Mastering Essential Banking Terms: A User-Friendly Guide

Banking words can be tough to understand. But, knowing them helps in using bank services better. Here are some important banking words:

1. NEFT (National Electronic Funds Transfer) – A way to send money between banks electronically.
2. Linked Account – An account connected to yours for sending money.
3. Base Rate – The lowest rate a bank can lend money to customers.
4. Balance Transfer – Moving the balance from one credit card to another.
5. Cashback – Money given back to you for spending on your credit card.
6. Credit History – Your past behavior with loans that shows how likely you are to pay back a loan.
7. Collateral – Something valuable, like land or gold, that you give to the bank when you take a loan.
8. Documentation Fee – Money you pay for the bank to check if you can borrow money.
9. Fixed Rate – An interest rate for a loan that stays the same.
10. Floating Rate – An interest rate for a loan that can change.
11. MICR Code – A nine-digit number on a check that is different for each bank.
12. No-frills Account – A basic savings account that doesn’t need a minimum balance.
13. Electronic Clearing Service – A way for money to be taken from your account every month for a loan payment.
14. Processing Fee – Money you pay for the bank to handle your loan application.
15. RTGS (Real Time Gross Settlement) – A way to send money between banks that is immediate and costs less.
16. KYC (Know Your Customer) – A check banks do to make sure you are who you say you are.
17. Routing Number – A number that identifies your bank based on where it is.
18. APR (Annual Percentage Rate) – Yearly interest you earn by putting your money in an account, without considering compound interest.
19. Compound Interest – Interest earned on your deposit plus the interest from before.
20. Returned Item Fee – A fee you pay if a check bounces.
21. Overdraft Fee – A fee you pay if you take out more money than you have in your account.
22. Liquidity – Being able to sell something without changing its price.
23. Monetary Policies – Rules from the Reserve Bank of India for banks.
24. Plastic Money – Debit and credit cards.
25. Cash Reserve Ratio (CRR) – The percentage of total bank deposits that has to be kept as cash.
26. Statutory Liquidity Ratio (SLR) – The minimum amount of gold a bank needs to have.
27. Bank Rate – Interest rate that the RBI charges banks to borrow money.
28. Basis Point – One hundredth of a percent, used to show changes in interest rates.
29. Capital Gain – Profit a bank makes from selling investments or property.
30. Debtor – A person or group that owes money to the bank.
31. Joint Account – An account shared by two or more people.
32. APY – Yearly percentage of interest earned, not including compound interest.
33. Bank Ombudsman – The person to complain to if other complaint methods don’t work.
34. Credit Rating – A number showing your credit history that helps decide if you can get a loan.
35. Micro Finance – Small loans given to poor people to help them make more money.
36. Mobile Banking – Using bank services on your mobile phone.

Mastering Essential Banking Terms


The concept of Universal Banking was recommended by Khan Committee. Universal Banking means allowing FIs and Banks to undertake  all kinds of activity of banking or  development financing activity, subject to compliance of statutory and other requirements prescribed by RBI, Govt. and related legal acts.

Activities include low risk activities like acceptance of deposits, investing in securities, medium risk activities like granting of loans, high risk activities like credit cards, forex, merchant banking , insurance and  project financing.

The objective is to help offer world class financial services to the clients by using information technology and cross selling, reduce per customer cost and increase per customer revenue, take benefit of economies of scale and compete with international banks expanding business.


Factoring is a financial transaction in which  short term domestic receivables on sale of goods or services are sold to  a company known as a Factor. It was introduced during 1991 on the report of Kalyanasundramam committee.It is  a type of debtor finance in which a business sells its accounts receivables (i.e. invoices) to a third party (called a factor) at a discount. A business will sometimes factor its receivable assets to meet its present and immediate cash needs.


It represents the purchase obligations, which  fall due at some future date and arise from delivery of goods or services  in export transactions, without recourse to the previous holder of obligation. It  is on the pattern of factoring and deals with long term and medium export receivables (deferred payment exports) while factoring deals with short term receivables.


It was introduced by RBI during June 2000.Under this fund is used by Banks for their day to day mismatch in liquidity. It  is short term loan that RBI allows to a commercial bank to cover the short term liquidity problem. It is through repo-reverse repo mechanism. All banks except RRBs and PDs having current accounts and SGL account with RBI are eligible.

Cap: 0.25% of NDTL w.e. 01.04.2014.

Minimum bid size: Rs 5 cr and in multiple of Rs 5 cr.

Eligible securities : Central Govt  dated securities and treasury bills.

ROI as fixed by RBI.


