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Banking Important Terms

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Banking Important Terms

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Knowledge of Banking Terminology is a great asset for every bank job aspirant. Also, the familiarity with Banking Important Terms will assist in understanding the advancements in Banking Industry. Banking Awareness is an important section in the employment-related competitive exams in India. In particular, exams like IBPS, SBI and other bank related employment exams have banking awareness questions along with general awareness section. [ Did You Know? - Monitoring your Credit is like getting a regular checkup at the doctor. ]
The Banking Awareness section primarily has questions related to the History of Banking, Banking Terms, Banking Products, Functions of Banks, Banks and their Taglines, Schemes, Committees related to Banking, Headquarters of Banks, most recent Banking News, Apps launched by Banks, New Schemes, Monetary Policies etc. The article Banking Important Terms lists the terminology in the banking sector in the alphabetical order.

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Term Definition Industry Example
Arbitrage
  • It is the practice of taking benefit of the price difference that exists between the two markets.

  • Simultaneous purchase and sale of an asset.

  • Profit is the difference between the two markets.
  • Since early 2018, the arbitrage in rupee is helping to deepen the domestic currency market. The option premium or the cost of insurance against price volatility has been 50 points less when comparing rupee with any other foreign currency.

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Term Definition Industry Example
Bancassurance
  • It is defined as a relationship that exists between a bank and an insurance company with the aim of offering insurance products and insurance benefits to the bank's customers.

  • It is regulated by RBI and IRDA.
  • SBI Life Insurance Company Ltd has a bancassurance tie-up with SBI.

  • It is a win-win strategy.
Banking Ombudsman Scheme
  • The Scheme was first introduced in 1995 in India.

  • The scheme creates a quasi-judicial authority called the Banking Ombudsman.

  • This authority resolves complaints of the bank's customers relating to the services rendered by them.
  • There are 21 regional offices of Banking Ombudsman in India, and the latest ones have begun operations in Jammu and Raipur.
Base Rate
  • The minimum rate below which the central bank forbids banks to lend its customers is known as the base rate.

  • In India, RBI revises these rate according to the Marginal Cost Lending Rate (MCLR).
  • The Base rate decided by RBI is 8.75% to 9.45%. This means that banks in India can lend its customer by charging a minimum interest rate of 8.75% and a maximum of 9.45%.
Blue Chip
  • A multinational company that has been in operations since some years is known as a Blue Chip.

  • They have a reputable brand that makes them a dominant leader in their respective companies.
  • Coca-Cola, Disney, PepsiCo, Wal-Mart, IBM, McDonald’s, and General Electric.
Bond Yield
  • It refers to the return that an investor realizes on a bond.

  • It is equal to the coupon rate.

  • It shall account for the time value of money and compounding interest rate.
  • 10 Year Government Bond Yield has been 7.71% on October 22, 2018.

  • This means each year; the issuer will pay an interest of 7.71%.

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Term Definition Industry Example
Capital Market
  • A financial market where long-term debt and securities backed by equity are bought and sold is known as a capital market.

  • The buying and selling of equity and security are undertaken by participants that may be individuals or institutions.

  • It acts as a support to the capitalism of the country.
  • Capital markets in India consist of two parts:

  • Primary: Companies, government and public sector institutions that can raise funds through bonds.

  • Secondary: Stocks, shares, and bonds issued by customers.
Cash Reserve Ratio
  • Reserve Bank of India mandates the banks to maintain a part of the banks' total deposit as liquid cash. This is known as Cash Reserve Ratio or CRR.

  • It is the statutory liquidity ratio.
  • The CRR set by RBI for August 2018 is 4%. This means that all banks in India will have to maintain 4% of their bank’s total deposits in the form of liquid cash.
Collateral
  • The property or asset that borrower offers as a way to secure the loan for a lender. If the borrower of the loan fails to pay the promised loan payment, the lender can seize the collateral.

  • A lender can claim the borrower’s collateral, and this is called a lien.
  • Axis Bank provides fast-track loans to SMEs if they keep the property as a collateral. In this case, the collateral coverage should be 100% of the loan amount.
Commercial Papers
  • It refers to the money-market security that is issued or sold by a large corporation to obtain funds.

  • It helps the corporations meet the short-term debt obligations.

  • It is held by an issuing bank or a company that promises to pay the amount on maturity.
  • In January 2017, Rashtriya Chemicals and Fertilisers (RCF) issued a commercial paper worth INR 180 crore o SBI. Its maturity date was March 30, 2017, and RCF's stock managed to reach its new 52 weeks high.
Coupon Rate
  • It is the yield that is paid by fixed income security.

