Friends.. Here are the important banking
terms & its definitions useful for all upcoming exams. This article has
been shared by our friend Varun Bansal. On behalf of all readers,
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1. SDR
(Special Drawing Rights): SDR are new form of International reserve assets,
created by the International Monetary Fund in 1967. The value of SDR is based
on the portfolio of widely used countries and they are maintained as accounting
entries and not as hard currency or physical assets like Gold.
2. NEFT
(National Electronic Fund Transfer): NEFT enables funds transfer from one
bank to another but works a bit differently than RTGS. NEFT is slower than
RTGS. The transfer is not direct and RBI acts as the service provider to
transfer the money from one account to another. You can transfer any amount
through NEFT, even a rupee. Minimum limit: No Minimum limit, Maximum Limit: No
maximum limit.
3. RTGS
(Real time gross settlement): RTGS system is funds transfer systems where
transfer of money or securities takes place from one bank to another on a
"real time" and on "gross" basis. Settlement in "real
time" means payment transaction is not subjected to any waiting period.
The transactions are settled as soon as they are processed. Minimum & Maximum
Limit of RTGS: 2 lakh and no upper limit.
4. CRAR(Capital
to Risk Weighted Assets Ratio) or CAR(Capital Adequacy Ratio): Capital to
risk weighted assets ratio is arrived at by dividing the capital of the bank
with aggregated risk weighted assets for credit risk, market risk and operational
risk.
5. Non
Performing Assets (NPA): An asset, including a leased asset, becomes non
performing when it ceases to generate income for the bank.The Duration of NPA
declaration is of 90 days.
6. Participatory
Notes : are derivative instruments, used by Foreign Institutional Investors
(FIIs) who are NOT registered with SEBI. These are mostly used by overseas HNIs
(High Net worth Individuals), hedge funds and other foreign institutions, allow
them to invest in Indian markets through registered Foreign Institutional
Investors (FIIs), while saving on time and costs associated with direct
registrations. Foreign institutions, allow them to invest in Indian markets
through registered Foreign Institutional Investors (FIIs), while saving on time
and costs associated with direct registrations.
7. IFSC:
IFSC code means Indian Financial System Code. RTGS and NEFT payment system
of Reserve Bank of India (RBI) use these codes. IFSC code consists of 11
Characters identified as under (Lets take an example of SBI, Madhapur
Hyderabad):- First 4 digits show the Identity of the bank. i.e. SBIN 5th digits
in default as ZERO (for future use) i.e. 0 Last 6 Characters display the Branch
Identity. i.e. 004187 So IFSC Code is SBIN004187
8. MICR:MICR
code means Magnetic Ink Character Recognition code which contains 9 digits,
like 380002006 appearing at the bottom of the cheque, following the cheque
number. Each Bank Branch has a unique MICR code. First 3 digits:-City PIN Code
+ Next 3 digits :Bank Code +Last 3 Digits-Branch Code
9. CTS
(CHEQUE TRUNCATION SYSTEM) is basically an online image-based cheque
clearing system where cheque images and Magnetic Ink Character Recognition
(MICR) data are captured at the collecting bank branch and transmitted
electronically. Truncation means, stopping the flow of the physical cheques
issued by a drawer to the drawee branch.
10. Core
Banking Solution (CBS) :-Core Banking Solution (CBS) is networking of
branches, which enables Customers to operate their accounts, and avail banking
services from any branch of the Bank on CBS network, regardless of where he
maintains his account.
11. Commercial
Paper: Commercial Paper (CP) is an unsecured money market instrument issued
in the form of a promissory note. Corporate, primary dealers (PDs) and the All
India Financial Institutions (FIs) are eligible to issue CP. Maturity period:
between a minimum of 7 days and a maximum of up to one year from the date of
issue. CP can be issued in denominations of Rs.5 lakh or multiples thereof.
Only a scheduled bank can act as an IPA (Issuing and Paying Agent) for issuance
of CP.
12. Treasury
Bills: Treasury bills (T bills) offer short term investment opportunities.
They are thus useful in managing short term liquidity. At present, the
Government of India issues three types of treasury bills through auctions,
namely, 91 day, 182 day and 364 day. There are no treasury bills issued by
State Governments. Treasury bills are available for a minimum amount of
Rs.25,000 and in multiples of Rs. 25,000. Treasury bills are issued at a
discount and are redeemed at par.
13. Certificates
of Deposit (CD): Certificate of Deposit (CD) is a negotiable money market
instrument and issued in dematerialised form or as a Usance Promissory Note
against funds deposited at a bank or other eligible financial institution for a
specified time period.
Note: CDs can be issued by (i) scheduled
commercial banks{excluding Regional Rural Banks and Local Area Banks}; and (ii)
select All ]India Financial Institutions (FIs) that have been permitted by RBI
Minimum amount of a CD should be Rs.1 lakh, and in multiples of Rs. 1 lakh
thereafter. The maturity period of CDs issued by banks should not be less than
7 days and not more than one year, from the date of issue.
14. Bank
Rate: The interest rate at which at central bank lends money to commercial
banks. Often these loans are very short in duration. Managing the bank rate is
a preferred method by which central banks can regulate the level of economic
activity. Lower bank rates can help to expand the economy, when unemployment is
high, by lowering the cost of funds for borrowers. Conversely, higher bank
rates help to reign in the economy, when inflation is higher than desired.
15. Repo
Rate: Whenever the banks have any shortage of funds they can borrow it form
RBI. Repo rate is the rate at which commercial banks borrows rupees from RBI. A
reduction in the repo rate will help banks to get money at cheaper rate. When
the repo rate increases borrowing form RBI becomes more expensive.
16. Reverse
Repo Rate: Reverse Repo rate is the rate at which RBI borrows money from
commercial banks. Banks are always happy to lend money to RBI since their money
is in the safe hands with a good interest. An increase in reverse repo rate can
cause the banks to transfer more funds to RBI due to this attractive interest
rates. One factor which encourages an organisation to enter into reverse repo
is that it earns some extra income on its otherwise idle cash.
17. CRR
(Cash Reverse Ratio): CRR is the amount of funds that the banks have to
keep with RBI. If RBI increases CRR, the available amount with the banks comes
down. RBI is using this method (increase of CRR), to drain out the excessive
money from the banks.
18. SLR
(Statutory Liquidity Ratio): SLR is the amount a commercial banks needs to
maintain in the form of cash, or gold, or govt. approved securities (Bonds)
before providing credit to its customers. SLR rate is determined and maintained
by RBI in order to control the expansion of the bank credit.
19. Marginal
Standing Facility (MSF): MSF rate is the rate at which banks borrow funds
overnight from the Reserve Bank of India against approved government
securities.
