INSTITUTE OF BANKING SERVICES (IBS) A-Z BANKING TERMS Absolute Advantage: Country ‘A’ has an absolute advantage over country ‘B’ if the output per unit of input of A is higher than that of B. 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. Call Money Market: It is the market in which the Dealers and brokers locate and borrow money to satisfy their investment needs. Capital Gains Tax: Tax paid for the profit made through the sale of an asset. Cash Reserve Ratio{CRR}: It is determined by the RBI and is the minimum reserves each bank must hold to customer deposits and notes.. Both CRR and Statutory Liquidity Ratio{SLR} are used to combat inflation. Higher CRR and SLR decrease the money supply thereby combating inflation. Centrally planned economy: An economic system where the production & pricing of goods and services are determined by the goverment
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INSTITUTE OF BANKING SERVICES (IBS)
A-Z BANKING TERMS
Absolute Advantage: Country ‘A’ has an absolute advantage over country ‘B’ if the output per unit of input of A is higher than that of B.
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.
Call Money Market: It is the market in which the Dealers and brokers locate and borrow money to satisfy their investment needs.
Capital Gains Tax: Tax paid for the profit made through the sale of an asset.
Cash Reserve Ratio{CRR}: It is determined by the RBI and is the minimum reserves each bank must hold to customer deposits and notes.. Both CRR and Statutory Liquidity Ratio{SLR} are used to combat inflation. Higher CRR and SLR decrease the money supply thereby combating inflation.
Centrally planned economy: An economic system where the production & pricing of goods and services are determined by the goverment
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Classical Economics: The theory emphasizes the fact that free market can regulate themselves. This theory was framed by Adam Smith, David Ricardo, Thomas Malthus and John Stuart Mill
Closed economy: The economy is closed and doesnt have any contact with the rest of the world
Consumer Price Index: It is the measure of the average price of consumer goods and services purchased by households. It is measured with 1982 as it’s base year. 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 Account Deficit: Current account deficit= Export-Import
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.
Foreign Direct Investment: It is the investment made by a company in one country on building a factory in another country.
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Foreign Institutional Investor: Investor from a foreign country.
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.
GDP {Gross Domestic Product}:
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
GDP per capita: GDP per capita is the contribution of every citizen of the country to the total GDP
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}
Government Securities {G-Secs} These are issued by the RBI on behalf of the market borrowing programme. It includes State Government Securities, Central Government Securities and Treasury Bills.
Human development Index Measurement based on GDP per capita, life expectancy and education
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.
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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.”
Insurance Regulatory and Development Authority Act in 1999 This act allowed private companies into the insurance sector. It also increased the cap on FDI in insurance sector to 26 percent.
International Labour Organization{ILO} Was established in 1919 and is a specialized UN agency that deals with labour issues.
Internation Monetary Fund: It is an organization of 186 countries that aims at stabilizing foreign exchange rates and assisting the reconstruction of the international payment system. It was established in 1944.
International Poverty Line: It is the minimum money expressed in dollars that an individual needs to achieve an adequate standard of living. For some years this Internation Poverty Line has been roughly around one dollar a day.
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.
Net Domestic Product: NDP= GDP-depreciation of capital goods in that country. All are measured using Purchasing Power Parity
Nominal GDP: Nominal GDP growth is GDP growth in nominal prices (unadjusted for price changes).
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Parallel economy: Alternative term for black economy, shadow economy and underground economy.
Politically Exposed Persons PEPs Politically Exposed Persons are individuals who are or have been entrusted with prominent public functions in a foreign country.
Purchasing power parity: Using market exchange values to equalize their purchasing power.
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.
Reverse repo rate: The rates at which RBI borrows money from the Banks.
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}.
Statutory Liquidity Ratio It is determined by the RBI and is the minimum amount that a bank must hold in the form of gold, cash and government securities.
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.
The Wealth of Nations: It is the famous book written by Adam Smith {Renowned economist}
Treasury Bills: These are short term borrowing instruments that are issued by RBI. They are issued at discount to
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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.
Wholesale price Index: Wholesale price Index is used to measure the inflation in our country and is the price of a basket of wholesale goods with it’s base year as 1993-94.
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.
World Trade Organization: Was established in the year 1995 in order to supervise international capital trade.`
50 BANK TERMS MUST ANSWER
1. What is meant byRepo Rate?
2. What is meant by Reverse Repo Rate?
3. What do you mean by CRR Rate?
4. What is meant by SLR Rate?
5. What do you mean by Bank Rate?
6. What is meant by Inflation?
7. What is meant by Deflation?
8. What is meant by Deposit Rate?
9. What is meant by FII?
10. What do you mean by FDI?
11. What is meant by IPO?
12. What is meant by Disinvestment?
13. What do you mean by Fiscal Deficit?
14. What is meant by Revenue deficit?
15. What do you mean by GDP?
16. What is meant by GNP?
17. What is meant by National Income?
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18. What do you mean by Per Capita Income?
19. What is meant by Vote on Account?
20. Explain the Differences between a Vote on Account and an Interim
Budget?
