Term Loans & Deposits.

A Term Loan is defined as a loan which is repaid through regular periodic payments referred as Equated Monthly Installments or EMI, usually over a period of 1 to 10 years. If you approach a bank for a loan of one lac (1,00,000 INR), the bank after going through various calculations based on your eligibility criteria which mainly depends on your monthly income & your liabilities decides to provide the amount. You get the loan and agree to repay it within a period of somewhere between 6 months to 4 years. This is an example of term loan. Failure to repay the loan within the stipulated period will only result in the bank confiscating the security that you provided as a guarantee while taking the loan. Short term loans whether personal or commercial/business are taken for shorter repayment duration hence making the repayment options all the more easier for the borrower. A short term personal loan is taken for personal usage such as home house renovations, wedding, vacation planning etc. Short term business loans are mainly provided to raise working capital of your business. They are appropriate for both new and existing businesses. When dealing with new businesses, most banks will grant only shorter-term loans, because short-term loans are less risky than loans with longer terms.

A Term Deposit is a deposit held at a financial institute and has a fixed term. These are generally short-term deposits with maturities ranging anywhere from a month to a few years. When a term deposit is made, the account holder can only withdraw the amount after the term has ended or by giving a predetermined number of days notice. Term deposits are an extremely safe investment and are therefore very appealing to conservative, low-risk investors. Currently banks also offer flexible-term deposits (flexi deposits), which is a combination of a term-deposit facility and a savings account. Here the account holder is asked to deposit a certain amount from his savings account as a term deposit. This amount can be withdrawn if the required withdrawal amount isn’t available in your savings account. Once the amount that you withdraw from your term deposit is deposited in your savings account, the same amount that you withdrew is deducted from your savings account and deposited to your term deposit account.

Now comes the big question??? How are these two major terms related to each other? Well a bit of common sense does provide the answer. For instance you make in a term deposit of a lac for 3 years. The bank agrees to pay you an interest of 9% p.a. So at the end of 3 years going through the interest rate the amount that will be provided to you will approximately be around a lac and thirty thousand (1,30,000 INR). Now once you deposit the amount into a term deposit scheme for 3 years you will not be entitled to operate through that account. So what the bank usually does is loan this particular amount for a period that is lesser then the period of deposit. Now take another case: Say the bank could have 1 lac loaned to a company or individual for 3 years at 12% p.a, then at the end of the tenure the bank would re-collect an amount of  around a lac and forty thousand (1,40,000 INR).  So the bank profits by 10,000 INR. So the sole purpose of these two functions; i.e loans and deposits is financial regulation. You please a customer and at the same time you get business done for your bank. Most banks uses this theory to get a large part of their revenue streaming in.