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A To Z Banking Terms by Vijay Tripathi
A To Z Banking Terms by Vijay Tripathi
Accelerator Principle:
Accelerator Principle of a company is the growth in ouput of the company that would induce a
continuation in net investment.
Ad Valorem Tax:
It is a tax based on the value of the property.
Aggregate Demand:
It is the total of all the demand in a country. It can also be expressed as
Total Exports of a country – Total imports of the country.
Aggregate Supply:
Total value of good and services produced in an economy + {Imports-Exports}
Asset:
Any item of monetary value like bank accounts, real estate property, stocks,..etc
Barter System:
Trade which doesnt involve the exchange of money
Bretton-Woods:
It is a monetary system that existed from the year 1946-1973. In this monetary system the value of
dollar was calculated using gold reserves and every other country held it’s currency at an exchange
rate with US dollars.
Budget Deficit:
Budget Deficit = Goverment Expenditure- Goverment Revenues.
Closed economy:
The economy is closed and doesnt have any contact with the rest of the world
Countervailing Duties:
These are the duties that are imposed by a country on Foreign producers in order to neutralize the
negative effects of other duties.
Currency Appreciation:
Increase in the value of a currency over the other. It takes place when the market exchange rates
change.
Current GDP:
Current GDP is GDP expressed in the current prices of the period being measured
Customs Duty:
Duty levied on imports.
Deflation:
An economy is said to be in deflation when there is a fall in the prices of the commodities.
Direct Tax:
These are the taxes that are levied on us directly. Taxes on Corporate Income, Capital Gains tax,
Personal Income tax and Fringe benefit tax fall under this category.
Dividends:
It is the portion of the profits made by a company that is paid to the share holders.
Exchange rate:
Also called as Foreign Exchange Rates or FOREX of a country specifies how much the country’s
currency is worth in terms of the other currency.
Fiscal Deficit:
Fiscal Deficit= Goverment Expenditure in the current fiscal year- Goverment Revenues in the fiscal
year.
Fiscal Policy:
It is the use of goverment revenue to influence the country’s economic situation.
Free Trade:
In this type of trade there is no tariffs to the imported or exported goods between two countries.
Fringe Benefit:
These are the benefits that are offered to employees in addition to their salaries like lunch coupons,
cars, free petrol etc.
GATT:
The General Agreement on Tariffs and Trade{GATT} was created in 1947 as a replacement to
International Trade Organization (ITO). GATT was replaced by World Trade Organization in the
year 1995.
Expenditure method:
GDP = consumption + gross investment + government spending + (exports – imports)
Note: GNP is similar to GDP except for the fact that GNP takes the country’s localities into account
Income method:
The formula for GDP measured using the income approach, called GDP(I), is:
GDP = Compensation of employees + Gross operating surplus + Gross mixed income + Taxes less
subsidies on production and imports
Giffen goods:
These are the goods which people consume more as prices increase thereby violation law of demand.
{Usually people purchase less as the prices increase}
Inflation:
An economy is said to be in inflation when there is a rise in the price of the commodities.
Indirect Tax:
These are the taxes that we don’t pay directly. It includes Excise Duty, Customs Duty, Service tax and
Securities Transaction Tax.
INSTITUTE OF BANKING SERVICES (IBS)
Insurance Regulatory & Development Authority (IRDA):
It is based in Hyderabad and the Mission of IRDA as stated in the act is “to protect the interests of
the policyholders, to regulate, promote and ensure orderly growth of the insurance industry and for
matters connected therewith or incidental thereto.”
Macro-economics:
As the word suggests, it deals with the economic behaviour and performance of an entire country.
Microcredit
It is the provision of credit, parsimony, and other financial services and products of very small
amount to the poor in semi-urban, rural and urban areas. It is to enable them to raise their income
levels and improve their living standards.
Micro-economics:
This deals with studying how firms and households make decisions to allocate resources in markets.
Market analysis is the main concept of Microeconomics.
Monetary Policy:
The policy through which the RBI controls the supply, availability and cost of money {Interset rate}
in order to attain economic goals.
Nominal GDP:
Nominal GDP growth is GDP growth in nominal prices (unadjusted for price changes).
INSTITUTE OF BANKING SERVICES (IBS)
Parallel economy:
Alternative term for black economy, shadow economy and underground economy.
Quasi Money:
Also called as Near Money. These are the assets that can be easily converted to money without no
loss in value.
Real GDP:
Real GDP growth is GDP growth adjusted for price changes(using ppp).
Repo rate:
The rates at which banks borrow money from RBI.
Securities:
It is an instrument that has a financial value. It can be classified as debt securites{Bank
notes(currency), bonds} and equity securities{Stocks}.
Subsidy:
It is the payment given to the producers and distributors in a particular sector to prevent the
downfall of that sector. For example goverment providers subsidies to small scale industry owners in
order to prevent the downfall of small scale industries in the country.
Treasury Bills:
These are short term borrowing instruments that are issued by RBI. They are issued at discount to
INSTITUTE OF BANKING SERVICES (IBS)
face value and on attaining maturity the maturity value is paid to the holder. The minimum amount
in treasury bills is 25,000 Rs and thereafter they are available in multiples of 25,000.
