Friday, 22 July 2016

Banking Awareness Study Notes for Bank Exams : Banking & Financial Terms

Dear Readers,
Here is the various important Banking & Financial Terms free banking awareness study notes for upcoming bank exams as well as competitive recruitment examinations.

Repo Rate: Repo rate is the rate of interest which is levied on Short-Term loans taken by commercial banks from RBI. Whenever the banks have any shortage of funds they can borrow it 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: This is exact opposite of Repo rate. Reverse repo rate is the rate at which commercial banks CHARGE on their surplus funds with RBI. RBI uses this tool when it feels there is too much money floating in the banking system. Banks are always happy to keep money with RBI since their money is in the safe hands with a good interest. An increase in Reverse repo rate can cause the banks to transfer more funds to RBI due to these attractive interest rates.

CRR Rate: Cash reserve Ratio (CRR) is the amount of cash funds that the banks have to maintain 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.

SLR Rate: SLR (Statutory Liquidity Ratio) is the amount a commercial bank needs to maintain in the form of cash, or gold or government approved securities (Bonds) before providing credit to its customers. SLR is determined and maintained by the RBI in order to control the expansion of bank credit. SLR is determined as the percentage of total demand and time liabilities. Time Liabilities are the liabilities a commercial bank is liable to pay to the customers after a specific time period. SLR is used to control inflation and proper growth. Through SLR tuning, the money supply in the system can be controlled efficiently.

Bank Rate: Bank rate is the rate of interest which is levied on Longt-Term loans and Avances taken by commercial banks from RBI. Changes in the bank rate are often used by central banks to control the money supply.

MSF Rate: MSF(Marginal Standing Facility Rate) is the rate at which banks can borrow overnight from RBI.This was introduced in the monetary policy of RBI for the year 2011-2012. Banks can borrow funds through MSF when there is a considerable shortfall of liquidity. This measure has been introduced by RBI to regulate short- term asset liability mismatches more effectively.

Base Rate: The Base Rate is the minimum interest rate of a Bank below which it cannot lend, except for DRI advances, loans to bank's own employees and loan to banks' depositors against their own deposits. (i.e. cases allowed by RBI) .

Term Deposit Rate: A deposit held at a financial institution that has a fixed term. These are generally short- term with maturities ranging anywhere from a month to a few years. When a term deposit is purchased, the lender (the customer) understands that the money can only be withdrawn after the term has ended or by giving a predetermined number of days notice.

Inflation: Inflation is as an increase in the price of goods and services that projects the Indian economy. An increase in inflation figures occurs when there is an increase in the average level of prices in goods and services. Inflation happens  when there are fewer  goods  and more buyers;  or  we can say when demand is more than supply. This will result in increase in the price of goods, since there is more demand and less supply of the goods.

Deflation: Deflation is the continuous decrease in prices of goods and services. Deflation occurs when the inflation rate becomes negative (below zero) and stays there for a longer period.

FII: FII (Foreign Institutional Investor) used to denote an investor, mostly in the form of an institution. An institution established outside India, which proposes to invest in Indian market, in other words buying Indian stocks. FII’s generally buy in large volumes which has an impact on the stock markets. Institutional Investors includes pension funds, mutual funds, Insurance Companies, Banks etc.

FDI: FDI (Foreign Direct Investment) occurs with the purchase of the “physical assets or a significant amount  of ownership (stock) of a company in another country in order to gain a measure of management control” (or) A foreign company having a stake in an Indian company.

SEZ: SEZ means Special Economic Zone is a special geographic part of country which possess special economic regulations that are different from other areas in the same country. Moreover, these regulations tend to contain measures that are favourable to foreign direct investment. Conducting business in a SEZ usually means that a company will receive tax incentives and the opportunity to pay lower tariffs. The basic motto behind this is to increase foreign investment, development of infrastructure, job opportunities and increase the income level of the people.

