A Quick Guide to Important Banking Terms
Each field has its own set of terminologies, even banking. If you are looking to work in a financial institute or get a banking job, then there are some terminologies that you need to learn. These terminologies can make their way into your interview, so do not miss out on them.
Here is a list of 27 most important banking terminologies:
- Repo Rate: It is an interest charged by monetary authorities to the bank on any short term loans (1-90 days) that they have taken from RBI. The Current Repo rate is 4% (source: RBI). A high repo rate is used by RBI in the situation of inflation. A high repo rate makes it difficult for the banks to borrow, which leads to high priced loans.
- Reverse Repo Rate: When a bank deposits its excess money with RBI, then the RBI pays an interest rate to the bank known as reverse Repo Rate. A high reverse repo rate assists in adding liquidated funds in the economy. Reverse repo rate cannot be higher than Repo rate. Current Reverse Repo rate is 3.35% (source: RBI).
- Statutory Liquidity Ratio (SLR): Each bank must maintain an 18% (current rate) SLR with them at the end of each working day. SLR is a total deposit in the form of gold, securities, bonds and cash. It helps RBI to control the credit flow in the bank, and making them invest in government bonds and securities ensure the bank’s financial liquidity. High SLR rate is administered to control the inflation whereas lower SLR rate encourages growth in the economy.
- Non Performing Assets (NPA): NPA is any asset that doesn’t yield income for the bank. Commercial loans that are 90 days overdue and consumer loans that are 180 days overdue are considered as NPA, which comes under liabilities. To calculate the NPA ratio divide the NPA with the total amount of loans.
- Money Inflation: It is a situation in which the value of money falls while the prices rise over a time period. A sudden increase in the demand of products and services can cause inflation. This can be good for economic growth in some cases, as it promotes consumer demand and consumption.
- Negative Interest Rate: In a situation of deflation, when the banks deposit excess money with the central bank, the central bank charges a negative interest rate which means the lender has to pay the interest to the borrower. The central bank charges the commercial banks and the commercial bank charges the interest to their customers. It encourages investments, lending and spending instead of hoarding the cash.
- Blockchain System: This system was introduced in banks to make the banking system much more efficient and safe. Blockchain system supports the evolution of RTGS, makes online transactions safer and faster, removes potential errors, confusions and frauds in bookkeeping.
- Skimming: This is a method used by fraudsters to take a person’s credit card or personal account information through the magnetic strip present in the card. When the card is swiped, the information gets stored in either a computer or a skimmer by the fraudster.
- Money Laundering: It is a transactional crime that legitimizes illegal money by covering up its true origin with a legal one.
- Cash Reserve Ratio (CRR): The commercial banks have to hold a minimum amount of deposits in the form of CRR with RBI ( current CRR 4%). The CRR amount cannot be invested or lent by the bank to any individual or organisation, it should remain liquid . The bank has to pay CRR to the RBI every 15 days. It is to encourage commercial banks to build and maintain a solvency position.
- Bank Rate: It is also known as the discount rate. It is the interest rate the central bank charges the commercial bank on borrowed funds and the commercial banks charge their customers on loans. (Current bank rate is 4.25% )
- Clean Note Policy Of RBI: RBI introduced the Clean note policy in 2001 to increase the durability of the currency note. One of the aims is to provide citizens with clean and good quality currency and pull the soiled and damaged money out of the system. A customer can present a soiled or torn currency at the bank, and the bank further passes it down to RBI in exchange for currency which is in a better condition.
- Core Banking Solution (CBS): This system gives the customer the freedom to do their banking activity from any branch of the bank and not be limited to the branch in which they opened their account. This way they become the bank’s customer instead of the branch’s customer. It makes it easier for the bank to introduce and manage new financial products in the system.
- Letter of Credit: It is a letter issued by the bank, guaranteeing that the borrower will pay the correct amount to the lender on the given date. If the borrower fails to repay the lender then the bank pays the remaining amount on his behalf.
- The Balance Of Trade: It is the difference between a country’s imports and exports. Balance of trade is one of the main components of a country’s balance of payment. It can be calculated by subtracting total country’s import from total country’s export for a given time period.
- Balance of Payments: It is the difference between the money coming into the country at a given time period and the money going out of the country. The sum of current account, financial account, Capital account and balancing items gives BOP.
- NOSTRO Account: It is an account opened by an Indian Commercial Bank to hold foreign currency in another commercial bank.
- CASA Account: Also known as Current Account Savings Account. This account is a non-term deposit account, it is a ratio of savings and current deposits to total deposits.
- RAFA Account: Also known as Recurring Deposit Account Fixed Deposit Account. It shows how much deposit a bank has in terms of recurring and fixed deposits.
- Demat Account: Demat account stands for dematerialized account. This account is for customers willing to buy or sell shares, debentures and mutual funds listed in the stock market. Unlike other bank accounts, this account is used to hold stocks.
- MSME: MSME stands for Micro Small and Medium enterprises. It was introduced in the year 2006 under the MSMED act. According to this act MSME are enterprises that produce, process or preserve goods and commodities.
- External Commercial Borrowings: This is a loan given to an Indian, in foreign currency, by a non-resident lender. This loan has a minimum average maturity period of 3 years.
- Priority Sector Lending: RBI has made it mandatory for banks to dedicate funds to sectors that don’t receive timely and adequate credit, like agriculture, MSME, Export Credit, Education, Housing and renewable energy.
- Credit Rating: Also known as credit score, this instrument is used to see the credit worthiness of an individual based on records of repayment and income. This rating is taken in consideration by banks and financial institutes before giving a loan.
- National Electronic Fund Transfer (NEFT) : It is an electronic method to transfer funds from one bank account to another. A bank branch should be NEFT enabled, for the customer to use the NEFT services.
- Real Time Gross Settlement (RTGS): It is the fastest mode of online fund or securities transfer. A person can transfer a minimum 2 lakhs per transaction.
- Immediate Payment Services (IMPS): It is an instant online transfer of funds between different banks, through mobile phones. The minimum amount a person can transfer using this service is Rs 1 and maximum amount is Rs 2 Lakhs. This service is available throughout the year 24×7, including bank holidays.
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