2.
SOME COMMON BANKING TERMS
BANK - A financial institution that is licensed to deal with
money and its substitutes by accepting time and demand
deposits, making loans, and investing in securities. A bank
generates profits from the difference in the interest rates
charged and paid.
BANKING SYSTEM - A banking system is a group or
network of institutions that provide financial services for
us. These institutions are responsible for operating a
payment system, providing loans, taking deposits, and
helping with investments.
INDIGENOUS BANKS - Indigenous bankers are private
firms or individuals who operate as banks and as such both
receive deposits and give loans.
3. CENTRAL BANK - Autonomous or semi-autonomous
organization entrusted by a government to, administer
certain key monetary functions, such as to (1) issue, manage,
and preserve value of the country's currency, (2) regulate the
amount of money supply, (3) supervise the operations of
commercial banks, (4) and serve as a banker's bank and the
lender of last resort. In India, Reserve Bank of India is Central
Bank.
COMMERCIAL BANKS – These are the financial institutions
that provide various financial services, such as accepting
deposits and issuing loans to the public as a whole.
INVESTMENT BANKS – These banks expedite the purchase
and sales of bonds, stocks and other investments and aid
companies in making the Initial Public Offerings. Services
provided by them are: Underwriting, Asset Management,
Advisory services etc.
4. DEVELOPMENT BANKS – These are the specialized
financial institutions concerned with providing all the types
of financial assistance (medium as well as long term) to
business units, underwriting, investments and guarantee
operations and promotional activities for economic
development in general and industrial development in
particular.
REGIONAL RURAL BANKS – These are the financial
institutions which ensure adequate credit for agriculture
and other rural sectors.
COOPERATIVE BANKS – These banks involve
autonomous association of persons united voluntarily to
meet their common economic, social and cultural needs
through a jointly owned and democratically controlled
enterprise functioning on “No Profit, No Loss” basis.
5. SCHEDULED BANKS – These are the banks which have
been included in the Second Schedule of Reserve Bank of
India Act, 1934.
NON– SCHEDULED BANKS – These are the banks which
have not been included in the Second Schedule of Reserve
Bank of India Act, 1934.
PUBLIC SECTOR BANKS – These are the banks where
majority of stake in the bank is held by government.
PRIVATE SECTOR BANKS - These are the banks where
majority of stake in the bank is held by private entities.
FOREIGN BANK - A Foreign bank is a bank with head
office outside the country in which it is located.
6. DOMESTIC BANK – Any bank established within the
domestic boundaries of the country and operating there is a
Domestic Bank.
RETAIL BANKING – It is the typical mass-market banking
in which individual customers use local branches of larger
commercial banks. It is also known as Consumer banking
as it focuses on every individual customer.
WHOLESALE BANKING - Wholesale banking focuses on
providing for financial needs of industry and institutional
clients.
ONLINE BANKING - The accessing of bank information,
accounts and transactions with the help of a computer
through the financial institution's website on the Internet is
called online banking. It is also called Internet banking or e-
banking.
7. RELATIONSHIP BANKING - Relationship banking is an
attempt to advance the sales culture in bank marketing
beyond order taking to a more pro-active form of direct
selling instead of selling financial services. One at a Time,
an account officer attempts to gain an understanding of the
consumer's needs and offer services that fulfill those needs.
UNIVERSAL BANKING - Banking that includes
investment services in addition to services related to
savings and loans.
VIRTUAL BANKING - A virtual bank is a bank with a very
small or nonexistent branch network. It offers financial
services by: Telephone Banking, Online Banking,
Automated Teller Machines, Mail Banking, Mobile
Banking which leads to cost reduction and in turn offering
high rate of interest.
8. UNIT BANKING – It is the limited way of banking where
banks operate only from a single branch taking care of local
customers.
BRANCH BANKING – It is the most common type of
banking where bank is engaged in banking activities away
from bank’s home office.
MIXED BANKING – When the banks undertake activities
of investment as well as commercial banking together, it is
called Mixed Banking.
CHAIN BANKING – In this system of banking, a group of
minimum 3 banks is held together by group of persons for
effective banking activities while the banks function
independently without the hindrance of a holding
company.
9. OFF SHORE BANK - An offshore bank is a bank located
outside the country of residence of the depositor, typically
in a low tax jurisdiction (or tax haven) that provides
financial and legal advantages. These advantages
typically include some or all of the following - Strong
Privacy, Less Restrictive Legal Regulation, Low or No
Taxation, Easy access to deposits, Protection against Local
Political or Financial Instability.
ISLAMIC BANKING - Islamic banking refers to a system of
banking or banking activity that is consistent with Islamic
law (SHARIA) principles and guided by Islamic economics.
Particular Islamic law Prohibits usury, the Collection and
payment of interest, Islamic law prohibits investing in
businesses' that are considered unlawful.
10. NARROW BANKING – It involves the mobilizing the large
part of deposits in the Risk Free Assets such as Government
Securities and matching the maturity of assets with the
liabilities in order to reduce the Asset Liability Mismatch.
CORE BANKING SOLUTION - Core or centralized
banking solution is a heart of banking system. This is a
process by which a bank has interconnect their maximum
branches through wide area network and only this system
provide a facility of any branch or any time banking.
FINANCIAL INCLUSION - It is a delivery of banking
services at an affordable cost to the vast section of
disadvantage or low income group in order to connect each
and every individual to the financial network.