Balance of Payment: A record of all transactions made between one particular country and all other countries during a specified period of time. Balance of payment of a country is a systematic record of all economic transactions completed between its residents and the residents remaining world during a year. In other words, the balance of payment shows the relationship between the one country’s total payment to all other countries and its total receipts from them.

Balance of Trade: Balance of trade refers to the total value of a country’s export commodities and total value of imports commodities. Thus balance of trade includes only visible trade i.e. movement of goods (exports and imports of goods). Balance of trade is a part of balance of payment settlement.

Balance sheet: Balance sheet is a statement showing the assets and liabilities of a business at a certain date. Balance sheet helps in estimating the real financial situation of a firm.

Direct and Indirect Taxes: Direct taxes are levied on the income of individuals and corporates. For example, income tax, corporate tax etc. Indirect taxes are paid by consumer when they buy goods and services. These include excise duty, custom duty, VAT, service tax etc.

Bridge Loan: A loan made by a bank for a short period to make up for a temporary shortage of cash. On the part of borrower, mostly the companies for example, a business organization wants to install a new company with new equipments etc. while his present installed company/equipments etc. are not yet disposed off. Bridge loan covers this period between the buying the new and disposing of the old one.

Call Money:-Call money is in the form of loans and advances which are payable on demand or within the number of days specified for the purpose.

Clearing Bank: Clearing bank is one, which settles the debits and credits of the commercial banks. Even of the cash balances are lesser, clearing bank facilitates banking operation of the commercial bank.

Clearing House: Clearing house is an institutions which helps to settle the mutual indebtedness that occurs among the members of its organization.

Gresham’s Law: “Bad money (if not limited in quantity) drives good money out of circulation” – This statement was given by Sir Thomas Gresham, the economic adviser of Queen Elizabeth. This law states that people always want to hoard good money and spend bad money when two forms of money are in circulation at the same time.

HDI: A tool developed by the United Nations to measure and rank countries’ levels of social and economic development based on four criteria: Life expectancy at birth, mean years of schooling, expected years of schooling and gross national income per capita. The HDI makes it possible to track changes in development levels over time and to compare development levels in different countries.

Monetary Policy: Monetary policy is the process by which monetary authority of a country, generally a central bank controls the supply of money in the economy by exercising its control over interest rates in order to maintain price stability and achieve high economic growth. In India, the central monetary authority is the Reserve Bank of India (RBI). is so designed as to maintain the price stability in the economy. Other objectives of the monetary policy of India, as stated by RBI, are: Regressive Tax It is the tax in which rate of taxation falls with an increase in income. In regressive taxation incidence falls more on people having lower incomes than that of those having higher incomes.

Credit Authorization Scheme:-Credit Authorization Scheme was introduced in November, 1965 when PC Bhattacharya was the chairman of RBI. Under this instrument of credit regulation RBI as per the guideline authorizes the banks to advance loans to desired sectors Open Market Operations:-An open market operation  is an instrument of monetary policy which involves buying or selling of government securities from or to the public and banks.

Moral Suasion: Moral Suasion is just as a request by the RBI to the commercial banks to take so and so action and measures in so and so trend of the economy. RBI may request commercial banks not to give loans for unproductive purpose which does not add to economic growth but increases inflation.

Shadow Price: It is an imputed value for a good based on the opportunity costs of the resources used to produce it such values are of particular significance in resolving problems of resource allocating with respect to the effect on welfare.

Special Drawing Rights (SDRs): It is a reserve asset (known as ‘Paper Gold’) created within the framework of the International Monetary Fund in an attempt to increase international liquidity, and now forming a part of countries official forex reserves along with gold, reserve positions in the IMF and convertible foreign  currencies.

Stagflation: It is a state of the economy in which economic activity is slowing down, but wages and prices continue to rise. The term is blend of the words stagnation and inflation.

Transfer payment: It is a payment made by public authority other than one made in exchange for goods or services produced. Transfer payments are not the part of National Income. Examples includes unemployment benefit and child benefits. In other words, the transfer is made without any exchange of goods or services. Examples of certain transfer payments include welfare (financial aid), social security, and government making subsidies for certain businesses.