World Bank:
It is an international financial institution that was established in the year 1945. It provides loans to
poor countries in order to reduce poverty.
From the ancient times in India, an indigenous banking system has prevailed. The businessmen
called Shroffs, Seths,Sahuk ars, Mahajans, Chettis etc. had been carrying on the business of banking
since ancient times. These indigenous bankers included very small money lenders to shroffs with
huge businesses, who carried on the large and specialized business even greater than the business of
banks.
The origin of western type commercial Banking in India dates back to the 18th
century. The story of banking starts from Bank of Hindusthan established in 1779 and it was first
bank at Calcutta under European management.
In 1786 General Bank of India was set up. Since Calcutta was the most active trading port in India,
mainly due to the trade of the British Empire, it became a banking center.Three Presidency banks
were set up under charters from the British East India Company- Bank of Calcutta, Bank of Bombay
and the Bank of Madras. These worked as quasi central banks in India for many years. The Bank of
Calcutta established in 1806 immediately became Bank of Bengal.
In 1921 these 3 banks merged with each other and Imperial Bank of India got birth. It is today's State
Bank of India. The name was changed after India's Independence in 1955. So State bank of India is
the oldest Bank of India.
In 1839, there was a fruitless effort by Indian merchants to establish a Bank called Union Bank. It
failed within a decade.
Next came Allahabad Bank which was established in 1865 and working even today. The oldest Public
Sector Bank in India having branches all over India and serving the customers for the last 145
years is Allahabad Bank. Allahabad bank is also known as one of India's Oldest Joint Stock
Bank. The Oldest Joint Stock bank of India was Bank of Upper India established in 1863 and failed
in 1913.
The first Bank of India with Limited Liability to be managed by Indian Board was Oudh Commercial
INSTITUTE OF BANKING SERVICES (IBS)
This was the first phase of Indian banking which was a very slow in development. This era saw many
ups and downs in the banking scenario of the country. The Second Phase starts from 1935 when
Reserve bank of India was established. Between the period of 1911-1948, there were more than 1000
banks in India, almost all small banks. The
Reserve Bank of India was constituted in 1934 as an apex Bank, however without major
government ownership. Government of India came up with the Banking Companies Act 1949. This
act was later changed to Banking Regulation (Amendment) Act 1949.
The Banking Regulation (Amendment) Act of 1965 gave extensive powers to the Reserve Bank
of India. The Reserve Bank of India was made the Central Banking Authority. The banking sector
reforms started immediately after the independence. These reforms were basically aimed at
improving the confidence level of the public as most banks were not trusted by the majority of
the people. Instead, the deposits with the Postal department were considered safe.
State Bank of India was made to act as the principal agent of RBI and handle banking transactions of
the Union and State Governments.In a major process of nationalization, 7 subsidiaries of the State
Bank of India were nationalized by the Indira Gandhi regime. In 1969, 14 major private commercial
banks were nationalized. These 14 banks
INSTITUTE OF BANKING SERVICES (IBS)
The above was followed by a second phase of nationalization in 1980, when Government of India
acquired the ownership of 6 more banks, thus bringing the total number of Nationalised Banks to
20. The private banks at that time were allowed to function side by side with nationalized banks and
the foreign banks were allowed to work under strict regulation.
After the two major phases of nationalization in India, the 80% of the banking sector came under
the public sector / government ownership.
The Cash Reserve Ratio is the amount of funds that the banks are bound to keep with Reserve bank
of India, with reference to the demand and time liabilities (NDTL) to ensure the liquidity and
solvency of the Banks. Please note that earlier RBI was empowered to fix RBI between 3-20% by
INSTITUTE OF BANKING SERVICES (IBS)
notification. However, from 2006 onwards the RBI is empowered to fix the CRR on its discretion
without any ceiling. The CRR is maintained fortnightly average basis.
Please note that RRBs (Regional Rural Banks) maintain the same CRR as Scheduled Commercial
Banks from 2002 onwards). Current CRR is 5.5%
When CRR is reduced, more funds are available to banks for deploying in other business as
they have to keep fewer amounts with RBI. This means that the banks would have more money to
play and this leads to reduction of interest rates on Loans provided by the Banks.
RBI uses the method of CRR hike to drain out the excess liquidity from the banks. This is because;
the banks will now have to keep more money with the Reserve Bank of India. On this money banks
don`t earn any / much interest. Since they don't earn any interest, the banks are left with an option
to increase the interest rates. If RBI hikes this rate substantially, banks will have to increase the loan
interest rates. The home loans, car loans and EMI of floating Rate loans increase.
Basel Committee on Banking Supervision is an institution of Governors of the Central Banks of "G-
10" nations and was formed in 1974. It has 27 members viz. Argentina, Australia, Belgium, Brazil,
Canada, China, France, Germany, Hong Kong SAR, India, Indonesia, Italy, Japan, Korea,
Luxembourg, Mexico, the Netherlands, Russia, Saudi Arabia, Singapore, South Africa, Spain,
Sweden, Switzerland, Turkey, the United Kingdom and the United States.
