Why bank account is a must?

Modernised payment and settlement system makes it mandatory for a person to have a bank account
Representational Image
Representational Image kalingatv [Creative Commons]

During our school days going to a bank branch was a big deal. We as school going kids had no idea about a bank account. Basically our elders were very conservative when discussing money matters in our presence. It was a sort of a blasphemous act to let children know about financial matters.

Now times have changed. The scenario is opposite to what we have experienced in our childhood. Today, we cannot let our children be ignorant about money matters.

In other words, teaching our young ones the importance of managing money is inevitable. However, among other things, it is increasingly significant for us to talk about saving habits with them at an early age.

Since it’s an era of credit driven society, it becomes equally important for the elders today to give them a fair understanding of how to use and when to use a bank’s money.

During all these years while writing this column on financial matters, I have observed a unique trend among our young ones. The kind of mails that frequently hit my mailbox from these youngsters always looked for guidance to have access to bank finance.

Not a single email as I remember was about a bank deposit scheme, though sometimes they sought information about stock market scenarios.

It’s interesting that youngsters who have either completed their studies and stand unemployed or are still pursuing education have been frequently asking for ways and means to access bank finance.

More interesting is that many first time employees divulge their tales of love for credit that unfortunately end them up with empty hands. They mostly have good earnings, but by the end of the month there is so little to save that they are left with no savings.

They have raised multiple loans and a substantial amount of their monthly earnings goes EMI (equated monthly installment) way. Precisely, today most of the youngsters are lost to the love for credit (loans) where they prefer spending over savings.

Saving for rainy days is a big challenge for them and in the milieu, the concept of investing is lost. We can sum up that most of our youngsters lack the desire to save and how can they think about investment when they don’t have the savings.

Easy access to finance has pushed the youngsters into the ‘catch them young’ trap of banks. They are lured to keep up a lifestyle, which otherwise they cannot afford. It’s as good as surviving on a ventilator and once a youngster or for that matter anyone gets used to living this way, the chances of getting out of this ‘catch them young trap’ are rather bleak.

We have been seeing a lot of push from the government on entrepreneurship where through a series of financial schemes they lure unemployed youth into self-employment ventures. There is nothing bad in nurturing entrepreneurship.

But what makes it bad is the lack of proper hand holding of youngsters after they are placed on the platform of entrepreneurship. Here it’s the financial management guidance which is overlooked while financing these start-ups.

This is what has triggered the failure rate of the entrepreneurship culture and the youngsters who suffer failure in their ventures are left in lurch with debt mostly in the shape of bank loans.

So, the scenario at the moment reveals that our youngsters are more inclined to bank loans and have almost no love for savings and investing. We have observed a lot of push towards financial inclusion - reaching to the unreached through financial schemes.

But poor financial literacy among our young ones is not only defeating the objective of financial inclusion, but also pushing our young brigade into a life-long debt trap. However, youngsters’ own inertia to understand financial prudence too leaves them in financial mess.

Is it mandatory to have a bank account?

It’s not mandatory to have a bank account. But to be a part of the modernized payments and settlements system makes it mandatory for a person to have a bank account.

Otherwise also, having a bank account gives a sense of empowerment as you can have control over your finances. Besides, there are some important benefits to having your own bank account.

Government benefits like subsidies on various items are now routed through ‘direct deposit’. For accessing these benefits you need to have a bank account.

Using another person’s bank account is not an option even if the account holder is from your family. The account holder’s name should necessarily match up with the name of the person who is receiving the benefit.

Therefore, ensuring hassle free access to government benefits etc. through direct deposit mechanism, you must have a bank account. However, there may be an occasion when receiving a benefit would not be possible through a direct deposit mechanism.

It is likely you may receive a physical cheque. If you have your own bank account, you will be able to deposit the cheque and then take the money out. If you do not have your own account, you will face a lot of hassles to en-cash the cheque. Even chances are that you would not be able to cash it.

Do banks allow teenagers to open an independent Savings Bank Account?

Banks have different variants of savings bank account schemes in place, which also includes independent savings bank account facilities for teenagers. However, these accounts can be managed under the supervision of a guardian or parents.

Here it is worth mentioning that the Indian Contract Act that governs transactions for consideration between two entities holds transactions with a minor as null and void.

Under the law, transactions with anyone aged less than 18 years are not valid. So, a teenage account holder can enjoy the benefits of a bank account, but cannot enter into third-party transactions on his own. Such account holders are not allowed an independent overdrawing facility that amounts to a lending transaction.

However, the teenager will get acquainted with the banking system through the means of depositing and drawing money and conducting online transactions in the account. With a savings bank account during his teenage period, he will gain experience to make best use of the money available to him.

During the course of time, he will be able to save and invest before he turns 18. In other words, he will step into adulthood with a sense of responsibility to manage his own money.

Do banks pay interest on money deposited in a Savings Bank Account?

Yes. As per the RBI guidelines, banks have to pay interest on all deposits, be it money deposited in a Savings Bank account or any term deposit scheme. However, the interest paid on Savings Bank deposits is comparatively less than term deposits.

The interest on a savings account is determined daily based on the closing balance. The interest earned is credited in the account on a semi-annual or quarterly basis, depending on the type of savings account and the bank’s policy.

The Reserve Bank of India (RBI) has advised banks to credit interest on Savings accounts on a quarterly basis since doing so encourages users to save more money.

What should be done to help youngsters to observe financial discipline?

I have been advocating financial management programmes for students in schools and colleges and schools in my previous columns.

The growing financial indiscipline among our young ones, which leads them to financial mess, makes sense to reiterate that the government should direct all educational institutions to take up teaching about money matters in school and colleges beyond loans with the focus on importance of savings and investments.

It’s only through aggressive financial literacy education programmes that can save the young ones from the web of financial stress.

Disclaimer: The views and opinions expressed in this article are the personal opinions of the author.

The facts, analysis, assumptions and perspective appearing in the article do not reflect the views of GK.

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