.     International Money Orders: Money orders are financial instruments purchased for a specific amount and can be used to make payments. International money orders function similarly to domestic money orders but are designed for cross-border transactions. They can be obtained from banks, post offices, or other financial institutions.

6.     Crypto Currencies: Crypto Currencies like Bitcoin, Ethereum, and others have gained popularity as a means of settling international payments. They allow for peer-to-peer transactions without the need for intermediaries or traditional banking systems. Crypto currencies can provide fast and low-cost transfers, but their acceptance and regulatory frameworks vary across countries.

7.     Trade Financing: In some cases, trade financing methods such as factoring or forfaiting can be used to settle international payments. These methods involve selling or discounting trade receivables or exporting goods to a financial institution or third party, which provides immediate cash in exchange.

It is important to note that the availability and suitability of these methods may vary depending on the countries involved, the amount of the payment, regulatory requirements, and the preferences of the parties involved. It’s always recommended to consult with financial experts or institutions to determine the most appropriate method for a specific international payment.

What do you mean by ‘Real Time Gross Settlement (RTGS)’ system? Explain the advantages of RTGS when used by a country's central bank

 Real Time Gross Settlement (RTGS) is a payment used by central banks to facilitate large-value and time-critical interbank fund transfers. It enables real-time processing and settlement of individual transactions on a gross basis, meaning each transaction is settled individually and immediately, without netting or offsetting against other transactions. Here’s an explanation of the advantages of RTGS when used by the central bank of a country.

1.     Real-Time Settlement: RTGS system provides immediate and final settlement of transactions, ensuring that funds are transferred in real time. This eliminates the credit and liquidity risks associated with delayed or uncertain settlement. The central bank can enhance the stability of the financial system by offering a secure and efficient mechanism for banks to settle their high-value transactions promptly.

2.     High Transaction Volume: RTGS system is designed to handle large transaction volumes effectively. Central banks can process a significant number of high-value transactions seamlessly, allowing banks to conduct their interbank transfers efficiently. This scalability ensures that the payment system can accommodate the needs of a country’s financial sector, supporting economic activities and facilitating the smooth functioning of financial markets.

3.     Enhanced Liquidity Management: The instantaneous settlement nature of RTGS system enables bank to manage their liquidity more efficiently. By having immediate accesses to funds, banks can optimize their cash positions, meet their payment obligations, and manage their liquidity risks efficiently. This contributes to overall financial stability and reduces the need for banks to hold excessive reserves, potentially enhancing their profitability.

4.     Mitigation of System Risks: RTGS system play a crucial role in mitigating systematic risks within the financial system. By providing a secure and reliable mechanism for settlement, the central bank can minimize the potential for settlement failures, counterparty risks, and contagion effects that could arise from delayed or failed transactions. This helps maintain trust and confidence in the financial system, reducing the likelihood of disruptions and crises.

5.     Transparency and Auditability: RTGS system offers transparency and auditability, as each transaction is settled individually and leaves an auditable trail. The central bank can closely monitor and supervise the payment flows, identify and irregularities or potential risks, and take necessary actions to ensure compliance with regulations and policies. This transparency contributes to the integrity of the financial system and helps combat illicit activities, such as money laundering and fraud.

6.     Integration with Monetary Policy: RTGS system provides the central bank with a powerful tool to implement and manage monetary policy effectively. By influencing the availability of liquidity in the banking system, the central bank can control interest rates manage inflation, and maintain price stability. The real-time settlement nature of RTGS enables swift transmission of monetary policy decisions and ensures their impact on the economy in a timely manner.

Overall, the advantages of RTGS system for central banks include real-time settlement, high transaction volumes, enhanced liquidity management, risk mitigation, transparency, auditability, and integration with monetary policy. By providing a robust and efficient payment infrastructure, RTGS system contribute to the stability, efficiency, and integrity of the financial system, supporting the overall economic development of a country.

Electronic payments can involve large amounts of money and so require a stringent set of controls to mitigate the risk of loss-Describe the control mechanism

 To mitigate the risks of loss in electronic payments involving large amounts of money, stringent control mechanisms are necessary. Here are some key control measures that organizations implement:

1.     Access Controls: Access controls ensure that only authorized individuals have access to sensitive systems and data related to electronic payments. This includes user authentication measures such as strong passwords, multi-factor authentication, and role-based access control. Access privileges should be granted o a need-to-know basis to limit the number of individuals with access to critical payment systems.

2.     Segregation of Duties: Segregation of duties is a control-mechanism that ensures that no single individual has complete control over the end-to-end payment process. Different tasks, such as initiating payments, approving transactions, and reconciling accounts, should be assigned to separate individuals or departments. This segregation reduces the risk or fraudulent activities or errors going undetected.

