Banking Terms

1. What is a Repo Rate?

A: Repo rate is the rate at which our banks borrow rupees 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.

2. What is Reverse Repo Rate?

A: This is exact opposite of Repo rate. Reverse Repo rate is the rate at which Reserve Bank of India (RBI)
borrows money from banks. RBI uses this tool when it feels there is too much money floating in the
banking system. Banks are always happy to lend money to RBI since their money is in safe hands with a
good interest. An increase in Reverse repo rate can cause the banks to transfer more funds to RBI due to
this attractive interest rates.

3. What is CRR Rate?

A: Cash reserve Ratio (CRR) is the amount of funds that the banks have to keep 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.3

4. What is SLR Rate?

A: SLR (Statutory Liquidity Ratio) is the amount a commercial bank needs to maintain in the form of
cash, or gold or govt. approved securities (Bonds) before providing credit to its customers.

SLR rate is determined and maintained by the RBI (Reserve Bank of India) in order to control the
expansion of bank credit. SLR is determined as the percentage of total demand and percentage of time
liabilities. Time Liabilities are the liabilities a commercial bank liable to pay to the customers on their
anytime demand. SLR is used to control inflation and propel growth. Through SLR rate tuning the money
supply in the system can be controlled efficiently.

5. What is Bank Rate?

A: Bank rate, also referred to as the discount rate, is the rate of interest which a central bank charges on
the loans and advances that it extends to commercial banks and other financial intermediaries. Changes
in the bank rate are often used by central banks to control the money supply.

Bank Rate
The standard rate of interest at which RBI is prepared to buy / rediscount bills of exchange
or other commercial paper from banks (See 49 of RBI Act).

6. What is Inflation?

A: Inflation is as an increase in the price of bunch 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; this will result in
increase in the price of Goods, since there is more demand and less supply of the goods.

7. What is Deflation?

A: 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.

8. What is PLR?

A: The Prime Interest Rate is the interest rate charged by banks to their most creditworthy customers
(usually the most prominent and stable business customers). The rate is almost always the same
amongst major banks. Adjustments to the prime rate are made by banks at the same time; although, the
prime rate does not adjust on any regular basis. The Prime Rate is usually adjusted at the same time and
in correlation to the adjustments of the Fed Funds Rate. The rates reported below are based upon the
prime rates on the first day of each respective month. Some banks use the name "Reference Rate" or
"Base Lending Rate" to refer to their Prime Lending Rate.

9. What is Deposit Rate?

A: Interest Rates paid by a depository institution on the cash on deposit.

Policy Rates:

· Bank Rate: 6.00%

· Repo Rate: 5.25%

· Reverse Repo Rate: 3.75%

Reserve Ratios:

· CRR: 6.00%

· SLR: 25.0%

Lending/Deposit Rates:

· PLR: 11.00%-12.00%.

· Deposit Rate: 6.00%-7.50%.

. Savings Bank rate: 3.5%.

Note: Rates as on 14-05-10.

10. What is FII?

A: 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.

11. What is FDI?

A: 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 a Indian Company.

12. What is IPO?

A: IPO is Initial Public Offering. This is the first offering of shares to the general public from a company
wishes to list on the stock exchanges.

13. What is Disinvestment?

A: The Selling of the government stake in public sector undertakings.

14. What is Fiscal Deficit?

A: It is the difference between the government’s total receipts (excluding borrowings) and total
expenditure. Fiscal deficit in 2009-10 is proposed at 6.8% of GDP.

15. What is Revenue deficit?

A: It defines that, where the net amount received (by taxes & other forms) fails to meet the predicted
net amount to be received by the government. Revenue deficit in 2009-10 is proposed at 4.8% of GDP.

16. What is GDP?

A: The Gross Domestic Product or GDP is a measure of all of the services and goods produced in a
country over a specific period; classically a year. GDP during 2008-09 is 6.7%.

17. What is GNP?

A: Gross National Product is measured as GDP plus income of residents from investments made abroad
minus income earned by foreigners in domestic market.

18. What is National Income?

A: National Income is the money value of all goods and services produced in a country during the year.

19. What is Per Capita Income?

A: The national income of a country, or region, divided by its population. Per capita income is often used
to measure a country's standard of living.Per capita income during 2008-09 estimated by CSO: Rs.25,
494.

20. What is Vote on Account?

A: A vote-on account is basically a statement ,where the government presents an estimate of a sum
required to meet the expenditure that it incurs during the first three to four months of an election
financial year until a new government is in place, to keep the machinery running.

