Banking Terms
BANK RATE :
Bank Rate is the rate at which central bank of the country (RBI) allows finance to commercial banks. Bank Rate is a tool, which RBI uses for short-term purposes. Any upward revision in Bank Rate by RBI is an indication that banks should also increase deposit rates as well as Base Rate / Benchmark Prime Lending Rate. Thus any revision in the Bank rate indicates that it is likely that interest rates on your deposits are likely to either go up or go down. Bank Rate in India is decided by RBI.
CRR RATE :
Cash reserve Ratio (CRR) is the amount of funds that the banks have to keep with RBI. If RBI decides to increase the percent of this, the available amount with the banks comes down. RBI is using this method (increase of CRR rate), to drain out the excessive money from the banks.
REPO RATE :
Repo Rate is the rate at which commercial banks borrow rupees from RBI. A reduction in the repo rate will help banks to get money at a cheaper rate. When the repo rate increases borrowing from RBI becomes more expensive.
REVERSE REPO RATE :
Reverse Repo rate is the rate of interest at which Reserve Bank of India (RBI) borrows money from commercial banks in the short term.. Commercial Banks are always happy to lend money to RBI since their money are in safe hands with a good interest.
An increase in Reverse repo rate can cause the banks to transfer more funds to RBI due to high interest rates. It can cause the money to be drawn out of the banking system. Due to this fine tuning of RBI using its tools of CRR, Bank Rate, Repo Rate and Reverse Repo.
ACCOUNT :
Refers to a running record of transactions which are taking place between two transactors, who may be in two departments of one business and a basic element in all systems of recording business transactions. In retail trading it refers to the credit facility which is automatically extended to a customer with whom an account is operated.
MFN :
MFN stands for Most Favoured Nation. The principle, fundamental to the GATT, of treating imports from a country on the same basis as that given to the most favored other nation. That is, and with some exceptions,
every country gets the lowest tariff that any country gets, and reductions in tariffs to one country are provided also to others.
GOLD STANDARD :
A monetary standard under which the basic unit of currency is equal in value to and exchangeable for a specified amount of gold.The exchange rate under the gold standard monetary system is determined by the economic difference for an ounce of gold between two currencies.The gold standard was first adopted in Britain in 1821. Germany, France, and the U.S. instituted it in the 1870s, prompted by North American gold strikes that increased the supply of gold.The gold standard was mainly used from 1875 to 1914 and also during the interwar year
DEFLATION :
Deflation is totally reverse process of inflation. In deflation the prices of goods and services are continuous decreased. Deflation occurs when the inflation rate becomes negative (below zero) and stays there for a longer period.
INFLATION :
Inflation is as an increase in the price of bunch of Goods and services that projects the Indian economy, usually it measured by the CPI /WPI or by the implicit price deflator. An increase inflation figures occurs when there is an increase in the average level of prices Goods and services. Inflation happens when there are less Goods and more buyers, this will result increase the price of Goods, since there is more demand and less supply of the goods.
- The characteristics of inflation are as follows:-
Inflation involves a process of the persistent rise in prices. It involves rising trend in price level.
It is a state of disequilibrium.
It is scarcity oriented.
It is dynamic in nature.
Inflationary price rise is persistent and irreversible.
Inflation is caused by excess demand in relation to supply of all types of goods and services.
It is a purely monetary phenomenon.
It is a post full employment phenomenon.
It is a long-term process.
SLR RATE :
SLR (Statutory Liquidity Ratio) is the amount a commercial bank 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 the RBI (Reserve Bank of India) in order to control the expansion of bank credit. At present SLR is 23%.
- How is SLR determined?
SLR is determined as the percentage of total demand and percentage of time liabilities. Time Liabilities are the liabilities a commercial bank liable to pay to the customers on their anytime demand.
- What is the Need of SLR?
With the SLR (Statutory Liquidity Ratio), the RBI can ensure the solvency a commercial bank. It is also helpful to control the expansion of Bank Credits. By changing the SLR rates, RBI can increase or decrease bank credit expansion. Also through SLR, RBI compels the commercial banks to invest in government securities like government bonds.
- What is the main use of SLR?
SLR is used to control inflation and propel growth. Through SLR rate tuning the money supply in the system can be controlled efficiently.
BALANCE OF TRADE :
The value of a country’s exports minus the value of its imports. Unless specified as the balance of merchandise trade, it normally incorporates trade in services, including earnings (interest, dividends, etc.) on financial assets.
BALANCE OF PAYMENTS :
A list of all of a country’s international transactions for a given time period, usually one year. Payments into the country (receipts) are entered as positive numbers, called credits; Payments out of the country (payments) are entered as negative numbers called debits. A single numbers summarize all of a country’s international transactions: the balance of payments surplus.
BALANCED BUDGET :
A government budget surplus that is zero, thus with net tax revenue equaling expenditure. A balanced budget changes in policy or behavior is one which a component of the government budget, usually taxes, is adjusted as necessary to maintain a balanced budget.
BALANCED GROWTH OF AN ECONOMY :
Growth of an economy in which all aspects of it, especially factors of production, grow at the same rate.
