Next To page No 1 2 3 4 5 Role of Credit in Economy All banking operations, and the methods for controlling them, are part of the credit system of a country. The state of business activity within a country at any given moment may be gauged from the condition of the credit system: expanding credit generally reflects a period of business prosperity, whereas contracting credit usually reflects a period of declining economic activity or depression. Fluctuations in the credit system may affect the level of prices; that is, as credit expands the money supply increases; lending causes prices to rise. Some economists consider the credit inflation that preceded the 1929 crisis to have been the principal cause of the crisis. Role Of Credit In Bank's earnings The Credit plays an important role in bank earning. The interest on credit is the major source of bank profit. The bank collects deposits from individuals and different businesses and provides Loan in different forms to individuals and businesses. Normally the bank grand interest on bank deposit and charge interest on loans. The difference between the interests grants and charge is the bank earning. The banks collect following types of deposits (1) Demand deposits (2) Savings deposits (3) Hybrid checking/savings deposits (4) Time deposits. (1) Demand deposits A demand deposit is a deposit that can be withdrawn on demand at any time and in any amount up to the full amount of the deposit. The most common example of a demand deposit is a checking account. Money orders and traveler's checks are also technically demand deposits. Checking accounts are also considered transaction accounts in that payments can be made to third parties—that is, to someone other than the depositor or the bank itself—via check, telephone, or other authorized transfer instruction. Checking accounts are popular because as demand deposits they provide perfect liquidity (immediate access to cash) and as transaction accounts they can be transferred to a third party as payment for goods or services. As such, they function like money. (2) Savings deposits Savings accounts pay interest to the depositor, but have no specific maturity date on which the funds need to be withdrawn or reinvested. Any amount can be withdrawn from a savings account up to the amount deposited. Under normal circumstances, customers can withdraw their money from a savings account simply by presenting their "passbook" or by using their automated teller machine (ATM) card. Savings accounts are highly liquid. They are different from demand deposits, however, because depositors cannot write checks against regular savings accounts. Savings accounts cannot be used directly as money to purchase goods or services. (3) Hybrid checking/savings deposits The hybrid savings and checking account allows customers to earn interest on the account and write checks against the account. These are called either negotiable order of withdrawal (NOW) accounts, or money market deposit accounts, which are savings accounts that allow a maximum of three third-party transfers each month. (4) Time deposits. Time deposits are deposits on which the depositor and the bank have agreed that the money will not be withdrawn without substantial penalty to the depositor before a specific date. These are frequently called certificates of deposits (CDs). Because of a substantial early withdrawal penalty, time deposits are not as liquid as demand or savings deposits nor can depositors write checks against them. Time deposits also typically require a minimum deposit amount. | 
