Types of business bank account, and what each is for

A business that has outgrown a personal savings account usually finds out the awkward way: a credit gets returned, or the branch writes asking why a savings account is receiving regular trade receipts. There is a widespread belief that some specific turnover figure triggers the switch. No single statutory turnover number does, and any article quoting one is quoting a bank's internal policy as though it were law.

What actually forces the change is three things stacked together. The first is the savings product's own terms, which in most banks restrict the account to non-business use. The second is the transaction and cash-deposit limits attached to savings accounts, which a trading business hits quickly. The third, and the one that causes the most trouble, is the mismatch between the name on the account and the name on invoices, GST returns and payment-gateway settlements. A proprietor trading under a firm name but banking into a personal savings account produces records where the payer and the payee are apparently different parties. That is a reconciliation problem long before it becomes a compliance one. What follows describes what each facility is and what it costs. It does not say which one any particular business should open, because that depends on facts only the business and its banker have.

A current account is a transaction account with no cap on how often you move money and, by regulation, no interest on the balance. Those two features are the same design decision. The account exists to be churned, so the bank is not paying you to leave money in it, and in exchange it does not penalise you for a hundred entries a month.

What a current account gives you is a cheque book, the ability to be the named holder on NEFT and RTGS instructions in the entity's own name, and eligibility to have a borrowing facility attached later. What it takes is a balance requirement. Most current accounts specify a minimum or average balance, and falling below it attracts a non-maintenance charge rather than a returned transaction, which means the cost accrues quietly and shows up as a line on the statement rather than as a failure you notice.

The important point is that a current account is a place to transact, not a place to keep money. Balances sitting idle in one earn nothing at all. That is not a flaw in the product; it is the product working as designed, and it is why the other facilities below exist alongside it rather than instead of it.

These two are routinely listed as kinds of account, which obscures what they are. Both are credit facilities that operate through an account. You are not opening a different sort of account; you are being sanctioned a limit you may draw below zero into, and you pay interest on what you actually use rather than on the limit you were granted.

An overdraft is typically sanctioned against security — a fixed deposit, property, or the strength of the account's own turnover history. Interest is charged on the daily utilised balance, so a limit drawn for four days costs four days of interest. The facility is usually renewable annually and, in most sanction letters, repayable on demand, which is a materially different thing from a term loan with a fixed schedule.

Cash credit is the working-capital version, sanctioned against current assets — stock and receivables. The distinguishing mechanic is drawing power: the amount you may actually draw is recalculated from periodic stock and debtor statements, so the usable figure moves month to month even while the sanctioned limit stays the same. A business that treats the sanctioned limit as available cash and then finds drawing power has fallen has not been treated unfairly; it has misread how the facility is constructed.

A fixed deposit is a term deposit: a sum placed for a stated tenor at a rate agreed at the outset. It is not a transaction account and cannot be operated like one. Withdrawing before maturity is generally permitted but carries a penalty, usually expressed as a reduction in the applicable rate, so the effective return on a deposit broken early is lower than the rate on the certificate.

Two mechanics matter to a business more than the rate does. The first is that a deposit can be lien-marked as security for an overdraft, which is how a business with seasonal cash converts idle money into a standby limit without breaking the deposit. The second is that many banks offer a sweep or flexi arrangement linking a current or savings account to a deposit, moving balances above a threshold out and back automatically.

Rates on deposits are set by each bank and change; the tenor buckets and the premature-withdrawal terms are on the bank's published deposit schedule, and that schedule, not a general article, is the figure to work from. Deposit insurance covers depositors up to a limit per depositor per bank set under the DICGC framework, which is worth knowing exists and worth checking currently rather than assuming.

The checks fall into three groups, and knowing which group a document belongs to explains why the list differs between two banks on the same street.

The first group is proof that the entity exists and is what it says it is. What satisfies this depends entirely on entity type: a company has a certificate of incorporation, a partnership has a deed, and a proprietorship has no incorporating document at all, which is why proprietors are asked for registrations that stand in for one.

The second group is customer due diligence on the humans — identity and address verification for every authorised signatory and for beneficial owners above the prescribed shareholding threshold. This sits on the Prevention of Money-Laundering Rules and the Reserve Bank's Master Direction on Know Your Customer, which is why it is not negotiable at branch level.

The third group is the bank's own risk policy, layered on top of the first two. This is the part that varies, and it is the honest reason no article can publish a definitive list or a reliable turnaround time. Both are set by the individual bank, and the only authoritative version is the one the branch or the bank's website gives you on the day you ask.

Comparing accounts on headline features tends to produce the conclusion that they are all the same. Comparing them on the schedule of charges usually does not, because that is where the products actually diverge.

The recurring items are worth knowing by name. Minimum or average balance requirements, and the non-maintenance charge that applies when they are missed. Cash deposit and withdrawal allowances, which are commonly expressed both as a number of free transactions per month and as a rupee value, whichever is exhausted first — a distinction that catches out cash-heavy businesses. Charges on outward transfers, which differ by rail and by channel. Cheque return charges, on both cheques you issue and cheques you deposit that come back. And charges for services that feel administrative rather than commercial: duplicate statements, standing-instruction failures, signature verification.

A “zero balance” current account is not free; it is an account whose cost has been moved somewhere else on that schedule. Banks are required to publish these schedules, and reading the one that applies to the specific variant you are being offered is the only way to compare two accounts on the terms that will actually bill you.