3.     Transaction Monitoring and Fraud Detection: Robust transaction monitoring systems are crucial to identify and flag suspicious or fraudulent activities. Real-time monitoring tools can analyze payment patterns, transaction amounts, and other parameters to identify anomalies and potential fraud. Additionally, implementing anti-fraud measures, such as fraud scoring models, machine learning algorithms, and rule-based alerts, can enhance the detection of fraudulent transactions.

4.     Strong Authentication and Authorization: Strong authentication and authorization mechanisms are essential to ensure that electronic payments are authorized by the appropriate individuals. This includes techniques such as digital signatures, encryption, and secure communication protocols. Additionally, implementing dual control or dual authorization procedures for high-value transactions adds an extra layer of security.

5.     Payment Reconciliation: Regular and timely reconciliation of payments is critical to detect and resolve any discrepancies or errors. This involves comparing payment records with supporting documentation, bank statements, and other relevant information. Automated reconciliation tools can help identify and resolve discrepancies more efficiently, reducing the risk of loss due to incorrect or unauthorized payments.

6.     Payment Limits and Approval Hierarchies: Implementing predefined payment limits and approval hierarchies can help control the size and authorization of electronic payments. Setting limits on individual transactions, daily or weekly limits, and escalation procedures for exceptional cases can help prevent unauthorized or excessive payment.

7.     Disaster Recovery and Business Continuity Planning: Having robust disaster recovery and business continuity plans in place is essential to ensure the continuity of electronic payment operations. This includes regular data backups, redundant systems, alternative communication channels, and contingency plans to address potential disruptions or system failures.

By implementing these control mechanisms, organizations can mitigate the risk of loss associated with electronic payments involving large amounts of money. These controls help protect against fraud, errors, unauthorized access, and system failures, ensuring the security and integrity of electronic payment processes.

Define payment system. What are the motives behind the demand for money? Briefly describe the ‘Demand for Money’ with an example

 Payment System: Payment systems are the means by which funds are transferred among financial institutions, business and individuals, and are considered to be the critical factor for the proper functioning of a country’s financial system. The payments system is the set of institutional arrangements through which purchasing power is transferred from one transactor in exchange to another. For efficient exchange, a common medium of exchange or means of payment is necessary. The payment system is organized around the use of money. An efficient organization of the monetary system is the sine qua non of an efficient payment system.

The organization and running of the payment system involves costs to transactors and to the economy. The more efficient the payment system, the lower the cost of transfer of funds per. The gain of lower costs accurses to the whole economy.

Broadly stating, there are three main motives, for which money is wanted by the people:

a)     Transaction Motive;

b)    Precautionary Motive;

c)     Speculative Motive;

a)     Transaction Motive: It refers to the demand for money for conducting day-to-day transactions. This motive can be looked at from the perspective of consumers, who want income to meet their household expenditure (income motive) and from the perspective of businessmen, who require money to carry on their business activities (business motive).

The transaction motive relates to demand for money to meet the current transactions of individuals and business units. The income, which a person gets, is not continuous whereas, expenditure is continuous, So, to bridge the gap between receipt of income and its expenditure, people hold cash.

 

According to Keynes, transaction demand for money is positively associated with the level of income, i.e. higher the level of income, the larger would be the size of money holdings for transactions.

 

b)    Precautionary Motives: It refers to the desire of people to hold cash balances for unforeseen contingencies. People wish to hold some money to provide for the risk of unforeseen events like sickness, accident, etc. The amount of money held under this motive, depends of the nature of individual and on the conditions in which he lives. The demand of money for precautionary balances is also closely related to the level of income. Higher the level of income, more will be the cash balances for contingencies.

c)     Speculative Motives: It refers to desire of the holder to keep cash balance as an alternative to financial assets like bonds. Under speculative motive, it is presumed that people can hold their wealth either in the form of bonds or in the form of cash balances. The decisions regarding holding of bonds or cash balances depend upon the expectations about changes in the rate of interest or capital value of assets (bond) in future.

The interest rate varies inversely with the market value of securities (bonds), i.e. when interest rate rises, market value of bonds falls. Hence, demand for money for speculative motive becomes less at high interest rates and becomes large at low interest rates.

What are the functions of money and types of Money

 Functions of Money:

Medium of exchange: Money is generally accepted medium of exchange that is used to make all the transactions. Ex-payments of goods, payment of tax, etc.

A Measure of Value: Money expresses the value of every service as well as goods. Therefore, it is a common denomination.

Standard of deferred payments: Money is considered the standard for future payments. Ex-The payment of the electricity bill on the upcoming due date.

Store of Value: It means that money is capable of being stored and transferring the purchasing power from today to the future. Ex: Using the money in a savings account to buy new furniture.

