Important Banking Terminology for upcoming Banking Exams

Hello readers, I am a Bank PO at UBI, here I have brought to you the most commonly used terms in banking. The terms will be helpful to improve your knowledge in banking. It is also expected to appear many questions in upcoming banking exams.

Current Policy Rates
Bank Rate 6.75%
Repo Rate 6.25%
Reverse Repo Rate 6%
Marginal standing facility (MSF) 6.75%
Cash Reserve Ratio (CRR) 4%
Statutory Liquidity Ratio (SLR) 20.0%

Basis points: A basis point is a unit of measure used in finance. 1% point = 100 basis point.

Bank Rate: It is the rate at which commercial banks can borrow money from the reserve bank of India.

It is used to control liquidity into the market. It can also be referred as discount rate.

Current Bank rate on 7th June, 2017 is 6.75%.

Liquidity adjustment facility (LAF): It is a policy tool which helps banks to adjust their day to day liquidity mismatches.

It consists of repo and reverses repo operations. The definition of repo and reverse repo are as follows:

Repo Rate: Whenever the banks have any shortage of funds they can borrow it form RBI.

Banks sell their securities, financial assets to the RBI with an agreement to repurchase them at a pre-determined price in some future date. So, these transactions are called repurchase agreements.

Repo rate is the rate at which a central bank lends money to commercial banks. If repo rate is high then borrowing from RBI becomes more expensive.

Current Repo rate on 7th June, 2017 is 6.25%.

NOTE: Both the repo rate and Bank rate is used to control liquidity into the market. Both are the rate of interest that a central bank charges for lending purposes. The only difference between them is repo rate is used for short term lending purposes (period ranging from 2 to 90 days) while the bank rate is used for long term lending purposes (above 90 days).

Reverse Repo Rate: This is exact opposite of repo rate. Reverse repo is the rate at which RBI borrows money from commercial banks. RBI uses this tool whenever it feels there is too much money floating into the banking system. Banks are always happy to lend money to the RBI as their money is in safe hands.

Current Reverse Repo rate on 7th June, 2017 is 6%.

MCLR : The Reserve Bank of India (RBI) issued fresh norms on how banks ought to calculate their lending rates - a move which is aimed at lowering borrowing costs at a time when lenders are reluctant to do so.

The new method - Marginal Cost of funds based Lending Rate (MCLR) - will replace the present base rate system.

MCLR, as the name suggests, mandates banks to calculate the lending rate taking into account the marginal cost of funds. In the base rate system, it was left to the individual banks as to what cost it used, which typically was the average cost of funds.

Current MCLR on 7th June, 2017, is 8.85-9.15%.

CRR (Cash Reverse Ratio): CRR is the % of a bank’s total deposit that the bank is required to maintain with the RBI. Banks are mandated to keep this amount with the RBI on a fortnightly basis. If RBI increases the CRR rate then available amount in the hand of bank comes down.

SLR (Statutory Liquidity Ratio): SLR is the proportion of a bank’s NDTL( net demand and time liabilities) that the bank is required to maintain in cash, gold or govt. approved securities before providing credit to its customers. SLR rate is determined and maintained by the RBI.

After keeping the necessary amount for SLR and CRR, banks are free to provide the remaining amount for lending purposes.

Current SLR is 20.0 % and CRR is 4 % of NDLT.

NDTL: Bank a/c from which we can withdraw money at any time is called demand liabilities ex. Savings a/c, Current a/c.

Bank a/c from which we can’t just withdraw money at any time but you have to wait for certain period is called time liabilities. Ex. Fixed deposits, Cash certificates.

Marginal Standing Facility (MSF): MSF is the rate at which scheduled commercial banks can borrow money from the RBI for their overnight liquidity requirements. But banks can do this type of borrowing only against their SLR holdings.

Current Marginal Standing Facility rate on 7th June, 2017 is 6.75%.

NEFT (National Electronic Fund Transfer): Individuals, firms or corporate whether they are customer of a bank or not can transfer fund from one place to another using this facility. But the beneficiary should have a bank a/c at the NEFT enabled destination bank branch.

NEFT enables funds transfer from one bank to another but works a bit differently than RTGS.

NEFT is slower than RTGS. It conducts in hourly batches. You can transfer any amount through NEFT, even a rupee.

There is no minimum or maximum limit on the amount of fund that can be transferred.

RTGS (Real time gross settlement): Like NEFT this system is also used to transfer fund from one place to another. RTGS process on real time, continuously through- out the RTGS business hours. There will be no maximum limit for RTGS but the min. limit is 2 lakh(rupees).

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. They are not shifted to somebody else. Examples of direct tax are wealth tax, corporate tax, income tax, property tax.

Trick to remember: We- wealth tax, pro- property tax, co- corporate tax, in- income tax.

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.

Trick to remember: Excuse me.
Ex- excise tax, cu- custom tax, se- service tax, m- market tax/VAT, e- entertainment tax.

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 (Special Drawing Rights): SDR 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.

BOND: Publicly traded ling term debt securities issued by corporations and governments, whereby the issuer agrees to pay a fixed amount of interest over a specified period of time and to repay a fixed principal maturity.

CRAR(Capital to Risk Weighted Assets Ratio):

Capital to risk Weighted assets ratio is arrived at by dividing the capital of the bank with aggregated risk weighted assets for credit risk, market risk and operational risk.

Non Performing Assets (NPA): An asset (loan), including a leased asset, becomes non performing when it ceases to generate income for the bank.

Once the borrower is failed to make payment of interest or principal for 90 days the loan is considered as NPA. This is a major problem for banking industry today. Banks are groaning with the rising burden of NPA.

Inflation: inflation is a rise in the general level of prices of goods and services in an economy over a period of time. When general price level rises, each unit of currency buys fewer goods and services.

Consequently, inflation reflects a reduction in the purchasing power per unit of money &ndash a loss of real value in the medium of exchange and unit of account within the economy.

Hope this will help our readers to understand banking terminology better. This post is helpful in bank exams as well as in bank interviews. I would like to have your view in comment box if post is helpful or not.

You can go here for MCQ questions on Banking Awareness

The article is shared by Payel Dalmia. She is a bank PO at UBI.

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Comments ( 5 )

  1. Sabbir Ali
    8 years ago
    nice article.. lots of helpful information.. thank you maam..
  2. Aditya Patwardhan
    8 years ago
    thanxxx payal
  3. Chetan S.
    7 years ago
    very nice and helpful thank you
  4. subhadarshan panigrahi
    7 years ago
    Thanks mam nice job need more topics
  5. Bikesh chauhan
    4 years ago
    This article very much useful for those who preparing banking exam . Thank you so much sir