List of Bank Terminologies with their Meaning & Definitions – Asked in Bank PO Interview – Probationary Officer Exam consists of section General Awareness which includes the latest news updates and banking sector knowledge. A part of it consists of the current prevailing rates and various terms used in banking industry.
Common Banking Terms / Important Rates
Bank Rate: Normally RBI lends to commercial banks through its discount window to help the banks meet depositor’s demands and reserve requirements. The interest rate the RBI charges the banks for this purpose is called bank rate. The current bank rate is 9%.
Cash Reserve Ratio: All commercial bank have to keep certain minimum cash reserves with RBI to the needs of securing the monetary stability in the country. The Reserve Bank could prescribe CRR for scheduled banks between 3% and 20% as per the demand. The current rate is 4%.
Statutory Liquidity Ratio (SLR): Apart from the CRR, banks are required to maintain liquid assets in the form of gold, cash and approved securities. Higher liquidity ratio forces commercial banks to maintain a larger proportion of their resources in liquid form and thus reduces their capacity to grant loans and advances, thus it is an anti-inflationary impact. The current rate is 23%.
Repo Rate or Repurchase Rate: Repo Rate is the rate at which the RBI lends shot-term money to the banks against securities. When the repo rate increases borrowing from RBI becomes more expensive. Therefore, we can say that in case, RBI wants to make it more expensive for the banks to borrow money, it increases the repo rate; similarly, if it wants to make it cheaper for banks to borrow money, it reduces the repo rate. The current rate is 8%.
Reverse Repo Rate: Reverse Repo Rate is the rate at which banks park their short-term excess liquidity with the RBI. The banks use this tool when they feel that they are stuck with excess funds and are not able to invest anywhere for reasonable returns. An increase in the reverse repo rate means that the RBI is ready to borrow money from the banks at a higher rate of interest. As a result, banks would prefer to keep more and more surplus funds with RBI. The current rate is 7%.
Indian Settlement Systems: India has two main electronic funds settlement systems for one to one transactions: the real time gross settlement (RTGS) and the national electronic fund transfer (NEFT) systems.
Real Time Gross Settlement: The term ‘RTGS’ stands for real time gross settlement, and Reserve Bank of India maintains this payment network. RTGS system is a funds transfer mechanism where transfer of money takes place from one bank to another on a ‘real time’ and on ‘gross’ basis. This is the fastest possible money transfer system through the banking channel.
National Electronic Fund Transfer: The national electronic fund transfer (NEFT) system is a nationwide system that facilitates individuals, firms and corporate to electronically transfer funds from any bank branch to any individual, firm or corporate having an account with any other bank branch in the country. IFSC or Indian financial system code is required to perform a transaction using NEFT or RTGS and can be found out on RBI website.
Automated Teller Machine or Automatic Teller Machine (ATM), is a computerized device that provides customers of a financial institution with access to financial transactions in a public space without the need for a cashier, clerk or bank teller.
Demat Account: An account required for trading in listed stocks or debentures in electronic form rather than paper, as required for investors by the Securities and Exchange Board of India (SEBI).
Foreign Exchange Market: The foreign exchange market (forex/ currency market) is a form of exchange for the global decentralized trading of international currencies. Financial centers around the world function as anchors of trading between a wide range of different types of buyers and sellers around the clock, with the exception of weekends.
Cash Credit: Cash credit is an arrangement whereby the bank allows the borrower to draw amount up to a specified limit. The amount is credited to the account of the customer. Interest is charged on the amount actually withdrawn. Cash Credit is granted as per terms and conditions agreed with the customers.
Overdraft: Overdraft is also a credit facility granted by bank to the customer who has a current account with the bank is allowed to withdraw more than the amount of credit balance in his account. It is a temporary arrangement.
Discounting of Bills: Banks provide short-term finance by discounting bill, that is, making payment of the amount before the due date of the bills after deducting a certain rate of discount. The party gets the funds without waiting for the date of maturity of the bills. In case any bill is dishonoured on the due date, the bank can recover the amount from the customer.