Distribution of social income: Income can be easily be distributed with the help of money. Ex: Distribution of total money earned by a school in the form of salaries, wages, utility bills, etc.

Basis of Credit Creation: The “store of value” function of the money helps in credit creation by the banks. Ex: Using the money of demand deposits as a tool for credit creation.

Liquidity: Money is the most liquid asset of the economy. Ex: Credit cards, debit cards, cash.

 

Types of Money:

Money serves as a medium of exchange, a unit of account, a store of value, and a standard of deferred payment. The types of money can be classified based on different criteria, including their intrinsic value, backing, and form. Let’s discuss these types more elaborately:

1.     Commodity Money: Commodity money has intrinsic value because it is made of a valuable commodity, such as gold, silver, or precious metals.

Characteristics: The value is derived from the commodity itself.

Historically, gold and silver coins have been examples of commodity money.

It has inherent value beyond its use as a medium of exchange.

2.     Representative Money: Representative money is backed by a commodity but it is not the commodity itself. It represents a claim on a commodity like gold or silver.

Characteristics: Paper currency that can be exchanged for a specific amount of a commodity.

The value is based on the backing commodity, and it can be redeemed for that commodity.

3.     Fiat Money: Fiat money has no intrinsic value and is not backed by a physical commodity. Its value is based on the trust and confidence people have in the government that issues it.

Characteristics: Its value is established by government decree and is not tied to any physical asset.

Most of the world’s currencies, like the US Dollar and Euro, are fiat currencies.

4.     Fiduciary Money: Fiduciary money is a currency without intrinsic value and not backed by a commodity. Its value is based on the trust and confidence people have in the issuing authority.

Characteristics: Relies on the trust in the stability of the government or institution issuing it.

It includes most of the paper currency in circulation today.

5.     Cryptocurrency: Digital or virtual currencies that use cryptography for security. cryptocurrencies are an electronic medium of exchange that exists virtually. Crypto is a peer-to-peer system that runs on the blockchain. In simple terms, it is an intangible form of currency with opportunities for international exchange.

6.     Local Currencies:  Money issued and accepted in a particular locality or region.

Characteristics: Used alongside or instead of national currencies in local communities.

May serve to promote local economic development.

7.     Digital Currency: Money in digital form, including both physical and purely electronic representations.

Characteristics: Digital wallets, online banking, and electronic payment systems falls under this category.

The rise of digital currencies is transforming the nature of transactions.

8.     Legal Tender: Legal tender is currency that must be accepted for transactions and debts as recognized by law

Characteristics: Not all forms of money are necessarily legal tender.

Governments typically define what constitutes legal tender in a particular jurisdiction.

These categories illustrate the diverse forms and functions of money in different economic systems.

The evolution of money continues with technological advancements and changes in financial landscape. The coexistence of various types of money reflects the dynamic nature of modern economics.

 

What is money? What are the Characteristics of Money?

 Money is anything that serves as a medium of exchange. A medium of exchange is anything that is widely accepted as a means of payment. Money is treated as a medium of exchange that is centralized, generally accepted, recognized and facilitates transactions of goods and services, is known as money.

·        Money is a medium of exchange for various goods and services in an economy.

·        The money system varies with the governments and countries.

·        Different countries have different currencies

·        The central authority is responsible for monitoring the monetary system

·        There are many forms of money, and cryptocurrencies is the newest addition to the forms of money and can be internationally exchanged.

Characteristics of Money:

Fungible currency: A currency must be fungible, which means that the units used as a currency must be equal in quality and shall be interchangeable. A non-fungible currency form of currency is not considered eligible for transactions.

Durable: A good currency is durable enough to be used more than just one time. It should not be perishable. A perishable good or article should not be used as a currency because it cannot be used multiple times and also cannot be stored for further transactions. Therefore, to conserve the future oriented use-value of the money, a currency must be durable.

Easily recognizable: The use of the money must be ascertained of its authenticity. In other words, the currency must be universally recognized. An unrecognized currency or money leads to disagreement with the exchange terms.  A recognized currency ensures trust in the money system as well as its acceptance.

Stability: A currency must be stable in terms of value. In simple terms, money should have a constant or increasing value. Money cannot be unstable whose value keeps drastically changing. An unstable currency can give room to the risk of a sudden drop in value which can hamper the acceptance and authenticity of the money system.

Portable: A currency must be portable and can be conveniently transported from one place to another. The money must be divided into various quantities making its use better. Money if not portable can lead to an exceeded cost of transportation of the currency itself. Therefore, money should be able to be divided into further smaller units to facilitate smooth transactions of various quantities of goods. Secondly, it should be easily transferable and portable.