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What is a Demand Deposit? Research Team | Posted On Monday, November 12,2018, 11:54 AM

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What is a Demand Deposit?



A demand deposit is money that you deposit into a bank account from which you can withdraw on demand, at any time, without any advance notice to the bank. Common examples of accounts that are demand deposit accounts include current and savings bank accounts. The demand deposits are a type of fund that provides money to an individual for paying daily expenses. The money that is deposited at the bank can be withdrawn as per the requirement of the depositor. Amounts that are lying in the savings and current accounts are known as demand deposits, as they can be used at any point of time.

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What is a demand deposit?

Types of demand deposits:

There are two types of demand deposits. They are current account and savings account. They are discussed below:

Current account: A current account is always a demand deposit. A current account functions in a manner where the bank is obliged to pay the money on the depositor’s demand. The current account bears no interest. The current account facilitates the easy operation of the account to an individual or a firm.

Current accounts are normally used to hold short-term funds that are used to pay for transactions involving goods and services and to obtain easy access to cash when needed.

Savings account: This is the second type of demand deposit. Unlike the current account, a savings account receives interest which is usually at a fixed rate set by the bank in which the account exists. These accounts are used to hold funds that a customer can avail in times of need, in the short term. Savings account does not have the facility of giving funds using cheques. The funds can be withdrawn by a customer at a bank branch or an ATM.  Many banks offer the facility of transferring funds between savings and current accounts. 

Features of demand deposits:

The Deposits in the bank accounts which are payable on demand are called demand deposits. Some of the salient features of demand deposits are listed below:

  • People have the provision to withdraw money as and when required.
  • Interest is paid by the bank on these deposits provided they are saving account deposits and not current accounts.
  • Bank allows the owner of demand deposits to make out a cheque for a specific amount.
  • Demand deposit owners may have joint accounts. Either owner may deposit or withdraw funds.
  • Financial institutions create a minimum balance for a demand deposit account.

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Demand deposit account:

An account from which deposited funds can be withdrawn at any point of time without any notice is known as demand deposit account. On the other hand we can say that the deposit which may be allowed or withdrawn on demand is called Demand Deposit. 

Importance of demand deposit:

The importance of demand deposit is as follows:

  1. Saving and investment methods: These deposits are a crucial part of the money supply. Government spreads money throughout the economy for the purpose of investments. Investment is mainly possible due to movement of money through saving, transferring as well as withdrawing funds. Bank deposits are the primary tool of investment. Demand deposits allow the flexible use of money by individuals as well as firms.
  2. Money creation through demand deposit: Firms and individuals receive funds through banks. Banks can affect the supply of money through demand deposits or loans that the banks funds through cash deposits it receives. The banks levy interest to make their own profit. In this way banks are also making money to increase the money supply in the economy. However, the banks cannot use all the money as they must keep a certain percentage with them to satisfy withdrawals.
  3. Federal funds rate: The government controls the money supply in the economy to influence inflation and other instruments that drive an economy through federal funds rate. This is the rate at which the banks lend money to each other. Lending from other banks allows banks to meet short term obligations or raise the investment amounts for a short period of time. It is easy for banks to borrow funds using the federal funds rate. If the federal rate rises, the banks generally raise their supply of reserves to control the flow of money in the open market.

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Advantages of demand deposits:

The advantages of demand deposits are as follows:

  • Withdrawals: The demand deposit allows customers to withdraw the available funds on demand. The demand deposits allow high level of liquidity in funds. If you deposit a cheque, then it takes time for the banks to process the request and make ready the funds available to the customer. But in case of demand deposits, money can be withdrawn immediately from the bank branch or an ATM as and when required.
  • Electronic transfers: This facility is offered by the bank to avail cash in case you have deposited money in your current or savings account. These accounts are generally attached with a debit card that facilitates the withdrawal of funds as and when required. Through this facility the customer can withdraw money as well as electronically transfer money from the account. This provides convenience and also simplifies your finances because you can set up your bills on a specific day each month.
  • No fee or charges: The customer can withdraw funds from a current or savings account and the bank does not levy an extra fee on the withdrawals. The withdrawal from demand deposit accounts does not carry any encashment charges.

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