  • It is the payments paid by the issuer annually relative to the bond’s face value.
  • In November 2017, Reliance Industries raised $800 million through the sale of 10-year bonds. These bonds were priced at a coupon rate of 3.66%.

  • This has been the lowest rate achieved ever by an Indian corporate in the past ten years.

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Term Definition Industry Example
Debentures
  • Long-term security that yields at a fixed interest rate.

  • It is issued by a company as an unsecured loan certificate.

  • It is secured against assets.
  • In 2016, Axis Bank raised INR 1800 crore via debentures.
Debt Consolidation
  • A financial strategy to merge multiple bills into a single debt.

  • It can be done with or even without a loan.

  • It helps to cut the costs by lowering the rate of interest on debts.

  • Effective in high-interest debts like credit card bills.
  • CitiBank personal loan for debt consolidation.
Deposit rate
  • The interest rate due per period as a proportion of the total amount lent, deposited, or borrowed is known as the deposit rate.

  • Banks have to pay deposit rates on savings as well as on other investment accounts.
  • HDFC offers loans against 75% of the number of deposits that are older than three months. Interest on such loans is 2% above the deposit rate levied.

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Term Definition Industry Example
Fiscal Deficit
  • A financial situation in which the total expenditures exceeds the revenue.

  • It is an indicator of the borrowings needed by the government.
  • According to an estimate, the fiscal deficit targeted for 2018-19 is around 3.3% of the GDP.
Foreign Direct Investment (FDI)
  • FDI is an investment made in one country in the form of controlling ownership in a business by an entity based in some other country.
  • The total FDI in India increased in 2017-18 to USD 61.96 billion.

  • As estimated by the United Nations, India attracted a total FDI flows of USD 22 billion in the first half of 2018.

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Term Definition Industry Example
Hedge
  • An advanced investing strategy.

  • An investment that is made to reduce the risk of adverse effects of asset price movements.

  • Hedge funds take an offsetting position in a related security.
  • Tata Capital has a collection of alternative investment funds that include hedge funds that provide excellent opportunities to large institutional investors and corporates and individuals with high net worth.

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Term Definition Industry Example
Inflation
  • A quantitative measure that represents the rate at which the average price level of a basket of selected goods and services in the economy increases over a period is known as inflation.

  • It is indicative of a decrease in the purchasing power of the nation’s currency.
  • Inflation in India is a measure of Wholesale Consumer Price Index measured quarterly.

  • In August 2018, the inflation was 3.69%.
Insolvency
  • The state in which a person or a company is unable to pay the money owed on time is referred to insolvency.

  • A person or a company in the state of insolvency are referred to insolvents.

  • There are two types of insolvencies: cash-flow and balance-sheet.
  • In October 2017, RBI issued a list of twelve companies for immediate insolvency proceedings. These included Bhushan Steel Ltd., Lanco Infratech Ltd., Essar Steel Ltd., Alok Industries, and so on.

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Term Definition Industry Example
Legal Entity Identifier (LEI)
  • A 20-character identifier that is used to identify the distinct legal entities that are engaged in financial transactions is known as a legal entity identifier.

  • It is defined by ISO 17442.

  • Natural persons shall not require to have LEI.
  • Mahindra Rural Housing Finance Limited is registered under the Legal Entity Identifier India Ltd. and has LEI as 335800FVH4MOKZS9VH40.
Liquidity Adjustment Facility
  • It is a monetary policy tool that allows banks to borrow money through repurchase agreements.

  • It is used to aid banks in adjusting the daily mismatching of liquidity, i.e. deficit or surplus.
  • On August 2, 2017, RBI announced to reduce the Repo rate under the Liquidity Adjustment Facility by 25 points or from 6.25% to 6%.

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Term Definition Industry Example
Marginal Cost of Funds based Leading Rate (MCLR)
  • MCLR is the minimum rate of interest of a bank that it cannot lend.

  • For banks, it is the internal benchmark or reference rate.
  • MCLR for IDBI Bank set in August 2018 are:

  • Overnight tenure loans: 8%

  • One-month tenure loans: 8.25%

  • 3-months loans: 8.45%

  • 6-months: 8.6%

  • 1-year loan: 8.85%

  • 3-year loan: 8.9%
Marginal Standing Facility (MSF) Rate
  • The Central Bank or the Reserve Bank of India (RBI) can lend money to banks by pledging government securities at a rate that is higher than the repo rate under LAF. This rate is known as the MSF rate.
  • The MSF rate set by RBI for August 2018 is 6.75%. This means that RBI can lend banks money by pledging government securities at a rate of 6.75%.
Merchant Discount Rate
  • The rate that is charged to a merchant for the services related to payment processing.