Devaluation: The loss of value of currency of a country relative to other foreign currency is known as devaluation. Devaluation is a process in which the government deliberately cheapens the exchange value of its own currency in terms of other currency by giving it a lower exchange value. Devaluation is used for improving, the balance of payment situation in the country.

Fiscal Policy: Fiscal policy is the use of government revenue collection (taxation) and expenditure (spending) to influence the economy Fiscal policy is that part of government policy which deals with taxation, expenditure, borrowing and the management of public debt in the economy. fiscal policy primarily concerns itself with the  flow of funds in the economy. it exerts a very powerful influence of the working of economy as a whole.

Scheduled Banks: They are banks which are included in the second schedule of the Reserve Bank of India Act, 1934. These banks enjoy certain privileges such as free concessional remittance facilities and financial accommodation from the RBI. they also have certain obligations like minimum cash reserve ratio (CRR) to be kept with RBI.

ATM: ATMs are Automatic Teller Machines, which do the job of a teller in a bank through Computer Network. 

ATMs are located on the branch premises or off branch premises. ATMs are useful to dispense cash, receive cash, accept cheques, give balances in the accounts and also give mini-statements to the customers.

Bouncing of a cheque: Where an account does not have sufficient balance to honour the cheque issued by the customer , the cheque is returned by the bank with the reason "funds insufficient" or "Exceeds arrangement". This is known as 'Bouncing of a cheque'.

Collecting Banker: Also called receiving banker, who collects on instruments like a cheque, draft or bill of exchange, lodged with himself for the credit of his customer's account.

Debit Card: A plastic card issued by banks to customers to withdraw money electronically from their accounts. When you purchase things on the basis of Debit Card the amount due is debited immediately to the account. Many banks issue Debit-Cum-ATM Cards.

Demand Deposits: Deposits which are withdrawn on demand by customers. E.g. savings bank and current account deposits.

Demat Account: The term "demat", in India, refers to a dematerialised account for individual Indian citizens to trade in listed stocks or debentures in electronic form rather than paper, as required for investors by the Securities  and  Exchange  Board  of  India  (SEBI).  In  a  demat  account,  shares  and  securities  are     held

electronically instead of the investor taking physical possession of certificates. A demat account is opened by the investor while registering with an investment broker.

Electronic Commerce (E-Commerce): E-Commerce is the paperless commerce where the exchange of business takes place by Electronic means.

Endorsement: When a Negotiable Instrument contains, on the back of the instrument an endorsement, signed by the holder or payee of an order instrument, transferring the title to the other person, it  is  called  endorsement.

Merchant Banking : When a bank provides to a customer various types of financial services like accepting bills arising out of trade, arranging and providing underwriting, new issues, providing advice, information or assistance on starting new business, acquisitions, mergers and foreign exchange.

Minor Accounts: A minor is a person who has not attained legal age of 18 years. As per Contract Act a minor cannot enter into a contract but as per Negotiable Instrument Act, a minor can draw, negotiate, endorse, receive payment on a Negotiable Instrument so as to bind all the persons, except himself. In order to boost  their deposits many banks open minor accounts with some restrictions.

Mobile Banking : With the help of M-Banking or mobile banking customer can check his bank balance, order a demand draft, stop payment of a cheque, request for a cheque book and have information about latest interest rates.

Money Laundering: When a customer uses banking channels to cover up his suspicious and unlawful financial activities, it is called money laundering.

Mortgage: Transfer of an interest in specific immovable property for the purpose of offering a security for taking a loan or advance from another. It may be existing or future debt or performance of an agreement which may create monetary obligation for the transferor (mortgagor).

NABARD: National Bank for Agriculture & Rural Development was setup in 1982 under the Act of 1981. 

NABARD finances and regulates rural financing and also is responsible for development agriculture and rural industries.

Negotiation: In the context of banking, negotiation means an act of transferring or assigning a money instrument from one person to another person in the course of business.

