Dear Readers,
Welcome to Mentor
for Bank Exams. 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: wepro.co.in 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.
