40 Important Banking Terms and their meanings you need to understand

July 19, 2019 | Investopaper

In this modern life, banking has become an integral part. Every day a large population is involved directly or indirectly into the banking system. The major portion of all financial transactions is carried out through the banks. So, it is essential to understand the mechanics of the banking system. In order to carry out day-to-day activities, you need to familiarize yourself to the commonly used banking terms. Here, we have compiled 40 banking terms along with their meanings that may be helpful for you.

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Automated Teller Machine (ATM)

ATM machine dispenses cash and also provides mini statements to the customer. When the customer opens a bank account in the bank, s/he will be provided ATM card. By using this card s/he can withdraw money from any ATM machines.

ASBA

ASBA stands for Application Supported by Blocked Amount. It is the system through which the account holder can apply for shares (IPOs and FPOs). The value of the applied share will be in the same bank account but will be blocked or frozen. Once the share is allotted, only the allotted amount will be deducted from that bank account.

Bancassurance

Bancassurance is the selling of the insurance policies and products of insurance companies by banks. The banks act as a corporate agent of insurance companies through their branches.

Bank Rate

Bank rate is the rate of interest that is charged on the amount lent by the Central Bank to the banks and financial institutions.

Base Rate

Base rate is the minimum rate of interest on which bank can issue loans. It is calculated as per the formula provided by the Central Bank.

Bank Statement

The bank statement is the summary record of all the transaction of an account holder of a particular bank showing all the debits (withdrawals) and credits (deposits).

Bounced Cheque

It refers to the unsuccessful processing of the cheque. A situation where the account of the person does not have enough balance in his/her bank account to cash the amount written on the cheque.

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Capital Market

Capital market is the financial market where the long-term financial instruments like stocks, bonds, and others are traded. These instruments generally have a maturity period of more than a year.

CCD Ratio

CCD ratio stands for the credit to core capital plus deposit ratio. It is the limit to which the banks are allowed to issue the loans and advances. In Nepal, the CCD ratio limit is set at 80% by NRB and the remaining 20% is held by the banks for maintaining the liquidity. If a bank has Rs 100 as a sum of core capital and deposit, then it can provide a loan only up to Rs 80 and remaining Rs 20 should be held as liquidity.

Cheque

A cheque is a document that orders a bank to pay a specific amount of money from a person’s account to the entity whose name the cheque has been issued. When a  bank account is opened, the bank provides the checkbook to the account holder. There are three parties involved in cheque i.e. Drawer. Drawee and Payee.

Drawer: The person writing the cheque or the bank account holder.

Drawee: Bank who is responsible to make payment

Payee: Party receiving the payment whose name is written in the cheque

Compound Interest

It is the system or process of calculating the interest where interest receivable or accumulated is added with the principle that will give the compound amount and the interest is charged back on that compound amount. The interest amount is higher than the simple interest.

Cost of Fund

Cost of fund refers to the rate of interest that the bank and financial institutions have to bear while collecting the funds. In other words, it is the weighted average of all types of interest rates paid to various types of deposit accounts (short term and long term).

Credit Crunch

A credit crunch is a condition where banks are in a tight position to offer loans. During the credit crunch, the demand for the loan is high but the supply of deposit is very low or negligible.

Cash Reserve Ratio (CRR)

CRR is the certain rate of the amount of the cash that the bank and financial institutions should hold as reserves in the Central Bank. Currently, in the fiscal year, 2018/19 Nepal Rastra Bank has decreased the CRR rate from 6% to 4% for the commercial banks.

Demat Account

Demat Account is the account in which the investors can hold their shares in electronic form.

Digital Wallet / E-Wallet

Digital wallet is an application or system that allows the customer to perform a financial transaction (receive and payment) in the electronic medium. You will have unique user id where you can load money through bank account and the make payments in exchange of goods and services to supplier/seller.

E-Banking

E-banking is an electronic system which allows customers of the bank and financial institution to conduct their banking transaction, check the bank statements and other available services through their respective banks’ website. It is also popularly known as online banking and internet banking. The use of e-banking in Nepal is also increasing as it is easy to use and saves time.

Electronic Fund Transfer

Electronic fund transfer (EFT) is an electronic transfer of money from one bank account to another, either within a single financial institution or across multiple institutions, without the direct intervention of bank staff.