21. Difference between Vote on Account and Interim Budget?

A: Vote-on-account deals only with the expenditure side of the government's budget, an interim Budget
is a complete set of accounts, including both expenditure and receipts.

22. What is SDR?

A: The SDR (Special Drawing Rights) is an artificial currency created by the IMF in 1969. SDRs are
allocated to member countries and can be fully converted into international currencies so they serve as
a supplement to the official foreign reserves of member countries. Its value is based on a basket of key
international currencies (U.S. dollar, euro, yen and pound sterling).

23. What is SEZ?

A: SEZ means Special Economic Zone is the one of the part of government’s policies in India. A special
Economic zone is a geographical region that economic laws which are more liberal than the usual
economic laws in the country. The basic motto behind this is to increase foreign investment,
development of infrastructure, job opportunities and increase the income level of the people.

24. What is corporate governance?

The way in which a company is governed and how it deals with the various interests of its customers,
shareholders, employees and society at large. Corporate governance is the set of processes, customs,
policies, laws, and institutions affecting the way a corporation (or company) is directed, administered or
controlled.Is defined as the general set of customs, regulations, habits, and laws that determine to what
end a firm should be run.

1. Functions of RBI?

The Reserve Bank of India is the central bank of India, was established on April 1, 1935 in accordance
with the provisions of the Reserve Bank of India Act, 1934. The Reserve Bank of India was set up on the
recommendations of the Hilton Young Commission. The commission submitted its report in the year
1926, though the bank was not set up for nine years.To regulate the issue of Bank Notes and keeping of
reserves with a view to securing monetary stability in India and generally to operate the currency and
credit system of the country to its advantage." Banker to the Government: performs merchant banking
function for the central and the state governments; also acts as their banker.Banker to banks: maintains
banking accounts of all scheduled banks.

2. What is monetary policy?

A Monetary policy is the process by which the government, central bank, of a country controls (i) the
supply of money, (ii) availability of money, and (iii) cost of money or rate of interest, in order to attain a
set of objectives oriented towards the growth and stability of the economy.

3. What is Fiscal Policy?

Fiscal policy is the use of government spending and revenue collection to influence the economy. These
policies affect tax rates, interest rates and government spending, in an effort to control the economy.
Fiscal policy is an additional method to determine public revenue and public expenditure.

4. What is Core Banking Solutions?

Core banking is a general term used to describe the services provided by a group of networked bank
branches. Bank customers may access their funds and other simple transactions from any of the
member branch offices. It will cut down time, working simultaneously on different issues and increasing
efficiency. The platform where communication technology and information technology are merged to
suit core needs of banking is known as Core Banking Solutions.

5. What is bank and its features and types?

A bank is a financial organization where people deposit their money to keep it safe.Banks play an
important role in the financial system and the economy. As a key component of the financial system,
banks allocate funds from savers to borrowers in an efficient manner.

Regional Rural Banks were established with an objective to ensure sufficient

institutional credit for agriculture and other rural sectors. The RRBs mobilize

financial resources from rural / semi-urban areas and grant loans and advances

mostly to small and marginal farmers, agricultural labourers and rural artisans.

The area of operation of RRBs is limited to the area as notified by GoI covering

one or more districts in the State.

ii. Banking services for individual customers is known as retail banking.

iii. A bank that deals mostly in but international finance, long-term loans for

companies and underwriting. Merchant banks do not provide regular banking

services to the general public

iv. Online banking (or Internet banking) allows customers to conduct financial

transactions on a secure website operated by their retail or virtual bank.

v. Mobile Banking is a service that allows you to do banking transactions on your

mobile phone without making a call , using the SMS facility. Is a term used for

performing balance checks, account transactions, payments etc. via a mobile

device such as a mobile phone.

vi. Traditional banking is the normal bank accounts we have. Like, put your money in the bank and they
act as a security and you will get only the normal interests (decided by RBI in our case, FED bank in US).

vii. Investment banking is entirely different. Here, people who are having so much

money (money in excess which will yield only less interest if in Banks) will invest

their money and get higher returns. For example, If i have more money instead of

taking the pain of investing in share market, buying properties etc. I will give to

investment banks and they will do the money management and give me higher

returns when compared to traditional banks.

· What is E-Governance?

E-Governance is the public sector’s use of information and communication technologies with the aim of
improving information and service delivery, encouraging citizen participation in the decision-making
process and making government more accountable,transparent and effective.

· What is Right to information Act?

The Right to Information act is a law enacted by the Parliament of India giving citizens of India access to
records of the Central Government and State overnments.The Act applies to all States and Union
Territories of India, except the State of Jammu and Kashmir - which is covered under a State-level law.
This law was passed by Parliament on 15 June 2005 and came fully into force on 13 October 2005.