Out of them 12 are permanent members and its headquarters are located at Basel Switzerland. This
Basel Committee on Banking Supervision works on strengthening the soundness and stability of
the banking system, internationally.
In July 1988, it had released the guidelines on Capital Measures and Capital standards, which
were called Basel-I. These guidelines were accepted by RBI also and were implemented w.e.f 1992.
In June 2006, it again issued the revised guidelines which are called Basel II. In line with the Basel
II, RBI had issued the detailed guidelines from 2007.
The Narasimham Committee had recommended that the SLR should be reduced to 25% over the
period of time. The Narasimham Committee recommended that CRR should be reduced to 10% over
the period of time. The impact of reducing the CRR and SLR was that now more funds of the banks
could be deployed to some more remunerative loan assets.
The Narasimham Committee recommended that the Priority sector should be redefined and it
should include the following:
Marginal farmers
Tiny sector
Narasimham Committee recommended that there should be a target of 10% of the aggregate credit
fixed for the Priority Sector at least. (discussed later) The result of the Narasimham committee led to
some milestones in the banking sector reforms in India.
We all know that Capital refers to the assets which are capable of generating income and which
have themselves been produced. This is one of the four factors of production and consists of
Machine, Plant and Building, Land and Labour.
But in Banking Industry, Capital refers to the stock of Financial Assets which is capable of
generating income.
The Capital Adequacy Ratio is a thermometer of Bank's health, because it is the ratio of its capital to
its risk.
INSTITUTE OF BANKING SERVICES (IBS)
So simply, Capital Adequacy Ratio = Capital ÷Risk
So, the Capital Adequacy can indicate the capacity of the Bank's ability to absorb the
possible losses. The Regulators check CAR to monitor the health of the Bank, because a good CAR
protects the depositors and maintains the faith and confidence in the banking system.
CRAR is the acronym for capital to risk weighted assets ratio, a standard metric to measure balance
sheet strength of banks.
BASEL I and BASEL II are global capital adequacy rules that prescribe a minimum amount of capital
a bank has to hold given the size of its risk weighted assets. The old rules mandate banks to back
every Rs. 100 of commercial loans with Rs. 9 of capital irrespective of the nature of these loans. The
new rules suggest the amount of capital needed depends on the credit rating of the customer.
3. Market Discipline
The first pillar Minimum Capital Requirement has been discussed above. This mainly for total
risk including the credit risk, market risk as well as Operational Risk .
The second pillar i.e. Supervisory Review Process is basically intended to ensure that the banks
have adequate capital to support all the risks associated in their businesses.
In India , the RBI has issued the guidelines to the banks that they should have an internal
supervisory process which is called ICAAP or Internal Capital Adequacy Assessment Process. With
this tool the banks can assess the capital adequacy in relation to their risk profiles as well as adopt
strategies for maintaining the capital levels.
Apart from that, there is another process stipulated by RBI which is actually the Independent
INSTITUTE OF BANKING SERVICES (IBS)
assessment of the ICAAP of the Banks. This is called SREP or Supervisory Review and Evaluation
Process.
The independent review and evaluation may suggest prudent measures and supervisory actions
whatever is needed.
ICAAP is conducted by Banks themselves and SREP is conducted RBI which is along with the RBI's
Annual Financial Inspection (AFI) of the bank.
The idea of the third pillar is to complement the first and second pillar. This is basically a
discipline followed by the bank such as disclosing its capital structure, tier-I and Tier –II Capital and
approaches to assess the capital adequacy.
In the above discussion, we could understand that the Basel II and forthcoming Basel III are
basically guidelines which focus upon adequate capital in the banks and minimize the risk to the
customers or depositors. The idea is to make a sound financial system which not only helps the
banks and but the entire economy of the country to maintain the trust and faith, as transparency in
the business. The centerpieces are "Capital Adequacy" and "Risks.
The Basel-I defined two tiers of the Capital in the banks to provide a point of view to the regulators.
The Tier-I Capital is the core capital while the Tier-II capital can be said to be subordinate capitals.
The following info shows the 2 tiers of the Capital Fund under the Basel II.
Tier-I Capital
Paid up Capital
Statutory Reserves
Other disclosed free reserves
Capital Reserves which represent surplus arising out of the sale proceeds of the assets.
Investment Fluctuation Reserves
Innovative Perpetual Debt Instruments (IPDIs)
Perpetual Noncumulative Preference Shares.
Minus:
Equity Investment in subsidiaries.
Intangible assets.
Losses (Current period + past carried forward)
Tier-II Capital
As per the Basel II accords, the banks have to maintain the Minimum Total CRAR of 8%. The
RBI stipulated 9% for India and within that the Tier Capital would be 6% (By 31.3.2010)
Most banks prefer to hold at least 12% CAR at all points of time because a lower CAR increases their
cost of resource Please note that banks have to follow the following minimum requirements of
Capital Fund: