Banking Terms

 Banking - an organization whose principal operations are concerned with the accumulation of the temporarily idle
money of the general public for the purpose of advancing to others for expenditure.
 Plastic Money – Plastic or polymer money is an alternative of cash or the standard ‘money’. Plastic money is used
to refer to the credit cards, debit cards that we use to make purchases in day to day life. The ‘plastic’ portion refers to
the plastic construction of credit cards, as opposed to paper and metal of currency. The ‘money’ portion is an
erroneous reference to credit cards as a form of money, which they are not. They are not part of the economy’s
money supply. E.g.- cash cards, credit cards, debit cards, pre-paid cash cards and store cards.
 Statutory Liquidity Ratio (SLR) - The Reserve Bank of India mandates that every bank should have a specific
liquid reserve(Net Demand and Time Liabilities) in the form of cash or gold. The ratio of these liquid assets to the
demand and time liabilities is called Statutory Liquidity Reserve Ratio. Maximum 40% can be allowed by RBI. The
increase in this ratio constricts the ability of the bank to inject money into the economy. Current SLR is 19.5%.
 Indian Financial System Code - IFSC stands for Indian Financial System Code. It is an 11 digit code written in an
alphanumeric format, and it identifies the branches in the National Electronic Funds Transfer (NEFT) network. This
code is used by electronic payment system applications such as RTGS, NEFT and CFMS. This code is used by
electronic payment system applications such as RTGS, NEFT and CFMS. The first part is the first four alphabet
characters representing the Bank. Next character is 0(zero), which is reserved for future use. The last six characters
are the branch code.
 NEFT - National Electronic Funds Transfer is a nation-wide payment system. Under this Scheme,
individuals can electronically transfer funds from any bank branch to any individual having an account with
any other bank branch in the country participating in the Scheme. NEFT transactions are settled in batches.
Any transaction initiated after a designated settlement batch would have to wait till the next designated
settlement batch.
 Demand Draft – Demand Draft is a negotiable instrument issued by banks and is payable only on demand.
The bank issues the draft to a client (drawer) directing another bank or own branch to pay the specific
amount to the payee. The drawer has to pay before issuing a demand draft to the bank.
 SWIFT – Society for Worldwide Interbank Financial Telecommunications. Global communication network
that facilities 24hours secure international exchange of payment instruction between banks, central banks,
multinational corporations and major securities firm. SWIFT Code is an internationally recognized
identification code for banks around the world.
 CASA – Current Account and Savings Account which is mostly used in West Asia and South-east Asia.
CASA deposit is the amount of money that gets deposited in the current and savings accounts of bank
customers. It is the cheapest and major source of funds for banks. The savings accounts portion pays more
interest compared to current accounts.
 Repo Rate - It refers to the rate at which commercial banks borrow money from the Reserve Bank of India
(RBI) in case of shortage of funds. It is one of the main tools of RBI to keep inflation under control. Current
repo rate by RBI is 6.25% p.a.
 Reverse Repo Rate – When Reserve Bank of India faces a financial crunch, they invite commercial banks and
other financial institutions to deposit their excess funds into RBI treasury and offers them excellent interest
rates. Similarly, when banks have excess funds, they voluntarily transfer it to RBI as their money is safe and
secure with them. Generally, Reverse Repo Rate is always lesser than repo rate. The currency Reverse Repo
Rate as set by RBI is 6.00% p.a.
 Reverse Repo – Arrangement where a dealer or broker agrees to buy a security and sell it to a customer
(investor) at a higher price on a specified date. These agreement are in effect loans from dealers to investors,
collateralized by the securities bought. Purchase agreement (repo).
 RTGS – The acronym 'RTGS' stands for Real Time Gross Settlement, which can be defined as the continuous
(real-time) settlement of funds individually on an order by order basis (without netting). 'Real Time' means the
processing of instructions at the time they are received rather than at some later time. 'Gross Settlement' means
the settlement of funds transfer instructions occurs individually (on an instruction by instruction basis).
Considering that the funds settlement takes place in the books of the Reserve Bank of India, the payments are
final and irrevocable
 MICR - Magnetic Ink Character Recognition is a technology used to verify the legitimacy or originality of
paper documents, especially checks. Special ink, which is sensitive to magnetic fields, is used in the printing of
certain characters on the original documents. Information can be encoded in the magnetic characters.
 IMPS – Immediate Payment Service is an instant interbank electronic fund transfer service through mobile
phones. It is also being extended through other channels such as ATM, Internet Banking, etc.
 CAR - Capital Adequacy Ratio (CAR) is the ratio of a bank’s capital in relation to its risk weighted assets and
current liabilities. It is decided by central banks and bank regulators to prevent commercial banks from taking
excess leverage and becoming insolvent in the process. The Basel III norms stipulated a capital to risk weighted
assets of 8%. However, as per RBI norms, Indian scheduled commercial banks are required to maintain a CAR
of 9% while Indian public sector banks are emphasized to maintain a CAR of 12%.
 NDTL – The Net Demand and Time Liabilities shows the difference between the sum of demand and time
liabilities (deposits) of a bank (with the public or the other bank) and the deposits in the form of assets held by
the other bank.
 UPI – A Unified Payment Interface is a real-time single-window mobile payment system developed by the
National Payments Corporation of India (NPCI). It eliminates the need to enter bank details or other sensitive
information each time a customer initiates a transaction.
 MSF – Marginal Standing Facility is the rate at which scheduled banks could borrow funds overnight from the
Reserve Bank of India against approved government securities. Banks can borrow funds through MSF during
acute cash shortage (considerable shortfall of liquidity). This measure has been introduced by RBI to regulate
short-term asset liability mismatches more effectively. The current MSF rate is 8.5%.
 Credit Rating – Credit rating is an analysis of the credit risks associated with a financial instrument or a
financial entity. It is a rating given to a particular entity based on the credentials and the extent to which the
financial statements of the entity are sound, in terms of borrowing and lending that has been done in the past.
 RWA – Risk-weighted assets are used to determine the minimum amount of capital that must be held by banks
and other institutions to reduce the risk of insolvency. The capital requirement is based on a risk assessment for
each type of bank asset.
 Advances – The extension of money from a bank to another party with the agreement that the money will be
repaid. Nearly all bank loans are made at interest, meaning borrowers pay a certain percentage of the principal
amount to the lender as compensation for borrowing. Most loans also have a maturity date, by which time the
borrower must have repaid the loan. A bank loan occasionally is called a bank advance.
 MCLR – Marginal Cost of Funds based Lending Rate (MCLR) is the minimum interest rate, below which a
bank is not permitted to lend. RBI can give authorization for the same in exceptional cases.
 BPLR - Benchmark Prime Lending Rate, is the reference interest rate based on which a bank lends to its credit
worthy borrowers. Normally, loans are given out a little more or a little less than this reference interest rate. All
retail loans are linked to the BPLR.
 Base Rate - Base rate is decided in order to enhance transparency in the credit market and ensure that banks
pass on the lower cost of fund to their customers. Loan pricing will be done by adding base rate and a suitable
spread depending on the credit risk premium. Base rate is the minimum rate set by the Reserve Bank of India
below which banks are not allowed to lend to its customers.
 PLR – The interest rate charged by banks to their largest, most secure, and most creditworthy customers on
short-term loans. This rate is used as a guide for computing interest rates for other borrowers. Also called prime
rate.
 KYC – Know Your Customer refers to the process of verifying the identity of bank’s customers, either before or
during the time that they start doing business with banks. The term KYC also references the regulated bank
customer identity verification practices to assess and monitor customer risk and a legal requirement to comply
that are intended to prevent banks from being used for money laundering activities.
 NPA – An asset, including a leased asset, becomes non-performing when it ceases to generate income for the
bank. A ‘non-performing asset’ was defined as a credit facility in respect of which the interest and/ or instalment
of principal has remained ‘past due’ for a specified period of time.
 AML – Anti Money Laundering refers to a set of procedures, rules, laws and regulations designed to stop the
practice of generating income through illegal actions.
 DTL – Deferred tax liability is a balance sheet line item that accounts for the temporary difference between
taxes that will come due in the future and taxes paid today.
 CRR – Cash Reserve Ratio (CRR) is the share of a bank’s total deposit that is mandated by the Reserve Bank of
India (RBI) to be maintained with the RBI in the form liquid cash. The current CRR is 4%.