· Credit Rating Agencies in India?

The credit rating agencies in India mainly include ICRA and CRISIL. ICRA wasformerly referred to the
Investment Information and Credit Rating Agency of India Limited. Their main function is to grade the
different sector and companies in terms of performance and offer solutions for up gradation. The credit
rating agencies in India mainly include ICRA and CRISIL(Credit Rating Information Services of India
Limited)

· What is Cheque?

Cheque is a negotiable instrument instructing a Bank to pay a specific amount from a specified account
held in the maker/depositor's name with that Bank.A bill of exchange drawn on a specified banker and
payable on demand.“Written order directing a bank to pay money”.

· What is demand Draft?

A demand draft is an instrument used for effecting transfer of money. It is a Negotiable Instrument.
Cheque and Demand-Draft both are used for Transfer of money. You can 100% trust a DD. It is a
banker's check. A check may be dishonored for lack of funds a DD can not. Cheque is written by an
individual and Demand draft is issued by a bank. People believe banks more than individuals.

· What is a NBFC?

A non-banking financial company (NBFC) is a company registered under the

Companies Act, 1956 and is engaged in the business of loans and advances, acquisition of
shares/stock/bonds/debentures/securities issued by government, but does not include any institution
whose principal business is that of agriculture activity, industrial activity, sale/purchase/construction of
immovable property.

NBFCs are doing functions akin to that of banks; however there are a few differences:

(i)A NBFC cannot accept demand deposits (demand deposits are funds deposited at a depository
institution that are payable on demand -- immediately or within a very short period -- like your current
or savings accounts.)

(ii) it is not a part of the payment and settlement system and as such cannot issue cheques to its
customers; and

(iii) Deposit insurance facility of DICGC is not available for NBFC depositors unlike in case of banks.

· Diff between banking & Finance?

Finance is generally related to all types of financial, this could be accounting, insurances and policies.
Whereas banking is everything that happens in a bank only.The term Banking and Finance are two very
different terms but are often associated together. These two terms are often used to denote services
that a bank and other financial institutions provide to its customers.
· What is NASSCOM ?

The National Association of Software and Services Companies (NASSCOM), the Indian chamber of
commerce is a consortium that serves as an interface to the Indian software industry and Indian BPO
industry. Maintaining close interaction with the Government of India in formulating National IT policies
with specific focus on IT software and services maintaining a state of the art information database of IT
software and services related activities for use of both the software developers as well as interested
companies overseas. Mr. Som Mittal – President. Chairman-Pramod Bhasin

· What is ASSOCHAM?

The Associated Chambers of Commerce and Industry of India (ASSOCHAM), India's premier apex
chamber covers a membership of over 2 lakh companies and professionals across the country. It was
established in 1920 by promoter chambers, representing all regions of India. As an apex industry body,
ASSOCHAM represents the interests of industry and trade, interfaces with Government on policy issues
and interacts with counterpart international organizations to promote bilateral economic issues.
President-Swati Piramal

· What is NABARD?

NABARD was established by an act of Parliament on 12 July 1982 to implement the National Bank for
Agriculture and Rural Development Act 1981. It replaced the Agricultural Credit Department (ACD) and
Rural Planning and Credit Cell (RPCC) of Reserve Bank of India, and Agricultural Refinance and
Development Corporation (ARDC). It is one of the premiere agency to provide credit in rural areas.
NABARD is set up as an apex Development Bank with a mandate for facilitating credit flow for
promotion and development of agriculture, small-scale industries, cottage and village industries,
handicrafts and other rural crafts.

· What is SIDBI?

The Small Industries Development Bank of India is a state-run bank aimed to aid the growth and
development of micro, small and medium scale industries in India. Set up in 1990 through an act of
parliament, it was incorporated initially as a wholly owned subsidiary of Industrial Development Bank of
India.

· What is SENSEX and NIFTY?

SENSEX is the short term for the words "Sensitive Index" and is associated with the Bombay (Mumbai)
Stock Exchange (BSE). The SENSEX was first formed on 1-1-1986 and used the market capitalization of
the 30 most traded stocks of BSE. Where as NSE has 50 most traded stocks of NSE.SENSEX IS THE INDEX
OF BSE. AND NIFTY IS THE INDEX OF NSE.BOTH WILL SHOW DAILY TRADING MARKS. Sensex and Nifty
both are an "index”. An index is basically an indicator it indicates whether most of the stocks have gone
up or most of the stocks have gone down.

