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August 08, 2014

Deposit Banking System

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Friends, as the part of Banking Awareness study material series for upcoming IBPS PO IV Online Exam, we have been discussing various types of Banking Systems. So far, we have discussed about Unit Banking System, Branch Banking System, Group Banking System and Investment Banking System. Today we shall discuss about Deposit Banking System. The Deposit Banking System has its origin in England. The system of receiving deposits and making advances for shorter period is called deposit banking. The underlying principle of this system is that banks cannot block up their deposits in long term investments as the deposits are repayable on demand.

Deposit banks will maintain liquidity. They must have enough cash reserves to meet withdrawals. Since deposits are of short-term nature, loans and advances will also be for short periods. The business is less risky as deposits are not locked up in long-term loans. Since loans are repaid in short period, the funds are recycled over. i.e, lent again and again.

A very important reason for supporting deposit banking is, the firm belief that banks are not only custodian but also trustees for the vast majority of depositors who have entrusted their hard-earned money with banks for safe custody. A great proportion of this money is payable on demand and this fact is never forgotten by banks. Naturally, they maintain a considerably percentage of their assets in the form of cash of high liquid assets to meet withdrawals by the depositors. 

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