NPA Account: If interest and installments and other bank dues are not paid in any loan account within a specified time limit, it is being treated as non-performing assets of a bank.

Plastic Money: Credit Cards, Debit Cards, ATM Cards and International Cards are considered plastic money as like money they can enable us to get goods and services.

Prime Lending Rate (PLR): The rate at which banks lend to their best (prime) customers. It is usually less than normal interest rate.

Promissory Note: Promissory Note is a promise / undertaking given by one person in writing to another person, to pay to that person , a certain sum of money on demand or on a future day.

Public Sector Bank: A bank fully or partly owned by the Government.

Virtual Banking: Virtual banking is also called internet banking, through which financial and banking services are accessed via internet's world wide web. It is called virtual banking because an internet bank has no boundaries of brick and mortar and it exists only on the internet.

Wholesale Banking: Wholesale banking is different from Retail Banking as its focus is on providing for financial needs of industry and institutional clients.

National Electronic Funds Transfer System (NEFT): RBI introduced an electronic funds transfer system to facilitate an efficient, secure, econo-mical, reliable and expeditious system of funds transfer and clearing in the banking sector throughout India, and to relieve the stress on the existing paper-based funds transfer and clearing system called  National Electronic Funds Transfer  System (NEFT System).

National Electronic Clearing Services (NECS): The objective of National Electronic Clearing Services (NECS) is to facilitate centralised processing for repetitive and bulk payment instructions. Sponsor banks shall submit NECS data at a single centre viz. at Mumbai. While NECS (Credit) shall Facilitate multiple credits to beneficiary accounts at destination branch against a single debit of the account of  a User with the sponsor bank, the NECS (Debit) shall facilitate multiple debits to destination account holders against single credit to user account.

Universal Banking: Universal Banking refers to those services offered by banks beyond traditional banking service such as saving accounts and loans and includes Pension Funds Manage-ment, undertaking equipment leas-ing, hire purchase business and factoring services, Primary Dealer-ship (PD) business, insurance busi- ness and mutual fund business.

Financial System: The economic development of a nation is reflected by the progress of the various economic units, broadly classified into corporate sector, government and household sector. While performing their activities these units will be placed in a surplus/deficit/balanced budgetary situations. There are areas or people with surplus funds and there are those with a deficit. A financial system or financial sector functions as an intermediary and facilitates the flow of funds from the areas of surplus to the areas of deficit.  A Financial System is a composition of various institutions, markets, regulations and laws, practices, money manager, analysts, transactions and claims and liabilities.

Financial Markets: A Financial Market can be defined as the market in which financial assets are created or transferred. As against a real transaction that involves exchange of money for real goods or services, a financial transaction involves creation or transfer of a financial asset. Financial Assets or Financial Instruments represents a claim to the payment of a sum of money sometime in the future and /or periodic payment in the form of interest or dividend.

Money Market: The money market is a wholesale debt market for low-risk, highly-liquid, short-term instrument. Funds are available in this market for periods ranging from a single day up to a year. This market is dominated mostly by government, banks and financial institutions.

Capital Market: The capital market is designed to finance the long-term investments. The transactions taking place in this market will be for periods over a year.

Forex Market: The Forex market deals with the multicurrency requirements, which are met by the exchange of currencies. Depending on the exchange rate that is applicable, the transfer of funds takes place in this market. This is one of the most developed and integrated market across the globe.

Credit Market - Credit market is a place where banks, FIs and NBFCs give short, medium and long-term loans to corporate and individuals.

Money Market Instruments: Money Market Instruments The money market can be defined as a market for short-term  money  and  financial  assets  that  are  near  substitutes  for  money.  The  term  short-term means
Generally a period up to one year and near substitutes to money is used to denote any financial asset which can be quickly converted into money with minimum transaction cost.
Some of the important money market instruments are briefly discussed below;
1. Call/Notice Money
2. Treasury Bills
3. Term Money
4. Certificate of Deposit
5. Commercial Papers

We discuss all above 5 money market instruments detailed study notes Click here.


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