What is a Demand Deposit? Meaning, Types & Bank Examples

A demand deposit is money you keep in a bank account. You can withdraw this money anytime without giving advance notice.

Example: Priya opens a savings account at the State Bank of India. She deposits ₹50,000 into her account on Monday. On Tuesday, she needs ₹5,000 for shopping. She goes to the ATM and withdraws the money immediately. She does not need to inform the bank beforehand. 

On Wednesday, she withdrew another ₹2,000 for petrol. The remaining ₹43,000 stays in her account. She can access this money whenever she wants.

Understanding the key characteristics of demand deposits helps you make better banking decisions. The following table summarises the essential features that define these accounts:

These characteristics make demand deposits particularly suitable for managing daily expenses and emergency funds. Banks use these deposits to provide loans to other customers, which form the foundation of everyday banking services.

Banks use demand deposits to provide loans to other customers. These deposits form the foundation of everyday banking services. Most people use demand deposits for their daily financial needs.

This guide explores everything you need to know about demand deposits, from their types and features to how they work in the banking system.

1. Understanding Demand Deposits

Demand deposits represent the most liquid form of bank deposits. This liquidity means you can access your money instantly without any waiting period. These accounts are perfect for managing day-to-day financial needs. Banks must keep these funds readily available for withdrawal. The account holder owns the money but allows the bank to use it temporarily to fund loans. Banks keep enough in reserve to meet withdrawals.

Example: Rahul keeps ₹75,000 in his HDFC Bank savings account. He can withdraw money using his debit card at any time. Last week, he withdrew ₹5,000 for groceries on Monday. On Thursday, he transferred ₹15,000 to his friend online. The bank processed both transactions immediately without any delay, leaving him with ₹55,000 available for future use.

This instant processing demonstrates the core benefit of demand deposits - immediate access to your funds whenever needed.

The Reserve Bank of India regulates demand deposits through various policies. Banks must maintain a certain percentage as cash reserves. This ensures they can meet customer withdrawal demands promptly. 

Digital banking has made demand deposits more accessible than ever. Mobile apps allow customers to check balances and transfer money instantly.

2. Types of Demand Deposits

Banks offer several types of demand deposit accounts. Each type serves different customer needs and preferences. The main types include savings accounts, current accounts, and salary accounts.

The following table outlines the main types of demand deposits with practical examples:

Each account type serves specific financial needs and comes with distinct advantages for different user groups.

3. Features and Characteristics

Demand deposits share several important features that make them popular. They provide high liquidity, meaning easy access to cash. Account holders can withdraw money through various channels like ATMs and cheques.

Example: Amit uses his Axis Bank savings account in different ways. He withdraws ₹3,000 weekly from ATMs for pocket money. He writes cheques worth ₹25,000 monthly for rent payments. He also uses internet banking to pay ₹8,000 for utility bills.

These deposits do not have fixed maturity periods like fixed deposits. Banks cannot restrict withdrawals unless legal issues arise. Most accounts offer free basic services with minimal charges.

Modern demand deposits come with additional features like overdraft facilities. Account holders can spend more than their available balance temporarily. Banks provide debit cards for easy shopping and bill payments. 

Many accounts include free insurance coverage and reward points. Electronic statements help customers track their spending patterns efficiently.

4. How Demand Deposits Work

Banks use demand deposits to create credit for other customers. When you deposit money, banks lend it to borrowers. This process helps banks earn profits through interest rate differences.

Example: Priya deposits ₹2,00,000 in her Punjab National Bank account. The bank keeps ₹20,000 as a reserve requirement with the RBI. It lends ₹1,80,000 to other customers at 9% interest. Priya earns 2.5% interest on her deposit.

This system creates a money multiplier effect in the economy. Banks must maintain adequate reserves to meet withdrawal demands. The difference between lending and deposit rates generates bank profits.

The fractional reserve system allows banks to create new money. When someone borrows money, it gets deposited elsewhere as new demand deposits. This cycle continues and expands the money supply naturally. Central banks monitor this process to control inflation rates. Digital transactions have made this money creation process faster and more efficient.

5. Advantages and Disadvantages

Demand deposits offer several benefits but also have some limitations. Understanding both sides helps customers make informed banking decisions. The main advantage is instant liquidity for emergencies.

These pros and cons become clearer when you see them in real-life situations.

Example: Suresh keeps ₹1,50,000 in his Bank of Baroda savings account. He enjoys the advantage of instant access when his car breaks down unexpectedly, and he withdraws ₹15,000 immediately for repairs. However, he faces the disadvantage of earning only ₹4,050 annual interest at 2.7%. A fixed deposit would give him ₹10,500 at 7% interest, but he wouldn't be able to access the money for emergencies.

Conclusion

Demand deposits provide easy access to your money anytime you need it. They offer convenience for daily expenses but give lower interest rates than fixed deposits. Most people use these accounts for regular banking needs. Banks benefit by lending this money to other customers. Choose demand deposits when you prioritise liquidity over higher earnings.

FAQs
 

1. What happens to my demand deposit if my bank fails? 

DICGC protects up to ₹5,00,000 per depositor per bank.

2. Can banks freeze my demand deposit account? 

Yes, due to suspicious activities, court orders, or compliance issues.

3. Why do some ATMs charge fees while others don't?

Non-partner ATMs charge ₹20-25 after exceeding your monthly free limit..

4. How do banks make money from my zero-interest current account?

Through transaction fees and lending your deposits to borrowers at higher rates.

5. Are there any withdrawal limits on demand deposits? 

Banks may charge fees for excessive transactions beyond free monthly limits.

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