Demand Liabilities and Time Liabilities
Banks have various kinds of liabilities that can be broadly categorized into two main types – demand liabilities and time liabilities.
Demand liabilities refer to those liabilities which are payable by the bank on demand, without any prior notice. Some examples include:
- Current Account Deposits– The balance in a customer’s current account is payable on demand. If a customer wishes to withdraw funds from their current account, the bank has to pay it immediately.
- Savings Account Deposits– The demand liability portion of savings bank deposits also needs to be paid by the bank on demand. Customers can withdraw a certain amount from their savings account without prior notice.
- Outstanding Payment Instruments– Payment instruments like demand drafts, telegraphic transfers, mail transfers etc. issued by a bank also constitute demand liabilities. The bank has to honor these instruments and make the payment as and when they are presented.
- Unclaimed Deposits– Deposits that have remained unclaimed or inactive for a long time are also considered demand liabilities. Banks have to return these to the customers whenever demanded.
- Cash Credit Accounts– The balance in cash credit accounts given to businesses is a demand liability for the bank. The overdraft facility can be withdrawn by the customer anytime.
Time liabilities are those liabilities which are repayable after a specific time period. Some examples are:
- Fixed Deposits– The maturity amount of fixed deposits is payable only after the completion of the fixed tenure chosen by the customer.
- Recurring Deposits– Banks need to pay recurring deposits only on maturity after the specified installment amounts have been deposited every month.
- Savings Account Deposits– The time liability portion of savings accounts which is not meant for withdrawal on demand is payable after a notice period.
- Term Loans– The principal amount of term loans or retail loans like home loans, auto loans etc. is payable as per the repayment schedule and not on demand.
- Certificates of Deposit– Certificates of deposit issued to customers have a fixed maturity date after which the amount is paid by the bank.
By segregating liabilities into demand and time liabilities, banks are able to manage liquidity in a better manner. This categorization helps banks match their liabilities with assets of similar maturity profiles.