11. FIXED DEPOSIT ACCOUNT – In this type of account, a
particular sum of money is deposited in a bank for specific
period of time usually for long period of time. A higher rate
of interest is paid on it and premature withdrawal of the
amount attracts a penalty.
RECURRING DEPOSIT ACCOUNT – This account is
opened by those who want to save certain amount of
money regularly for a certain period of time and earn a
higher rate of interest.
CURRENT ACCOUNT – It is mainly for business persons,
firms, companies, public enterprises etc. and are never used
for the purpose of investment or savings. There is no limit
on the number or amount of the transactions in a day. No
interest is paid on the amount deposited while bank
charges certain service charges.
12. SAVING ACCOUNT - Saving account are made for the
household saving purpose and interest rate varies from bank
to bank which is lower than the rate in Fixed Deposit
Account.
DEMAND DEPOSITS - The money which is kept in our
saving accounts is like a medium of exchange and this is
called Demand Deposits. It is also known as CASA (Current
Account and Saving Account)
TIME DEPOSITS – It is an interest bearing bank deposit
account that has a specified date of maturity.
CHEQUE - Cheque is a negotiable instrument instructing a
bank to pay a specific amount from a specific account held in
the maker/depositor name with that Bank.
13. CASH CREDIT - Cash Credit is a type of short-term loan
facility in which the withdrawal of money by the company is
not restricted to the amount the borrower holds in his cash
credit account but up to a predefined limit. The bank charges
interest on the withdrawal amount not on the limit
sanctioned.
OVERDRAFT - Bank Overdraft is a facility provided by the
bank to its customers withdraw money more than the
amount he holds in his account. The overdraft limit
sanctioned is predefined by the bank depending upon the
securities pledged or repayment capacity of the Account
holder. Interest is charged on the amount utilized not on the
limit sanctioned.
DISCOUNITNG OF BILLS – It is an arrangement where
seller gets cashing or trading a bill of exchange by bank at
less than its par value and before its maturity date.
14. CREDIT CREATION – It is the process of multiple
expansion of bank’s demand deposits. Banks while granting
loans, do not provide cash to the borrower instead they
open an account in their bank, thus automatically creating
deposits and hence Credit Creation.
MONETARY POLICY – The central policy to control and
regulate the supply of money or credit in the economy is
called Monetary Policy.
INFLATION – The continuous rise in general price level is
called Inflation.
DEFLATION – The continuous fall in general price level is
called Deflation.
15. BANK RATE - Bank Rate is the rate of interest at which
RBI provide loan to the Scheduled Commercial banks for
productive purposes & for long term.
CASH RESERVE RATIO - CRR is the ratio of banks total
deposits for which they are bound to keep with the RBI. It
could be between minimum 3% to maximum 15%. CRR is
the most effective measure to check inflation; if CRR
increases bank are bound to keep more money with the
RBI & the liquidity in market decreases & the value of
money increases & inflation come down.
STATUTORY LIQUIDITY RATIO - SLR is the ratio of
banks total deposits for which banks are required to keep
with themselves. It might be in form of cash, gold,
government securities and deposits in other banks as
current account.
16. LIQUIDITY ADJUSTMENT FACILITY – Liquidity
Adjustment Facility (LAF) is a monetary policy tool which
allows banks to borrow money through repurchase
agreements. LAF is used to aid banks in adjusting the day to
day mismatches in liquidity. LAF consists of Repo and Reverse
Repo Operations.
MARGINAL STANDING FACILITY – Marginal Standing
Facility is the rate at which scheduled banks could borrow
funds overnight from Reserve Bank of India (RBI) against
government securities.
REPO RATE – Repo or repurchase option is a collaterized
lending i.e. banks borrow money from RBI to meet short term
needs by selling securities to RBI with an agreement to
repurchase the same at predetermined rate and date. The rate
charged by RBI for this transaction is called the Repo rate.
Repo operations therefore inject liquidity into the system.
17. REVERSE REPO RATE - Reverse repo operation is when
RBI borrows money from banks by lending securities. The
interest rate paid by RBI in this case is called the Reverse
Repo Rate. Reverse repo operation, therefore absorbs the
liquidity in the system.
PRIME LENDING RATE (PLR) - A Prime Rate or Prime
Lending Rate is an interest rate used by banks, usually the
interest rate at which banks lend to favored customers—
i.e., those with good credit.
KNOW YOUR CUSTOMER NORMS - KYC is a term
commonly used for customer identification process or
these are the guidelines issued by the RBI and SEBI for
financial institutions. The intention behind the KYC is to
check the money laundering.
18. MICRO FINANCE - Micro Finance aims at alleviation
of poverty and empowerment of weaker sections in
India. In micro finance, very small amounts are given as
credit to poor in rural, semi-urban and urban areas to
enable them to raise their income levels and improve
living standards.
PRIORITY SECTOR LENDING – Lending by banks to
certain sectors which are identified as “Priority Sectors”
by the Central Bank is called Priority Sector Lending.
Priority Sectors include Agriculture, MSMEs, Renewable
Energy, Export Credit etc.
NON PERFORMING ASSETS – A loan is classified as
Non Performing Asset when payment of interest or
principal is due for 90 or more than 90 days.
19. CAPITAL ADEQUACY RATIO (CAR) – It is a measure
of a bank’s capital. Also known by the name of Capital to
Risk Weighted Assets Ratio (CRAR), it is used to protect
depositors and efficiency of financial systems around the
world.