21. What is meant by SDR?
22. What is meant by SEZ?
23. What is meant by Open Market operations (OMO)?
24. What is meant by Micro Credit?
25. What do you mean by KYC?
26. What is cash profit?
27. What is meant by Liquidity Adjustment Facility (LAF)?
28. What is meant by RTGS System?
29. What is meant by Bancassurance?
30. What is meant by Wholesale Price Index (WPI)?
31. What is meant by Consumer price Index (CPI)?
32. What is meant by Venture Capital?
33. What do you mean by Treasury Bills?
34. What is meant by Banking Ombudsmen Scheme?
35. What do you mean by Subsidy?
36. What is meant by Debenture?
37. What are the types of debentures?
38. What do you mean by hedge fund?
39. What is meant by FCCB?
40. What is meant by Capital Account Convertibility (CAC)?
41. What is meant by Current Account Convertibility?
42. What is meant by Arbitrage?
43. What do you mean by Capitalism?
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44. What is meant by Socialism?
45. Explain prepayment and default risk
46. What are your techniques to estimate your team’s performance?
47. What is transaction and core banking?
48. What is the importance of NRI banking?
49. What is meant by ULIP?
50. Forex? Have you heard about it?What is it?
Brief History of Banking in India-1
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
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Bank. It was established in 1881 at Faizabad. This bank failed in 1958. The first bank purely managed by Indian was Punjab National Bank, established in Lahore in 1895.
The Punjab national Bank has not only survived till date but also is one of the largest banks in
India. However, the first Indian commercial bank which was wholly owned and managed by Indians was Central Bank of India which was established in 1911.So this bank is called India's First Truly Swadeshi bank.
Brief History of Banking in India: 2
Central Bank of India was dreams come true of Sir Sorabji Pochkhanawala, founder of the Bank. Sir
Pherozesha Mehta was the first Chairman of this Bank. Many more Indian banks were established
between 1906-1911. This was the era of the Swadeshi Movement in India. Some of the banks are
Bank of India, Corporation Bank, Indian Bank, Bank of Baroda, Canara Bank and Central Bank of India. Bank of India was the first Indian bank to open a branch outside India in London in 1946 and the
first to open a branch in continental Europe at Paris in 1974. The Bank was founded in September 1906 as a private entity and was nationalized in July 1969. Since the logo of this Bank is a star, its
head office in Mumbai is located in Star House, Bandra East, Mumbai. There was a district in
Today's Karnataka state called South Canara under the British empire. It was bifurcated in 1859
from Canara district , thus making Dakshina Kannada and Udupi district. It was the undivided Dakshina Kannada district. It was renamed as Dakshina Kannada in 1947. Four banks
started operation during the period of Swadeshi Movement and so this was known as "Cradle of Indian Banking.
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.
Brief History of Banking in India -3 The first major step was Nationalization of the Imperial Bank of India in 1955 via State Bank of India Act.
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
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Nationalized in 1969 are as follows:
1. Central Bank of India
2. Bank of Maharastra
3. Dena Bank
4. Punjab National Bank
5. Syndicate Bank
6. Canara Bank
7. Indian Bank
8. Indian Overseas Bank
9. Bank of Baroda
10. Union Bank
11. Allahabad Bank
12. Union Bank of India
13. UCO Bank
14. Bank of India.
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. Please note the following sequence of events:
Creation of Reserve bank of India: 1935 Nationalization of Reserve Bank of India : 1949 (January ) Enactment of Banking Regulation Act : 1949 (March) Nationalization of State Bank of India : 1955 Nationalization of SBI Subsidiaries : 1959 Nationalization of 14 major Banks : 1969 Creation of Credit Guarantee Corporation: 1971 Creation of Regional Rural Banks : 1975 Nationalization of 7 more banks with deposits over Rs. 200 Crore: 1980
The result was outstanding. The public deposits in these banks increased by 800% , as the
government ownership gave the public faith and trust. The third phase of development of banking in
India started in the early 1990s when India started its economic liberalization.
Cash Reserve Ratio 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
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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%
What is impact of reducing CRR?
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.
What is impact of Hiking CRR?
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. What is Basel Committee on Banking Supervision?
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.
First Narasimham Committee
The most important committee was Narasimham Committee on banking Sector Reforms. It was set up in 1991. Please note that there were two Narasimham Committees.
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Narasimham Committee –I was formed in 1991 andNarasimham Committee –II was formed in 1998
and both were related to Banking Sector Reforms. First Narasimham committee submitted its report
in November 1991. It recommended the following: Reduction in the Statutory Liquidity Ratio Reduction in the Cash Reserve Ratio Interest rate in CRR Balances Redefining the priority sector Deregulation of the Interest Rates. Asset Classification and defining the Non Performing Assets. Improve transparency in the banking system Tribunals for recovery of Loans. Tackling doubtful debts Restructuring the banks Allow entry of the new private Banks
Please note these memorable Points: 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
Small business and transport operators
Village and Cottage Industries
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.
Understanding Capital Adequacy 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.
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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.
What is CRAR 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.
Three Pillars of Basel III The Basel III Guidelines are based upon 3 very important aspects which are called 3 pillars of the Basel II.These 3 pillars are as follows:
1. Minimum Capital Requirement
2. Supervisory review Process
3. Market Discipline
First Pillar: Minimum Capital Requirement 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 .
Second Pillar: Supervisory Review Process
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
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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. Third Pillar: Market Discipline 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.
What are Tier I and Tier II Capital?
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
Undisclosed reserves and cumulative perpetual preference shares. Revaluation Reserves General Provisions and loss reserves Hybrid debt capital instruments such as bonds. Long term unsecured loans Debt Capital Instruments. Redeemable cumulative Preference shares
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Perpetual cumulative preference shares.
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:
