Indian Banking system & Related Terms - UPSC

GS-PAPER-3 Economics-Banking and associated terms

Rates

1. Base Rate – This is the minimum rate at which a bank can lend to its customers. It cannot lend below the base rate. All interest rates determined for various loans will use the base rate as the benchmark.
2. Fixed Rate – A fixed rate is when the rate of interest for a loan remains constant throughout the entire tenure.
3. Floating Rate – Opposite of fixed rate, a floating rate of interest are interest rates that change during the tenure of the loan. These interest rates change as per the changes of interest rates in the economy.
4. Cash Reserve Ratio (CRR) – RBI has mandated all banks to maintain a certain percentage of the total bank deposits in cash. This percentage with regard to the total deposits is called cash reserve ratio.
5. Statutory Liquidity Ratio (SLR) – The minimum reserve required by the bank to maintain in the form of gold is called statutory liquidity ratio.
6. Bank Rate – This is the rate of interest that the RBI levies on banks if they wish to borrow money.
7. 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.
8. 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%.
9. 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%.

10. Escrow Account- A financial instrument held by a third party on behalf of the other two parties in a transaction. The funds are held by the escrow service until it receives the appropriate written or oral instructions-or until obligations have been fulfilled. Securities, funds, and other assets can be held in escrow.
11. Linked Account – An account that is linked to your account for the purpose of fund transfer is called a linked account.
12. 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.
13. VOSTRO Account- It is an account that a bank holds on behalf of another bank. The funds in this account are for foreign counterparts.
14. 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.
15. RAFA Account- It is the ratio of deposits in Recurring Deposit Account Fixed Deposit Account of a bank.
16. 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.
17. Zero-balance Account- Usually, account holders are required to maintain a certain minimum or average balance in their account. However, banks at times offer accounts which do not have this minimum or average balance requirement. This is a zero-balance account.
18. NEFT (National Electronic Funds Transfer) – NEFT is an electronic means to transfer money from one bank to another or within the same branch. Depending on the bank, NEFT charges and the minimum amount that can be transferred may vary.
19. Credit History – Credit history is the past behavioural patterns of a customer with regard to loans. A credit bureau will collect the information of a customer and then translate it to a number between 300 and 900. This is known as your credit score and the higher the credit score, the better your chances are to avail a loan or a credit card.
20. Collateral – Any security provided to the bank in exchange for a loan is known as collateral. A collateral can be in the form of land, gold, etc. This is called a secured loan and is less risky than an unsecured loan for the lender. In case of secured loans, the lender may auction off the collateral if the borrower fails to pay off his/her loan.
21. MICR Code – This is a nine digit code found in the bottom right hand corner of a cheque leaf. This code varies from bank to bank and is an acronym for Magnetic Ink Character Recognition.
22. No-frills Account – This is a rudimentary savings account that requires no minimum balance to enjoy benefits like net banking, online fund transfer, etc.
23. Electronic Clearing Service – This is a technology used by banks wherein a certain amount of money is directly debited from your account on a specified date every month towards the payment of a loan, mutual fund account, etc.
24. RTGS – RTGS (Real Time gross Settlement) is a fund transfer technology used by banks for same bank or interbank fund transfer. Contrasting NEFT or RTGS, transferring funds with RTGS is instantaneous and more nominal with regard to the costs incurred.
25. 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.
26. 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
27. KYC – KYC (Know Your Customer) is a procedure that all banks undergo in order to establish the correct identity of a customer. This is to ensure that no fraudulent operations are taking place in the bank.
28. Routing Number – This is a number that can identify your bank based on the geographical location of the institution. Bigger banks may have several routing numbers while smaller ones have only one.
29. APR – Annual Percentage Rate (APR) is the yearly interest you earn by depositing your money your money into an account. This does not take into consideration the compound interest.
30. Liquidity – The ability to sell an asset in the market without affecting its price is called liquidity. Higher is the liquidity, higher is the saleability. Eg.,Gold
31. Monetary Policies – This refers to the rules and regulations that the Reserve Bank of India have put in place in order to standardize banking procedures in the nation.
32. Plastic Money – This is a reference to currency used by individuals other than hard cash. Mostly it is used to refer to debit and credit cards.
33. Capital Gain – This is a profit or gain attained by a bank by sale of investments or properties. Eg., If you sold your assets for more than you paid, you have a capital gain. If you sold your assets for less than you paid, you have a capital loss
34. Debtor – A debtor is an individual or organization that owes money to the bank or any other financial institution.
35. Bank Ombudsman – A bank ombudsman is the authority to look into complaints, if in case other modes of complaints haven’t worked out for the customer.
36. Micro Finance – Small loans provided to the poor in urban, rural and sub-urban parts of the country in order to help them raise their income level is known as micro financing.
37. Annuities- From a banking perspective, annuities are contracts. These contracts guarantee income or returns in exchange for a huge sum of money. This money is either deposited as a lump sum or with the help of periodic payments.
