Important Banking Terms and Terminologies You Must know
Banking terms and concepts have always been part of our economics book. But they are hard to remember and tricky to apply. We all know that monetary policy revolves around repo rates, bank rates, and multiple other rates. This can lead to confusion between the concepts. This article includes important banking terms for competitive exams. They are defined in simple language to make you understand better. They are not only important for banking exams but are asked in other general ability papers as well.
1. Repo Rate
In India, it is the rate at which the Reserve bank of India lends money to commercial banks in need, with collateral. This situation usually arrives at the time of inflation. 40% is the current repo rate in India. Bank rate is similar to this but doesn’t require collateral to provide loans. The current bank rate is 4.25%.
2. Reverse Repo Rate
In India, it is the rate at which the reserve bank of India borrows funds from commercial banks. It is usually done to control the money supply in the market. The current reverse repo rate is 3.35%.
3. Statutory Liquidity Ratio
The Banks of India have to maintain a minimum percentage of cash, gold, and other securities, before lending loans to customers. This is called the Statutory Liquidity Ratio. This exists to control credit expansion in the country. The SLR rate is 18.50%.
4. Cash Reserve Ratio
In India, all the banks have to maintain a certain amount of funds with the Reserve Bank of India. This is called the Cash Reserve Ratio. It is usually increased when the RBI wants to control liquidity in the market. The current CRR rate is 3%.
5. Retail Banking
It is a service offered by many banks across the country. This allows every consumer to manage their accounts, enjoy access to their credits, and secure their money conveniently. This is also called consumer banking.
It is a cryptocurrency that can be sent from one person to another without any intermediaries. It is not administered by the RBI.
7. Call Money
It is a short term loan with usually higher interest. The maturity period of this is between 1 to 14 days. The lender can ask for the money anytime they want. If it is repaid within a day then it becomes call money. And if it is repaid after more than a day then it becomes notice money.
8. Capital Market / Money Market
The capital market deals with long term debts. It raises capital shares by dealing in shares, bonds, and other long-term investments. It is possible in primary and in secondary markets. The money market, on the other hand, deals with short term funds. The maturity period is usually less than 365 days.
9. Scheduled Bank
Reserve Bank of India Act, 1934 led to the formation of the Reserve Bank of India. This act has certain sections. The Second Schedule of the Act has banks listed in it called the Scheduled Banks. The banks not listed there are Non-Scheduled Banks.
10. Non Performing Assets
For banks in India, it is any loan that is overdue for more than 90 – 180 days. The interest or payment is missed and the loan becomes the default. The asset kept with the bank is not producing income anymore making it a non-performing asset.
11. Money Inflation
It refers to an increase in the money supply in the market reducing the purchasing power of the consumer. In easy words, the value of money drops, and fewer goods are consumed per unit currency. Deflation on the other hand refers to a decrease in the money supply that increases the purchasing power of the consumer.
12. Negative Interest Rate
It is a policy that allows central banks to charge interest to commercial banks for depositing money with the central bank. This, in turn, allows commercial banks to charge interest for cash deposits by customers rather than paying interest. This situation usually occurs at the time of deflation.
13. Green Banking
It is an idea to promote environmentally friendly practices to reduce carbon footprint by banking activities. It aims to achieve banking and environmental sustainability.
14. Blockchain System
It is a system to record information in a difficult way to prevent hacking and cheating of the system. It uses a digital ledger that is distributed across a number of networks. As a result, the data is available in sections across multiple locations making it difficult to hack.
15. Balloon Mortgage
It is a type of loan that allows borrowers to make low payments in the initial period, but repayment of the balance amount in a lump sum at maturity. The last payment becomes Balloon payment because of a higher amount.
It is an act to steal the customer’s personal information. It is done by using a magnetic stripe of the card. This is illegal and comes under cybercrime.
17. Money Laundering
It is an illegal financial process that includes criminals concealing the origin of money. It is usually to cover up the black money generated by illegal activities.
It is a paper that instructs the bank to pay a specific amount from one account to another account to whom the cheque is issued.
19. Direct Credit
It is an electronic transfer of funds from the payer’s account to the payee’s account. Direct Debit, on the other hand, is an instruction to your bank that allows a third party to make a transaction from your account. It is usually for paying bills.
20. Cash Credit
It is a type of loan which is short term in nature and fixed in the limit. It is usually extended by a bank to a company to meet its working capital requirements. Overdraft, on the other hand, allows extension of loans for personal use as well even with the low account balance.