· What is SEBI?
SEBI is the regulator for the Securities Market in India. Originally set up by the

Government of India in 1988, it acquired statutory form in 1992 with SEBI Act 1992 being passed by the
Indian Parliament. Chaired by C B Bhave.

· What is Mutual funds?

Mutual funds are investment companies that pool money from investors at large and offer to sell and
buy back its shares on a continuous basis and use the capital thus raised to invest in securities of
different companies. The mutual fund will have a fund manager that trades the pooled money on a
regular basis. The net proceeds or losses are then typically distributed to the investors annually.

· What is Asset Management Companies?

A company that invests its clients' pooled fund into securities that match its declared financial
objectives. Asset management companies provide investors with more diversification and investing
options than they would have by themselves. Mutual funds, hedge funds and pension plans are all run
by asset management companies. These companies earn income by charging service fees to their
clients.

· What are non-perfoming assets?

Non-performing assets, also called non-performing loans, are loans,made by a bank or finance company,
on which repayments or interest payments are not being made on time. A debt obligation where the
borrower has not paid any previously agreed upon interest and principal repayments to the designated
lender for an extended period of time. The nonperforming asset is therefore not yielding any income to
the lender in the form of principal and interest payments.

· What is Recession?

A true economic recession can only be confirmed if GDP (Gross Domestic Product)growth is negative for
a period of two or more consecutive quarters.

· What is foreign exchange reservers?

Foreign exchange reserves (also called Forex reserves) in a strict sense are only the foreign currency
deposits and bonds held by central banks and monetary authorities.However, the term in popular usage
commonly includes foreign exchange and gold,SDRs and IMF reserve positions.
1. Define the following terms
(a) Net Assets Value
The NAV of an investment scheme is a number which represents the value in rupees per fund
unit as on a particular date of the assets of the fund less liability and outstanding expenses.
Thus, if the NAV in more than the face value, it means your money has appreciated and vice-
versa. NAV is only the value that a fund’s assets would realise, less liabilities, in case the fund
was liquidated as on the particular date to which NAV relates. But there is no uniformity in
accounting policies of the various funds and hence one cannot compare one fund with another.

(b) Debit Cards

A credit card holder buys now and pays later. In effect, the credit card issuer hands him a loan.
Not so with a debit card. The debit card holder must have an account with the issuing bank.
When he buys something, the value of his purchase is instantly debited from his account. The
merchant establishment from which the debit card holder makes his purchase is linked
electronically to the bank’s main computer which contains the account details of the card holder.
The account can be accessed with a personal identification number (PIN) known only to the
account holder. But through it, the merchant can check the card holder’s account and debit the
value of his purchase.

Qu. What are the essential features of Negotiable Instruments ?

Ans. Essential Features of Negotiable Instruments

The following are the special features of the negotiable instruments :
1. The negotiable instruments are easily transferable from person to person and the ownership
of the property in the instrument may be passed on by mere delivery, in case of a bearer
instrument, or by endorsement and delivery, in case of an order instrument. Transferability is an
essential features of a negotiable instrument but all transferable instruments are not negotiable
instruments. Herein lies the difference between transferability and negotiability, which is
explained below.

2. A negotiable instrument confers absolute and good title on the transferee, who takes it in
good faith, for value and without notice of the fact that the transferor had defective title thereto.
This is the most important characteristic of a negotiable instrument. A person who takes a
negotiable instrument from another person, who had stolen it from somebody else, will have
absolute and undisputable title to the instrument, provided he receives the same for values (i.e.
after paying its full value) and in good faith without knowing that the transferor was not the true
owner of the instrument. Such a person is called the holder in due course and his interest in the
instrument is well protected by the law.
Q Write short notes on the following :
‘MAST’ Principle of Securities
(a) : While advancing against securities, a banker has to bear in mind that the securities
(b) should be such that they conform to the ‘MAST’ Principle.
MARKETABLE i.e. they are easily marketable
ASCERTAINABLE i.e. their value is ascertainable
STABLE i.e. they are stable in terms of its value and not widely
fluctuating
TRANSFERABLE i.e. and they are easily transferable
A banker, being one who, when confronted with default of repayment by a borrower, has to
proceed against the securities obtained and realize quickly the value of the securities by sale to
get paid, should always evaluate the securities offered against the above touchstones before
accepting them.