38. Automated Clearing House (ACH) - This is a nation-wide electronic clearinghouse that monitors and manages the process of cheque and fund clearance between banks. In simple words, when you deposit a cheque issued on a different bank into your bank account, the ACH manages the clearing process. Further, being electronic, it reduces manual work and distributes the credit and debit balances automatically.
39. Negotiable instrument : A cheque is a negotiable instrument. By definition, a Negotiable Instrument is a document that includes a promise to pay a certain amount of money to the intended beneficiary. A cheque instructs the bank to pay a certain amount of money from the issuer’s bank to the receiver of the cheque.
40. Debit Card- A debit card allows you to access the funds available in your account either from an ATM or a point of sale (PoS). The amount used by you is instantly debited from your account. Also, there is no credit available on a debit card.
41. Letter of Credit (Loc)- A bank issues a letter of credit on behalf of a buyer or an importer of goods. The Loc states the bank’s commitment to pay the seller or exporter a specific amount for the purchase of goods by the buyer.
42. Mortgage- It is a legal agreement between a lender and a borrower. Further, the property of the borrower is used as collateral for the loan.
43. Adjustable-Rate Mortgages (ARMS)- Also known as variable-rate mortgages. The initial interest rate is usually below that of conventional fixed-rate loans. The interest rate may change over the life of the loan as market conditions change.
44. Amortization- The process of reducing debt through regular installment payments of principal and interest that will result in the payoff of a loan at its maturity.
45. Overdraft- It is the amount of cheque above the balance in the account of the issuer. Further, some banks allow certain account holders to overdraft up to a certain limit.
46. Time Deposit- A time deposit is a type of a bank deposit. In this deposit, the investor cannot withdraw his funds before a fixed time elapses.
47. Wholesale Banking- Many banks offer banking services to corporate entities, large institutions, and even other financial institutions. This segment forms the Wholesale Banking segment of a bank.
48. Scheduled Bank- Reserve Bank of India Act, 1934 act regulates banks. Banks listed under Second Schedule of the Act are called the Scheduled Banks. The banks not listed there are Non-Scheduled Banks.
49. Non Performing Assets- It is any loan that is overdue for more than 90 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.
50. 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.
51. Deflation on the other hand refers to a decrease in the money supply that increases the purchasing power of the consumer.
52. 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.
53. 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.
54. 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.
55. 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.
56. 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.
57. Skimming- It is a type of Banking Fraud. Its 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.
58. 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.
59. 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.
60. 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.
61. 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.
62. Core Banking Solutions- It is a software that allows customers to access their bank accounts from any of the member branch offices.
63. 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
64. 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.
65. Automated Teller Machine (ATM)- A machine, activated by a magnetically encoded card or other medium, that can process a variety of banking transactions. These include accepting deposits and loan payments, providing withdrawals, and transferring funds between accounts.
66. 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.
67. 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.
68. Draft- A signed, written order by which one party (the drawer) instructs another party (the drawee) to pay a specified sum to a third party (the payee), at sight or at a specific date. Typical bank drafts are negotiable instruments and are similar in many ways to checks.
69. Demand Deposit- A deposit of funds that can be withdrawn without any advance notice.
70. Bancassurance- It is an agreement between banks and insurance companies. In this, the bank offers insurance benefits to its customers.
71. Banking Ombudsman- It is a judicial authority that allows customers to file complaints if they are not happy with banking services.
72. Legal Tender- It is a form of money that must be accepted ( by law) as a payment of any monetary debt.
73. Insolvency- It is a situation in which the person/company is unable to pay its debts on time.
74. Bankruptcy- After a person or company becomes insolvent, they can seek relief from some or all debts. This legal process is Bankruptcy.
75. Amortization-It is the process of distributing the payments in smaller installments. And Amortization of assets is allotting a price to an intangible asset.
76. External Commercial Borrowings- It is a transaction in which a non-resident of the country lends foreign currency loan to an Indian.
77. Small Finance Banks- It is a segment of banks to provide financial security to small businesses and industries.
78. Interest Rate Swap- It is a contract to exchange all future interest rates of a loan between two entities.
79. Public Credit Registry (PCR)- It is a public document that has financial information about all borrowers in India.
80. Off-Balance Sheet Exposure- This sheet includes all activities that do not involve lending or borrowing but generate fee income for banks.
81. Priority Sector Lending- According to this, all the banks have to offer a specified proportion of loans to certain sectors like micro and small industries, agriculture, etc.
82. Credit Rating- It is a system to recognize an individual’s ability to pay back the loan according to his past dealings and transactions.
83. 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.