FISCAL DEFICIT :
A deficit in the government budget of a country and represents the excess of expenditure over income. So this is the amount of borrowed funds require by the government to meet its expenditures completely.
DIRECT TAX :
A direct tax is that which is paid directly by someone to taxing authority. Income tax and property tax are an examples of direct tax. They are not shifted to somebody else.
INDIRECT TAX :
This type of tax is not paid by someone to the authorities and it is actually passed on to the other in the form of increased cost. They are levied on goods and services produced or purchased. Excise Tax, Sales Tax, Vat, Entertainment tax are indirect taxes.
NOSTRO ACCOUNT :
A Nostro account is maintained by an Indian Bank in the foreign countries.
VOSTRO ACCOUNT :
A Vostro account is maintained by a foreign bank in India with their corresponding bank.
SDR :
SDR (Special Drawing Rights) 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.
WHITE LABEL ATM :
These are ATM’s which are not owned by banks but by private ATM service providers. Customers from any bank can deposit or withdraw money from such ATM,s. Your banks pay a service fee for the usage.
“Such ATMs will help take banking services to remote places,” official sources said. Besides, it will help sponsored banks to set-up ATMs without incurring capital expenses for owning money dispensing machine. The Finance Ministry has given its view to the Reserve Bank in this regard, adding that the lead bank or sponsored bank of a district would be given the responsibility of filling cash and meeting other operational requirement. Thus, the bank will be saved from making investment for setting up ATMs, and even other expenses like technical infrastructure and security would be borne by non-bank entities.
State-owned IDBI Bank is considering to create a separate venture with private ATM service providers for running white-label ATMs, so called because they are not owned by any bank. Such entities should have a minimum net worth of Rs. 100 crore at the time of making the application and on a continuing basis after issue of the requisite authorization. Other guidelines for applying to the apex bank for authorisation under the PSS Act are available at the RBI official website.
Currently, only banks are being permitted to set up Automated Teller Machines (ATMs) in India. Banks have played a major role in encouraging ATM adoption and modifying behavioral strategies in the domain of personal banking. The banking space has seen considerable growth through the ATMs, which currently stands 87000 nos. and has been restricted principally to the urban/metro areas.
BROWN LABEL ATM :
The ATM is named under the brand of the sponsor bank but the ATM machine is not owned by the bank.
At present, banks allow customers of other banks five free-of-charge cash withdrawals at their ATMs every month but end up paying around Rs 3,000 crore a year to settle inter-bank transaction costs. In such cases, the hardware as well as lease is under the ownership of the service provider, while connectivity and cash handling and management is the responsibility of the sponsor bank.
SCHEDULED BANKS :
Which is registered under IInd Schedule of RBI act, 1934.
Three eligibility criteria exist for scheduled banks in India, the first of which entails carrying on the business of banking in India, which all banks ostensibly meet.
All scheduled banks must maintain a reserve capital of 5 lakhs rupees in the Reserve Bank of India.
A lakh constitutes 100,000. In 2011, 5 lakhs rupees, or 500,000 rupees, equates approximately $11,156. Any commercial bank, cooperative bank, nationalized bank, foreign bank, rural regional bank institution, State Bank of India branch or other private sector bank meeting these criteria qualifies as a scheduled bank. Thus all commercial banks in India qualify as scheduled banks, though not all scheduled banks qualify as commercial banks.
NON SCHEDULED BANKS :
The other commercial banks which do not part of the second schedule of the RBI act are known as the non scheduled banks. They are not entitled to the privileges and facilities extended by RBI to scheduled banks.
SUSPENSE ACCOUNT :
In accounting, the section of a company's books where unclassified debits and credits are recorded. The suspense account temporarily holds unclassified transactions while a decision is being made as to their classification. Transactions in the suspense account will still appear in the general ledger, giving the company an accurate indication of how much money it has.
In investing, a suspense account is a brokerage account where an investor places cash or short-term securities temporarily while deciding where to invest them for a longer term.
CALL DEPOSIT ACCOUNT :
A bank account for investment funds that offers the advantages of both a savings and a checking account. A call deposit account, like a checking account, has no fixed deposit period, provides instant access to funds and allows unlimited withdrawals and deposits. Like a savings account, a call deposit account pays interest. The rate of interest a call deposit account pays depends on the amount of money in the account, a system commonly referred to as banded interest rates. Also, different currencies may earn different interest rates. Depositors may have to meet a minimum balance threshold before they earn any interest.
MARGIN ACCOUNT :
A brokerage account in which the broker lends the customer cash to purchase securities. The loan in the account is collateralize by the securities and cash. If the value of the stock drops sufficiently, the account holder will be required to deposit more cash or sell a portion of the stock. In a margin account, you are investing with your broker's money. By using leverage in such a way, you magnify both gains and losses.
MONEY MARKET ACCOUNT :
This type of bank account pays interest at a higher rate than the rate paid on interest-bearing savings and checking accounts. Often, money market accounts impose a minimum balance for the account to start earning interest. The minimum required balance on a money market account is usually higher than that imposed on a checking or savings account. With a money market account, withdrawals are limited to six per month. No more than three of these withdrawals can be by check.