(a) Monopoly of Note Issue

Under Section 22 of the Reserve Bank of India Act, the Reserve Bank has the sole right for the
issue of currency other than one rupee coins and notes and subsidiary coins; and as in the case
of Bank of England, the Reserve Bank maintains two departments viz., The Issue Department
and The Banking Department. The notes are a liability of the issue department alone. The
assets of the issue department which form the backing for the note issue are kept distinct from
those of the Banking Department. According to Sec.33 of The Reserve Bank of India Act, the
assets of the Issue Department against which Bank loans are issued should consist of gold coin
and bullion, foreign securities, rupee coin, Government of India securities and such Bills of
Exchange and Promissory Notes payable in India and as are eligible for purchase by the Bank.
Under the original Act of 1934, not less than 2/5th of the assets of the Issue Department were to
be required to be held in gold coin, gold bullion or foreign securities, the value of the gold coin
and gold bullion not being below Rs. 40 crores. This was amended by The Reserve Bank of
India Amendment Act of 1959 which bought in the following changes :

a. Revaluation of the gold reserves held by the Reserve Bank from the original very low price of
Rs. 21.24 per tola to Rs. 62.50 per tola, which was Rupee equivalent of the price agreed to by
the International Monetary Fund.

b. A shift from the proportionate to the minimum reserve system with regard to the issue of
currency. Simultaneously, with the revaluation of gold, the minimum reserve to be held in gold
was fixed at Rs. 115 crores instead of Rs. 40 crores. According to the second change there
would be no limit to the volume of currency that could be issued by the Reserve Bank, provided
it maintained a minimum of Rs. 115 crores of gold and Rs. 400 crores of foreign exchange.
There were some amendments to these provision and as per the present provision the
aggregate value of gold bullion and foreign securities held in the Issue Department of the Bank
should not at any time be less than Rs. 200 crores of which the value of the gold coin and gold
bullion should at no time be less than Rs. 115 crores.

Control of Credit through Monetary Policy :

The objective of monetary policy in our country has been two-fold. It has to facilitate the
flow of an adequate volume of bank credit to industry, agriculture and trade to meet their
genuine needs. It is also with a view of provide selective encouragement to sectors which
stand in need of special assistance such as the weaker sections of the community and the
neglected sectors and areas in the country. At the same time, to keep inflationary pressures
under check it has to restrain undue credit expansion and also ensure that credit is not
diverted for undesirable purposes. As the central monetary authority, the Reserve Bank’s
chief function is to ensure the availability of credit to the extent that it appropriate to sustain
the tempo of development and promote the maintenance of internal price stability.
The instruments of credit control are of two types as under –
a. General or Quantitative
b. Selective or Qualitative
Under the General Credit Control, the instruments often employed by The Reserve Bank of
India
are –
i. Bank Rate Policy
ii. Reserve Requirements
iii. Moral Suasion
iv. Direct action

Changes in Role and Functions of Commercial Banks :

Ans. There has been a tremendous change over the years in the very meaning of Banking.
Banking earlier was purely restricted to borrowing money as deposits, with a view to lending
them as advances. Thus the main facets were confined to the acceptance of deposits and
lending of loans.
With the growth of Indian Economy and also as an off-shoot of reform measures, banks
have come to take upon themselves, various other activities which may not measure upto
this old definition of banking.
These activities include –
1. Investment Counselling
2. Investment Banking
3. Mutual Fund

4. Project Appraisal
5. Merchant Banking Services
6. Taxation Advisory Services
7. Executor Trustee Services
8. Housing Finance Activities
9. Segment – wise specilised branches
10. Credit Card Services
11. Computer Software Development
12. Forex Consultancy Services
13. 24 hours banking
14. ATM Services (Automated Teller Machines)
15. Transaction of Government business.
16. Securities Trading
17. Money Market Mutual Funds
18. Factoring
19. Leasing and hire-purchase
20. Gold / Silver / Platinum trading
21. Venture Capital Financing.
22. Insurance-life / general
These activities are either being pursued by separate departments of the banks or by
separately floated independent subsidiaries formed for undertaking such activities
exclusively.
Recently, banks have given more focus to increase and improve their profits from non-fund
based activities like guarantees and Letter of Credits, as the revenues from increased
lending activities are on the decline. And again, the recently introduced prudential norms
act as a sort of deterrence to banks to avoid lending activity and embrace investment
avenues in its place.
Further, with the massive computerisation taking place in the entire industry, banks have
been able to reduce the transaction time / cost, thus benefiting the customers.
Also, banks which were hitherto confining themselves with working capital finance have
embarked upon project financing activities too and in the process face stiffer competition from
financial institutions.
In the days to come, banking sector will witness a dramatic change. The internet banking
will bring a great revolution possibly ushering in “Branchless Banking”.