Fiscal Policy

Fiscal policy is the policy of the government which adjusts its spending levels (expenditure) in different sectors on the basis of its priority and tax rates (revenue) to influence the economy.

Initial Public Offering (IPO)

Initial Public Offering is an act of raising the investment capital by offering the stock of a company on a public stock exchange for the first time. In Nepal, the face value of IPOs is generally Rs 100.

Interest Rate Corridor

Interest rate corridor is the system or framework that is designed by the Central Bank to stabilize the short term interest rates by implementing on short terms monetary instruments like interbank rate, the repo rate, treasury bills, and others by setting the upper limit and lower limit of the interest rate.

Liquidity

Liquidity refers to the ability to convert (selling or buying) the liquid assets into the cash without affecting the assets price.

Monetary Policy

Monetary policy is the policy that is introduced by the Central Bank of the country which controls the money supply using the interest rates in the market in order to maintain the normal inflation rate to ensure the price stability and maintain the financial stability in the country.

Money Market

The money market is the market where the short term financial instruments which are highly liquid are traded. These money market instruments have a maturity of less than a year and possess less risk.

Mortgage

Mortgage is a legal agreement by which a bank and financial institutions lends money at certain interest rate in exchange for a collateral (debtor’s property which includes current and fixed assets) as a security of loan, with the condition that in case of the default by the borrower the bank will have right on that property to recover its loan amount along with interest receivable and the banks have to return the collateral upon the payment of the debt

Mutual Funds

A mutual fund is the professionally managed investment fund. It collects funds from many small and large investors. The main purpose is investing in securities such as stocks, bonds, money market instruments, etc.

Non-Performing Assets (NPA)

NPA refers to those kinds of loans and advances issued by the banks which are default or about to be a default. The borrowers are not paying their loan principal as well as interest.

Plastic Money

Plastic Money refers to hard plastic cards like credit cards, debit cards, cash cards, dollar cards, and other similar cards. It is being used in everyday life for making payments and replacing the use of paper cash.

Point of sale (POS)

Point of sale (POS) is also known as the point of purchase. It is the time and place where a customer completes its retail transaction by making payment in exchanges of goods and services.

POS (Point of Sale) terminal/ Process Data Quickly (PDQ) machine

A point of sale terminal (POS terminal) is an electronic handheld device. It is used to process card payments at retail location and prints a receipt.

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Premium Rate

In banking, a premium is the cost or reward of the risk borne or taken by banks while issuing the loans to its customers. It is the percentage that is added with the base rate of the particular bank which gives interest rate for lending. The premium rate differs from one customer to another and also on different package and sector.

Prime Interest Rate

Prime interest rate is the lowest rate of interest charged by banks to its largest, most secure, and most creditworthy customers on short-term loans. This rate is used as a guide for computing interest rates for other borrowers.

Repo Rate

The word “repo” means a repurchase agreement. Repo rate is the rate at which the Central Bank of a country lends money to its commercial banks against securities in the event of any shortfall of funds.

Reserve Repo Rate

Reserve Repo is just the opposite if the repo where the Central Bank borrows money from the commercial banks. So the reverse repo rate is the rate at which the central bank of the country borrows money from its commercial banks for short term purposes.

Retail Banking

Retail banking is the services that are provided by the bank to the general public on an individual basis. It is also known as consumer banking.

Real-Time Gross Settlement (RTGS)

RTGS is a form of electronic fund transfer system that transfers or clear and settle the high-value funds or cheques from one bank to other banks within a country in a few seconds.

Statutory Liquidity Ratio (SLR)

SLR is a provision of reserve requirement set by the central bank to its bank and financial institutions for maintaining some liquidity in the form of cash, government bonds or other convertible assets. At present, NRB has provisioned 10% SLR for commercial banks

SWIFT

SWIFT stands for Society for Worldwide Interbank Financial Telecommunication. It is an electronic system that connects financial institutions all over the world through a network. It allows performing the financial transaction (receive and payment) internationally.

Teller

Teller is the staff of the bank who cashes cheques, accepts deposits and performs different banking services for customers.

Wholesale Banking

Wholesale Banking is the services that are provided by the bank to companies or corporation or institutions. It is also known as commercial banking

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