Top 30 Important Terms in Banking

Assets of a bank typically include investments, money at call and short notice, loans and advances, and bills discounted and purchased.

Reserves comprise deposits with the Central bank (RBI), cash holdings, and financial instruments such as bonds and treasury bills issued by the RBI.

The primary liability of a bank is deposits received from customers.

The net worth of a bank is determined by subtracting its liabilities from its assets.

The money multiplier represents the ratio of the total money supply to the stock of high-powered money in an economy.

Fractional reserve banking allows banks to create loans from deposited money while maintaining only a specific amount of cash reserves.

The RBI regulates various aspects of commercial banks, including the liquidity of assets, branch expansion, bank mergers, and winding-up procedures.

Demand liabilities of a bank include current accounts, savings accounts, demand drafts, overdue balances in fixed deposits, and unclaimed deposits.

The Currency Deposit Ratio (CDR) is the proportion of public funds held in currency compared to bank deposits, calculated as Currency in Circulation divided by Demand Deposits.

The Reserve Deposit Ratio (RDR) represents the percentage of total deposits retained as reserves by commercial banks, consisting of vault cash and deposits with the RBI.

The Provision Coverage Ratio (PCR) reflects the percentage of funds set aside by a bank to cover potential losses from bad debts, serving as a buffer against Non-Performing Assets (NPAs).

Net Non-Performing Assets (NNPA) is derived by subtracting provisions made for bad debts from the Gross Non-Performing Assets (NPAs) of a bank.

The Liquidity Coverage Ratio (LCR) is a provision of Basel III norms requiring banks to maintain short-term liquidity to withstand financial stress for a period of 30 days.

The Intercreditor Agreement (ICA) is a component of Project Sashakt, facilitating the expedited resolution of stressed assets, particularly focusing on loan accounts exceeding ₹50 crore controlled by multiple lenders.

The Letter of Undertaking/Letter of Comfort serves as a bank guarantee allowing a customer to borrow short-term credit from another Indian bank’s foreign branch.

Nostro Accounts are maintained by Indian banks in foreign countries to facilitate smoother transaction clearing in their foreign operations, while Vostro Accounts are maintained by foreign banks in India with their corresponding banks to facilitate transactions in the Indian market.

The SWIFT System, or Society for Worldwide Interbank Financial Telecommunication, is a secure messaging network utilized by banks to exchange information, including instructions for money transfers.

The Banking Regulation (Amendment) Act, 2020, involves legislation aimed at amending banking regulations, potentially introducing changes to regulatory frameworks or operational guidelines within the banking sector.

Formal sector loans originate from banks and cooperatives, regulated by the RBI and requiring minimum cash balance maintenance. Informal sector loans, however, are sourced from entities like moneylenders and traders, outside formal banking channels.

The Terms of Credit include interest rates, collateral requirements, documentation prerequisites, and repayment modalities, collectively defining the conditions under which a loan is extended.

Collateral refers to assets owned by borrowers, such as land or vehicles, pledged to lenders as security until the loan is repaid.

A teaser loan offers initially lower interest rates for a specified period, often targeting entrepreneurs and new homeowners, regardless of their experience. It’s commonly associated with subprime lending practices.

Shadow banking encompasses activities or institutions operating partially outside traditional banks, lacking full RBI regulation and exemption from the Banking Regulations Act, 1949.

A Core Investment Company is a specialized NBFC registered with the RBI, with assets exceeding ₹100 crore, primarily involved in the acquisition of shares and securities.

SHGs are organized groups, mainly comprising rural women, pooling resources to facilitate collective lending without requiring collateral. They manage repayments collectively and have been instrumental in empowering marginalized communities.

The concept of SHGs originated from the Grameen Bank of Bangladesh, pioneered by Muhammad Yunus. In India, SHGs were introduced by NABARD in 1986-1987 and are supported by Regional Rural Banks and Scheduled Commercial Banks.

Credit rating agencies in India are regulated by the Securities and Exchange Board of India (SEBI). Six agencies are registered under SEBI, including CRISIL, ICRA, CARE, SMERA, Fitch India, and Brickwork Ratings.

Fitch Ratings, Moody’s Investors Service, and Standard & Poor’s (S&P) control approximately 95% of the global ratings business.

The Banks Board Bureau recommends the selection of heads for Public Sector Banks and key personnel, develops strategies for capital raising and performance improvement. However, it has been replaced by the Financial Services Institutions Bureau.

Core Banking Solution (CBS) is a network of bank branches that enables customers to manage accounts and access banking services globally.

The Business Correspondent (BC) Model was launched in 2006. It facilitates rural beneficiaries’ access to subsidies, social security benefits, and banking services.

Regional Rural Banks (RRBs) provide credit assistance to rural households. They are supported by NABARD, which provides refinance facilities to various banking institutions.

The Serious Fraud Investigation Office (SFIO) investigates white-collar crimes in India under the Ministry of Corporate Affairs. It was established based on recommendations from the Naresh Chandra Committee.

A “Bail In” involves utilizing a bank’s own deposits to rescue or reduce its liabilities, while a “Bail Out” involves external parties, typically governments using taxpayer funds, to rescue a financial institution.

“Willful Defaulters” are entities or individuals who have the ability to repay loans but fail to do so.

eKuber is a Core Banking Solution process where customer account information is stored centrally rather than at branch servers, enhancing efficiency and accessibility.

Selective Credit Control is a qualitative method employed by central banks to encourage development credit while discouraging speculative credit, thereby regulating the flow of credit in the economy.

Commercial banks such as SBI and Axis are regulated by the Reserve Bank of India (RBI).

Rural cooperative banks, operating within a single state, are regulated jointly by the RBI and the State Government’s Registrar for Cooperatives.

Urban cooperative banks within a single state are also regulated by the RBI.

Multi-state cooperative banks are regulated by the Reserve Bank of India (RBI).

Primary Agricultural Credit Societies (PACS) are regulated by the respective State Government’s Registrar for Cooperatives.