  • These include the debit card and credit card transactions.

  • The merchants must agree to the rate before accepting the cards.
  • What MDR priced in HDFC Bank is 2.75% for all international and commercial card transactions.

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Term Definition Industry Example
Non-Performing Assets (NPA)
  • Loans and advances that are classified as default or arrears on a scheduled payment.

  • Mostly, a debt is classified as NPA if the loan payments are not made within 90 days.
  • In March 2018, Vijaya Bank classified Reliance Naval as NPA when it failed to make the payment after 180 days.

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Term Definition Industry Example
Perpetual Bond
  • A bond with no maturity date.

  • It may be treated as equity rather than a debt.

  • The issuer pays the coupons on the perpetual bonds and never redeems the principal amount.
  • In March 2018, ICICI Bank raised INR 4000 crore through perpetual bonds.
Prompt Corrective Action (PCA)
  • The corrective actions that are taken by RBI to asses, monitor, and control weak and troubled banks are known as Prompt Corrective Action.

  • RBI is all set to revise its guidelines about PCA
  • The PCA is a US Federal law. In India, it is enacted when banks breach the regulatory requirements such as minimum capital, return on assets, and quantum of non-performing assets.
Public Provident Fund
  • PPF is a popular scheme that is well known for long-term investment.

  • It is backed by the government of India.

  • Interest rates are attractive.

  • Returns are fully exempted from tax.
  • SBI offers PPF scheme to mobilize small savings.

  • A minimum of INR 500 to a maximum of INR 1,50,000 annually have to be deposited.

  • The opening of account has to be in the name of the individual or on behalf of minor only.

  • The account cannot be opened in the name of Hindu Undivided Family.

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Term Definition Industry Example
Recapitalisation
  • A type of corporate reorganisation

  • It involves a substantial change in the company’s capital structure.

  • Mostly, a large part of equity is replaced with debt or otherwise.
  • The largest lender SBI, received recapitalisation from Indian government amounting to INR 2.11 lakh crore in November 2017. This was largely utilized to deal with the bank’s stressed assets.
Recession
  • A recession is referred to as a contraction in the business cycle that occurs due to a slow down in the economic activity.

  • GDP, investment spending, inflation, bankruptcies, household income, per capita income are a few indicators of recession.
  • The Great Recession of 2008 occurred in a period that witnessed a global economic decline.

  • The early signs of recession were seen in 2016 when the housing prices declined in America.
Repo Rate
  • It is the rate at which the Reserve Bank of India lends money to the commercial banks.

  • It is used by the monetary authorities to control the inflation.
  • In August 2018, the repo rate was 6.25%.
Reverse Repo Rate
  • The rate at which the Central Bank of a country borrows money from the commercial banks within the country is known as the Reverse Repo Rate.

  • This is a monetary policy instrument that is used to control the money supply in the country.
  • The Reverse Repo Rate decided by RBI for August 2018 is 6%.

  • This means that the Reserve Bank of India can borrow money from the commercial banks in India at a Reverse Repo Rate of 6%.

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Term Definition Industry Example
Sovereign Gold Bond
  • It is a bond issued under the Government of India’s Sovereign Gold Bonds Scheme that helps to assure interest rate earnings and eliminate the risk and cost of gold storage.

  • Attractive interest.

  • Opportunity for asset appreciation

  • Redemption is linked to the Gold price.
  • SGB issued by ICICI banks have the following features:

  • Tenure of 8 years

  • Option to exit after the 5 the year.

  • Online investing is available.

  • Holding the certificate issued towards investment in a bond.
Speculation
  • The purchase of an asset that is done with the motive that it will become more valuable in the future is known as speculation.

  • Here the risk of loss is offset by the possibility of huge gain.

  • It involves trading of financial instruments that involve high risk.
  • The Tata Group is conducting due diligence to purchase Jet Airways. The deal is speculative as Jet Airways is a cash-strapped airline which has a 24% of Etihad Airways already.

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Term Definition Industry Example
Unified Payments Interface (UPI)
  • A single-window mobile clearance system developed by National Payments Corporation of India is known as UPI.

  • It is regulated by RBI.

  • It facilitates inter-bank transactions by transferring the funds between the two bank accounts on a mobile platform.
  • All SBI account holders can avail their UPI number by downloading SBI Pay app in their respective mobile phones.

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Term Definition Industry Example
Valuation
  • The present value of a liability or an asset can be determined by a process known as valuation.

  • It is the monetary worth of something.

  • It is often carried out by a valuer.
  • Valuation for Reliance Industries Limited fiscal year 2019-2020 revealed that the valuation should increase by INR 45 per share.

