Basic Banking Terms and Definitions
what are important banking terms
what is Bank
Bank is a financial entity that accept deposits from the public and then gives that money as a loan and advance to those who require funds.The bank typically earn money by taking money deposits at lower cost and then lending the money at higher rates.
what are Bank fixed Deposits
Bank fixed Deposits deposits that are collected from investor by bank for a specific time period are known as bank fixed deposits these are the main forms of raising funds for the bank .
what re Co operative Bank : These are the bank that are operating in the economy under cooperative model of ownership .It is a situation where number of people get together form a cooperative and then run the bank jointly.
The ability of a fixed deposit in India to generate interest, which is then reinvested in order to generate further earnings is known as compound interest.
what do mean by KYC know your customer
KYC stands for know your customer is a form which will let the bank to know its customer address and his financial and occupational status.
An ETF is an Exchange Traded Fund, which means that it is traded on the stock exchange. A Through a Gold ETF, you can purchase a large amount of gold in the form of shares, maintaining the physical metal in storage. Gold ETF is a way of removing logistical hassles related to purchasing gold physically, such as insurance, storage, moving, and reselling.
A gold exchange-traded fund (or GETF) is an exchange-traded fund (ETF) that aims to track the price of gold. Gold ETFs are units representing physical gold which may be in paper or dematerialized form. These units are traded on the Exchange like a single stock of any company.
Letter of Credit
Letter of Credit is a payment terms used for international sales transactions.It is a documentary evidence which allow importer /buyer to offer secured terms of payment to exporter in which a bank get involved.
it is a document of bank grantee that the seller will received the payment in full as long as certain delivery condition have been met.In the process if the buyer is unable to met the payment then the bank will make the remaining payment.
it genrally used in international transaction where the seller and buyer does not know each other to maintain the trust this documentation is applied.
A regular payment made out of a current account which is of a set account and is originated by the account holder.
A standing order (or a standing instruction) is an instruction a bank account holder (“the payer”) gives to his or her bank to pay a set amount at regular intervals to another’s (“the payee’s”) account. The instruction is sometimes known as a banker’s order.
who is Guarantor
Guarantor A guarantor is a person who guarantees payment by another. A guarantor becomes a co-endorser and assumes liability in event of default.Guarantor A guarantor is a person who guarantees payment by another. A guarantor becomes a co-endorser and assumes liability in event of default.
The possible tendency for government spending on goods and services to put upward pressure on interest rates, thereby discouraging private investment spending.
is a situation where personal consumption of goods and services and investments by business are reduced because of increases in government spending and deficit financing sucking up available financial resources and raising interest rates.
Multi Option Deposit scheme:-
Multi Option Deposit scheme is a term deposit which is not fixed at all and comes with a unique break-up facility which provides full liquidity as well as benefit of higher rate of interest, through the savings bank account. One can also keep that deposit intact by availing on overdraft facility, to meet occasional temporary funds requirements.
Banks provide free ATM cum Debit card to its customers who have deposit account with them. This card provides online access to savings or current account. They can have the access to the widest network of ATMs across the country to withdraw cash, enquire about the account balance etc. Banks are also having bilateral sharing arrangement with other banks under this scheme
Banks have come forward to offer Demat Services to its customer. Demat account, the abbreviation for dematerialized account is used to avoid holding physical shares: The shares are bought and sold through a stock broker.
Transaction at the convenience of customers, saving times and cost through computers is popularly known as Online banking. It is also known as E-Banking or Net Banking or Internet Banking. It is done through a computer with internet facilities. Customers can monitor and control their through Internet Banking. They can check account balance view their account, get summary statement, make bill payments and utility payments, request for cheque book, drafts, Bankers cheques, stop cheque payments, transfer funds, request for third party transfers, invest and renew deposits, issue standing instruction, register mobile number for SMS alerts and many more attractive features user-id and password are given by the banks to the customer for operation of account after they successfully register with the bank.
NRI Banking :-
Banks allow NRI’s to open an NRI account when they complete the account opening formalities. A customer for this purchase a form has to be filled up in which the information sought the bank is provided. They can have a NRI Saving Bank Account, Current Account, Fixed Deposits in Indian Rupees, Fixed Deposits in foreign currency, NRO account (Rupee account for crediting income in India)
Current accounts are cheque operated accounts maintained for mainly business purpose. Unlike savings bank accounts no limits are fixed by banks on the number of transaction permitted in the account Banks generally insist on a higher minimum balance to be maintained in current account. Considering the large number of transactions in the account and volatile nature of balances maintained overnight banks generally levy certain service charges for operating a current account. In terms of RBI directive banks are not allowed to pay any interest on the balances maintained in current.
It is opened by the customer who have higher number of regular transaction with the bank.It include deposits ,withdrawal and contra entries.
Time deposits are deposits accepted by banks for a specified period of time. In terms of RBI directives the minimum period for which term deposits can be accepted is 15 days. The banks generally do not accept deposit for period longer than 10 years. Banks pay interest on term deposits based on the periods of deposits and normally pay higher interest for longer term deposits changes made in interest rates from time to time do not alter the interest paid on the existing deposits. Banks are allowed to levy a penalty for premature encashment of deposits at their discretion. Bank allow loans against the fixed deposits on demand margin retained over the deposit outstanding and interest
rate charged there on are decided by to bank and may vary from bank to bank.
there on are decided by to bank and may vary from bank to bank.
