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demand deposits


I am a new comer to this forum. I have very little knowledge of the law. I have a query on property rights related to demand deposit kept with a bank in India (which has a deposit insurance provided by Deposit Insurance and Credit Guarantee Corporation - DICGC ).

Demand deposits are normally called current and savings accounts in banking paralance. In my understanding, demand deposits accepted by banks are a property of the depositor. As the funds in these accounts can be withdrawn by him any time, logically they cannot be used by the bank.

However, by virtue of fractional reserve banking, and implied guarantee by the Central Bank of the coubtry (Reserve Bank of India), as a lender of last resort, banks lend the money deposited which is legally not theirs to begin with and create credit from thin air (as against money actually saved by businesses and wage earners). At the level of the entire banking system 1 Rupee kept in current and savings account can have a multiplier effect and create a credit of mutliple times(20 times, 30 times) depending on the Cash reserve ratio prescribed by the RBI. Banking systems earns income out of this credit which is not backed by equal savings and which it gets at a very low cost of current and savings deposit interest rate. This is Fractional Reserve Banking.

Reserve Bank by its support ensures that in case a bank does not have funds when asked by the depositor will print money out and lend to the bank deficient in funds.

Fractional Reserve Banking and lender of last resort are explained at  http://en.wikipedia.org/wiki/Fractional_reserve_banking and http://en.wikipedia.org/wiki/Lender_of_last_resort

Does it not contravene Property rights law of the depositor that his property is being lent when he has not consented for the same?

DICGC wrongly extends its insurance of 100 thousand per depositor to time deposits(called fixed deposits in India). Whatever return has to be earned is implicit in the interest rate of the deposit. And if all the funds from demand deposits are always kept in the bank

A very important bill was introduced in UK parliament, hoping to set this right. Sadly, the path to legislation is difficult, as the banking lobby is too strong economically and politically to let the bill pass(The second reading is on 30 March 2012, and his introduced by a member who does not have support from majority party). I think similar will be case in our country too.

Which are the relevant sections in Indian law, and if any of these sections are contravened, and can a case be made in courts against the practise followed by the banking industry in India?

Hoping for some guidance from the experts on this forum. Thanks in advance



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You have initiated a very interesting and useful thread.

Kindly provide the details who can initiate this effort in our country and how can the citizens proceed.

Valuable advice of experts and members having mastery on this subject is sought.



The concept and idea behind the query is explained in the book - Money, Bank Credit, and Economic Cycles by Jesus Huerta de Soto and is freely available at http://mises.org/document/2745. Its review is available at http://www.amazon.com/Money-Bank-Credit-Economic-Cycles/dp/1933550392.

The proposal at first seems paradoxical, and the impact if implemented is mind boggling. If one understands, the cost incurred is much more than the benefits advocated by monetary interventionists, one can then think of phasing out the impact over a period of time, so that the system has some time to adjust.

Hoping for some guidance from the experts on this forum. Thanks in advance






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