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Banking concepts are associated with banking and finance. The below terminologies are commonly asked in bank interviews and are frequently used in day- day banking related tasks as a PO/Clerk. Money Laundering means acquiring, owning, possessing or transferring any proceeds of money of crime. Black Money in short!
Hybrid Debt-Capital instruments: Capital Market instruments that combine certain characteristics of equity and some of debt; any instrument which combines the qualities of 2 or more traditional instruments will be referred to as a ‘hybrid’.
Pillars of Basel: (i) Minimum Capital Standards
(ii) Supervisory Review
(iii) Market Discipline (Imp to know from interview point of view too.)
Financial Literacy: Financial Literacy or financial education stands for being knowledgeable about and to be able to effectively make use of financial resources, such as banking /investing etc
Narrow Banking: Narrow Banking is a particular system of banking, in which a bank places its funds in risk free assets (ex.: govt. securities), with maturity period matching its liability’s (when the bank has to pay back to the customer) maturity timing – this helps to maintain proper liquidity at the time of demand payment and their funds have no chance of becoming an NPA. So, narrow banking is like narrow mindedness and to play it safe!
Venture Capital: Venture Capital is a source of fund, so, venture capital is the capital or source of fund which is used for financing new business ideas, which involves new technologies, high risk and potential high returns!
Index Linked Bonds: Index Linked Bonds is the kind of bonds, the redemption value of which increases or decreases according to the movements in the rate of inflation. Wholesale Price Index is used as the inflation measure.
Z-Group shares: Shares of those companies which do not adhere (follow) the SEBI’s listing agreements.
Casino Banking: No Banks are not running casinos!
AIR: Annual Information Return. This return is to be filed by banks with the income tax department; this return helps the Tax authorities to look into transactions of tax payers.
IPO: Initial Public Offer – when a listed company offers its shares to the public for subscription for the first time.
Listed Company: Listed Company is any company listed with SEBI; Securities Exchange Board of India, which is a regulatory body for companies and their dealings with the public in the share market.
DEMAT or Dematerialization: DEMAT or Dematerialization is the process of converting the physical share certificates into equivalent number of electronic holdings in the ‘Demat Account’ of the investor.
Blue Chip companies/stocks: Blue Chip companies/stocks are those companies and the stocks/shares of those companies which are very highly priced as they have very high earning capacities. Blue chip companies are high profit making companies which are expected to maintain their profitable performance in near future.
Bear/ Bear Market: When you say that an investor is expecting a bearish market, it means, that he expects the prices of stocks in the share/capital market to fall.
Bull/ Bullish Market: When an investor expect the prices to rise in the capital market.
Dawn Raiding: Dawn Raiding refers to buying of huge amount of shares immediately after the stock market open!
Gilt edged securities: Gilt edged securities are referred to those securities which are issued by the Government
Jobber: Jobber is a member broker of a stock exchange who only deals in buying and selling of securities from and to other fellow brokers. He does not deal with the public.
Kerb dealing: Kerb dealing is the trading transactions done between members after official closing of the trading hours.
Insider trading: Insider trading is when a person who has ‘privileged information’ or the ‘inside information’ of a company and its business- and uses this information to make transactions in the capital market to make huge personal profits. It is illegal!
Spot trading: Spot trading is when shares are bought and taken delivery of and paid for.
Derivatives Market: where the value of the instruments bought and sold is based on value of the underlying asset. The value of the instrument is ‘derived’ from the value of the underlying asset and hence it is known as Derivatives. Derivatives Market is where trading in derivative instruments take place.
Speculation: Speculation is when a person, known as the speculator, tries to make money on the difference in prices of stocks, by purchasing at lower price and selling at higher price.
Price Rigging: Where a person or a group of persons having knowledge expert knowledge of the working of a capital market – artificially increases or decreases prices of securities of a company to make money by cheating the investors. It can also be called as market manipulation
Cum-dividend/rights/bonus : Cum-dividend/rights/bonus means that the share which the investor is buying comes with rights to dividend, or special rights attached with the shares or to bonus shares issued by the company to which the shares belong.
Ex-dividend/rights/bonus : Ex-dividend/rights/bonus means that the shares that an investor is buying does not have any right to dividend/bonus/special rights issued by the company.
Bottom Fisher: Bottom Fisher is an investor, who looks to buy those share, the price of which has recently fallen to a great extent.
Panic Buying: When investors buy large number of shares during price rise, thinking that the prices will keep rising!
Caveat Emptor: Caveat Emptor means, ‘Let the Buyer Beware’. Which means the buyer, in our case the Investor needs to be knowledgeable about what he is doing and to be careful in his dealings.
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