21. Bill of Exchange
It is a financial instrument that instructs the person to make a payment of a specified amount to the signatory of the note. They are usually a part of international trade.
22. Marginal Standing Facility
It is a scheme by the RBI that allows commercial banks to borrow money from the central bank overnight in emergencies like dry liquidity. But the interest rate is higher than the repo rate in this situation. The current IMF rate is 6.75%.
23. Minimum Reserve System of RBI
It is a system that makes it mandatory for the central bank to keep a minimum reserve of gold and foreign exchange. The current minimum reserve amount is Rs 200 crores for the RBI.
24. Core Banking Solutions
It is a software that allows customers to access their bank accounts from any of the member branch offices.
25. Unified Payment Interface
It is a system that allows real-time payments facilitating inter-bank transactions. It is monitored by the central bank and works instantly.
26. Micro ATMs
It’s a card swipe device directly connected to the main banking system. They are present at the locations where bank branches cannot reach.
27. Letter of Credit
It is a document by the bank that guarantees full payment by the buyer to the seller on time. In case the buyer fails, the bank covers the payment. It is an undertaking by the bank to the seller.
It is an agreement between banks and insurance companies. In this, the bank offers insurance benefits to its customers.
29. Banking Ombudsman
It is a judicial authority that allows customers to file complaints if they are not happy with banking services.
30. NOSTRO Account
It is an account that the bank has of foreign currency deposits with another bank of that country. It is to initiate foreign exchange and trade transactions.
31. VOSTRO Account
It is an account that a bank holds on behalf of another bank. The funds in this account are for foreign counterparts.
The Mumbai Interbank Offered Rate is the rate at which a bank offers a short term loan to other banks. The current MIBOR rate is 4.28%.
33. CASA Account
It is a combination of current and savings accounts. It offers features of both the accounts. CASA Account has a low-interest rate on the current account and above-average return on saving return.
34. RAFA Account
It is the ratio of deposits in Recurring Deposit Account Fixed Deposit Account of a bank.
35. DEMAT Account
It is an account that allows Indian citizens to deal with stocks and debentures listed in the stock market. Like normal accounts have money deposits, Demat accounts have stock deposits.
36. Legal Tender
It is a form of money that must be accepted ( by law ) as a payment of any monetary debt.
37. Currency Chest
It is a depository by the central bank of India. There are 4,075 currency chests in India. All the excess money of the country is kept here under custody.
It is a situation in which the person/company is unable to pay its debts on time.
After a person or company becomes insolvent, they can seek relief from some or all debts. This legal process is Bankruptcy.
It is the process of distributing the payments in smaller installments. And amortization of assets is allotting a price to an intangible asset.
41. Credit Crunch
It is a situation in which there is a sudden fall in the availability of loans from banks and other lenders.
42. External Commercial Borrowings
It is a transaction in which a non-resident of the country lends foreign currency loan to an Indian.
43. Small Finance Banks
It is a segment of banks to provide financial security to small businesses and industries.
44. Interest Rate Swap
It is a contract to exchange all future interest rates of a loan between two entities.
45. Public Credit Registry (PCR)
It is a public document that has financial information about all borrowers in India.
46. Off-Balance Sheet Exposure
This sheet includes all activities that do not involve lending or borrowing but generate fee income for banks.
47. Priority Sector Lending
According to this, all the banks have to offer a specified proportion to certain sectors like micro and small industries, agriculture, etc.
48. Credit Rating
It is a system to recognize an individual’s ability to pay back the loan according to his past dealings and transactions.
49. Prepaid Payment Instrument (PPI)
It is a method that allows the purchase of goods and services with the value stored in this instrument. Smart cards, mobile wallets, etc. come under this instrument only.
50. National Electronic Fund Transfer
It is a payment system that allows the transfer of funds from one bank account to another account or another branch. It involves one to one fund transfer in a specific time slot.
51. Real-Time Gross Settlement
It is a process that allows instant transfer of funds in real-time. This means that the transaction is on a gross basis.
52. Immediate Payment Services
It allows instant interbank payment through electronic fund transfer using mobiles or laptops.
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The above-given terms are common in the general awareness section of competitive exams like UPSC, SSC, RRB, etc. We have tried to cover as many terms as possible. If you are an aspirant then this article is for you. Every year questions are there from this content. This will help students score well in the banking and accounts section. Read it thoroughly for the exams and to understand the banking system better.