Think of a commercial bank as a giant safe that holds your money and lets you use it when you need it. They also lend money to people and businesses, helping the economy grow.
Deposit accounts are the main way customers keep their money in a bank. They come in two main flavours: Demand Deposit Accounts (DDAs) and Savings Accounts.
🔑 Analogy: A DDA is like a wallet you can open anytime. You can withdraw money, pay bills, or use a debit card without any restrictions.
📌 Features:
💰 Analogy: A savings account is like a piggy bank that sits in the bank. You put money in, and it earns a small reward (interest).
📌 Features:
Commercial banks use the money you deposit to lend to others at a higher interest rate. The difference between the loan rate and the deposit rate is called the interest spread:
\$i{\text{loan}} - i{\text{deposit}} = \text{spread}\$
This spread is a major source of profit for banks.
| Account Type | Withdrawals | Interest | Typical Use |
|---|---|---|---|
| Demand Deposit Account (DDA) | Unlimited | None or very low | Daily spending, bills, emergencies |
| Savings Account | Limited (e.g., 6 per month) | Moderate, varies by bank | Long‑term saving, emergency fund |
🔍 Tip 1: When asked about the functions of commercial banks, list at least three (e.g., accepting deposits, providing loans, facilitating payments) and give a short example for each.
📝 Tip 2: For demand deposit accounts, remember they are current accounts with no interest and unlimited withdrawals.
💡 Tip 3: For savings accounts, note the interest rate and the typical withdrawal restrictions.
📌 Tip 4: Use the word interest spread when explaining how banks profit from deposit accounts.