Capital Adequacy Ratio :-
Capital adequacy ratio measures the amount of a bank’s capital expressed as a percentage of its credit exposure. Globally, the capital adequacy ratio has been developed to ensure banks can absorb a reasonable level of losses before becoming insolvent. Indian banks are expected to maintain a minimum capital adequacy ratio of 9 per cent (Rs 9 as capital for every Rs 100 in loan or asset) Applying minimum capital adequacy ratios serves to protect depositors and promote the stability and efficiency of the financial system by reducing the likelihood of banks be coming insolvent.
Regular Savings Account:-
A Form of deposit account with no legal limits or requirements as to amount duration or times of addition or withdrawals.
The terms “economic miracle”, ” economic boom” ,” tiger economy” or simply “miracle” have come to refer to great periods of change, particularly periods of dramatic economic growth, in the recent histories of a number of countries.
Fixed income :
It refers to any type of investment under which the borrower/issuer is obliged to make payments of a fixed amount on a fixed schedule: for example, if the borrower has to pay interest at a fixed rate once a year, and to repay the principal amount on maturity.
Premium Financing :
Premium Financing involves the lending of funds to a person or company to cover the cost of an insurance premium. Premium finance loans are often provided by third party finance entity known as a “Premium Financing Company”; however insurance companies and brokerages occasionally provide premium financing services
Net present value:-
In finance, the net present value (NPV) or net present worth (NPW) of a time series of cash flows, both incoming and outgoing, is defined as the sum of the present values (PVs) of the individual cash flows of the same entity.
are short term (up to one year) borrowing instruments of the union government. It is a promise by the Government to pay a stated sum after expiry of the stated period from the date of issue (14/91/182/364 days i.e. less than one year). They are issued at a discount to the face value, and on maturity the face value is paid to the holder. The rate of discount and the corresponding issue price are determined at each auction.
Commercial paper is an unsecured promissory note with a fixed maturity of 1 to 364 days. Commercial paper is a money-market security issued (sold) by large corporations to get money to meet short term debt obligations (for example, payroll), and is only backed by an issuing bank or corporation’s promise to pay the face amount on the maturity date specified on the note.
Inter-Bank Term Money:-
Inter-bank market for deposits of maturity beyond 14 days is referred to as the term money market. The entry restrictions are the same as those for Call/Notice Money except that, as per existing regulations, the specified entities are not allowed to lend beyond 14 days.
A cheque is “cleared” when its account is debited or deducted from the payer’s account and credited or added to the payee’s account.
A cheque that a bank has refused to cash or pay because the account holder does not have sufficient funds to cover it in this account.
A cheque issued by a bank drawn on its own funds rather than on the funds its depositors.
Reverse Repo Rate :
This is exact opposite of Repo Rate. Reverse Repo rate is the rate at which commercial bank charge on there surplus funds with RBI.RBI used it tool when it feels there is too much money floating in the banking system.Banks are always happy to keep money in RBI since there money is in safe hand with goods interest rate. An increase in reverse repo rate can cause the bank to transfer more funds to RBI due to this.Reverse repo rate is the rate at which the central bank of a country (RBI in case of India) borrows money from commercial banks within the country.
Bouncing of a cheque
: Where an account does not have sufficient balance to honour the cheque issued by the customer , the cheque is returned by the bank with the reason “funds insufficient” or “Exceeds arrangement”.This is known as ‘Bouncing of a cheque’ .
ATMs are Automatic Teller Machines, which do the job of a teller in a bank through Computer Network. ATMs are located on the branch premises or off branch premises. ATMs are useful to dispense cash, receive cash, accept cheques, give balances in the accounts and also give mini-statements to the customers.
They are banks which are included in the second schedule of the Reserve Bank of India Act, 1934. These banks enjoy certain privileges such as free concessional remittance facilities and financial accommodation from the RBI. they also have certain obligations like minimum cash reserve ratio (CRR) to be kept with RBI.
Repro Rate : is the rate of interest which is levied on short term loans taken by commercial bank from RBI .Whenever bank have shortage of funds they can borrow it from RBI A reduction in the repo rate will help bank to get money at cheaper rate .When the repo rate increase borrowing from RBI gets more expensive.
Description :In the event of inflation central Bank increases repo rate as this act as disincentive for bank to borrow from the central bank this ultimately reduces the money supply in the economy and thus help in checking inflation.
Repo rate and reverse repo rate form a part of liquidity adjustment facility.
The interest rate at which the central bank (RBI) repurchased government securities from commercial banks The central Bank raises the repo rate when it wishes to reduce the money supply in the short term while it lowered the rate when it wishes to increase the money supply and stimulates the growth.
SLR Rate (Statutory Liquidity Rate )is the amount of commercial bank need to maintain in form of cash or gold or government approved securities bonds before providing credit to its customers.SLR is determined and maintain by RBI in order to control the expansion of Bank Credit .SLR is determined the as the percentage of total demand and time liabilities. A time liabilities are liabilities a commercial bank is liable to pay to its customer after specific time period. SLR is used to control inflation and proper growth. through SLR tuning the money supply in the system can be controlled efficiently
Bank Rates : bank Rates is the rate of interest which is levied on long term loans and advance taken by commercial bank from RBI .Changes in the bank rates are often used by central bank to control the money supply.
Outstanding Cheque : A cheque that has been written by a drawer and deducted on his or her record but has not reached the bank for payment and is not deducted from the bank balance by the time bank issue its statements.
Money Laundering : When a customer uses banking channels to cover up his suspicious and unlawful financial activities, it is called money laundering.
PRIME RATE is the interest rate that banks charge to their preferred customers. Changes in the prime rate influence changes in other rates; mortgage interest rates for example.