Net Banking or Online Banking: With the extensive use of computer and Internet, banks have now started transactions over Internet. The customer having an account in the bank can log into the bank’s website and access his bank account. He can make payments for bills; give instructions for money transfers, fixed deposits and collection of bill, etc.
Phone Banking: In case of phone banking, a customer of the bank having an account can get information of his account; make banking transactions like, fixed deposits, money transfers, demand draft, collection and payment of bills, etc. by using telephone.
Acceleration: A standard clause in a mortgage instrument permitting the lender to demand full payment of principal from the borrower upon default of the obligation.
Bill: A Bill in the banking parlance means a bill of exchange drawn by a seller on the buyer whenever he sells goods or services on “payment later” basis. Such a transaction is also referred to as a credit transaction. The bill is routed through the bank for collection of amount from the buyer.
Letter of Credit: One of the terms of supply is that buyer will establish a letter of credit in favour of the seller through his bank. The seller should furnish proof of dispatch of goods or services and submit all the documents required under the L/C. Then, the buyer’s bank will pay the amount of bill drawn by the seller on the buyer under this agreement. International letter of credit is by and large, “irrevocable”.
Remittance: A facility, by which its customers at one place makes funds available to the bank and the bank in exchange, makes the funds available to the customer or any other specified party at the required place, within the same country or abroad. Remittance can be in the form of Demand Draft (DD), Mail Transfer (MT), Telegraphic Transfer (TT), Electronic Mail transfer (EMT) through computer networking (or satellite channel), International Money Order (IMO) etc.
MICR: Magnetic Ink Character Recognition is a 9 digit number printed on banking instruments such as a cheque or a demand draft using a special type of ink made of magnetic material. The first 3 digits denote the city, the 4th to 6th digits denote the bank, while the last 3 digits denote the branch number. The code can be read by a machine, minimising the chances of error in clearing of cheques, thereby making funds transfer faster.
Payable At Par or MCC: Multi City Cheques (MCC) or Payable at Par (PAP) can be encashed anywhere in India irrespective of the city they were issued in. They are treated as local clearing cheques across India, the amount is credited in the account the same day and there is no inter-city collection charges associated with a normal cheques being encashed in another city.
Fixed Deposits: FD’s are deposits that are repayable on fixed maturity date along with the principal and agreed interest rate for the period. Banks pay higher interest rates on FDs than the savings bank account.
Recurring Deposits: These are also called cumulative deposits and in recurring deposit accounts, a certain amounts of savings are required to be compulsorily deposited at specific intervals for a specified period.
Credit Rating: It is the rating which an individual (or company) gets from the credit industry depending on the individual’s credit history. The details of which are available from specialist organisations like CRISIL in India.
Bill of Exchange: An order written by the seller of goods instructing the purchaser to pay the seller (or bearer of the bill) a specified amount on a specified future date.
Dividends: Company earnings that may be paid out to shareholders according to the number of shares or stocks they hold. Dividends can be earned on stocks as also units of mutual funds.
Inflation: A percentage rate of change in the price level.
Non Performing Assets (NPA): When due payments in credit facilities remain overdue above specified period, then such credit facilities are classified as NPA.
Reconciliation: Checking all bank account papers to make sure that the bank’s records and customer’s records ar in sync.
Cash Flow: The cash flow is often defined as the liquid balance of cash as well as the bank balance that is available with an organization or a corporation. In some cases, the cash flow is also defined as the net amount of cash that is generated by the net income that has been generated by an organization or corporation in a particular time period.
Endorsement: Endorsement is basically the handing over of rights of a financial/legal document or a negotiable instrument to another person. The person who hands over his/her rights is known as the endorser, and the person to whom the rights have been transferred is known as the endorsee.
Government Bonds: A government bond, which is also known as a government security, is basically any security that is held with the government and has the highest possible rate of interest.
Lock-in Period: A guarantee given by the lender that there will be no change in the quoted mortgage rates for a specified period of time, which is called the lock-in period.
Mortgage: A mortgage is a legal agreement between the lender and borrower where real estate property is used as collateral for the loan, in order to secure the payment of the debt. According to the mortgage agreement, the lender of the loan is authorized to confiscate the property, the moment the borrower stops paying the installments.
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