REPO means repurchase option , it is a forward  agreement  between bank & RBI.Bank. Bank promises  to repurchase G-Sec after REPO period. REPO period overnight, 7 days for term repo.It is also called sale purchase agreement .

 Repo-when RBI purchases govt. securities from banks to inject liquidity. It increases the liquidity with banks. It is done at Repo rate.

Reverse Repo: Under this banks deposit surplus cash to RBI.RBI provides G-Sec as collateral .It is called reverse repurchase option .Bank promises to resell G-Sec to RBI after Rev REPO period i.e. overnight.  RBI sells govt. securities to bank to absorb liquidity. It reduces liquidity with banks and done at Reverse Repo Rate.


Both CD & CP are Usance Promissory notes. Both are issued at Discount to face value. Can be issued in Dematerialisation form only.

Who can issue

Scheduled commercial banks (except RRBs) and All India Financial Institutions within their Umbrella limit(For issue of CD 4 conditions are to be satisfied

(1) Net worth Rs. 4 cr.

(2)Sanctioned working capital.

(3)Their loan accounts in standard category . (4)Credit rating of A3 from CRISIL or equivalent from others.

Financial Institutions, Primary dealers & reputed companies
CRR/SLR  Applicable on the issue price in case of banks Not applicable.
Investors Individuals (other than minors), corporations, companies, trusts, funds, associates etc Individuals (other than minors), corporations, companies, trusts, funds, associates etc
Maturity Min 7 days, Max 12 months (in case of FIs minimum 1 year and maximum 3 years) Min 7 days Max 12 months
Amount Min Rs. 5 lac, beyond which in multiple of Rs. 5 lac Min Rs. 5 lac, and in multiple of Rs. 5 lac
Loan Not allowed Not allowed
Premature Payment Not  allowed Not allowed



In India the concept of Narrow banking was introduced on recommendation of Committee on Capital Account Convertability.It was suggested as a solution to the problem of high NPAs and related matters.

Narrow banking is term used to describe a very restricted form of banking, where the institute is not allowed to take risks by giving fresh loans to business. Instead, it uses the incremental funds to invest in zero risk government securities with maturity period matching its liability maturity profile , so that there is no problem relating to asset liability mismatch . The idea is that the bank does not build up fresh bad loans.

Such an approach can ensure the regular deployment of funds in low risk liquid assets .With such deployment of funds theses banks are expected to remove the problems of bank failure and the consequent systemic risk and loss to depositors.


Shadow banking comprises a diverse set of institutions and markets that collectively carry out traditional banking functions  – but do so outside or in a way loosely linked to the traditional system of regulated depository institutions.

 Shadow banking system is the group of financial intermediaries facilitating the creation of credit across the global financial system but whose members are not subject to regulatory oversight. The shadow banking system also refer to unregulated activities by regulated institutions.

Ex securitization vehicles, money market mutual funds, investment banks , mortgage companies.

Payments Banks

  1. i) Objectives:

The objectives of setting up of payments banks will be to further financial inclusion by providing (i) small savings accounts and (ii) payments/remittance services to migrant labour workforce, low income households, small businesses, other unorganised sector entities and other users.

  1. ii) Eligible promoters :
  2. Existing non-bank Pre-paid Payment Instrument (PPI) issuers; and other entities such as individuals / professionals; (NBFCs), corporate Business Correspondents(BCs), mobile telephone companies, super-market chains, companies, real sector cooperatives; that are owned and controlled by residents; and public sector entities may apply to set up payments banks.

iii) Scope of activities :

  1. Acceptance of demand deposits. Payments bank will initially be restricted to holding a maximum balance of Rs. 2,00,000 per individual customer.
  2. Issuance of ATM/debit cards. Payments banks, however, cannot issue credit cards.
  3. Payments and remittance services through various channels.
  4. BC of another bank, subject to the Reserve Bank guidelines on BCs.
  5. Distribution of non-risk sharing simple financial products like mutual fund units and insurance products, etc.
  6. iv) Deployment of funds :
  7. The payments bank cannot undertake lending activities.
  8. Apart from amounts maintained as Cash Reserve Ratio (CRR),  SLR minimum 75 per cent
  9. v) Capital requirement :

The minimum paid-up equity capital for payments banks shall be Rs. 100 crore.

  1. The payments bank should have a leverage ratio of not less than 3 per cent, i.e., its outside liabilities should not exceed 33.33 times its net worth (paid-up capital and reserves).
  1. vi) Promoter’s contribution:The promoter’s minimum initial contribution to the paid-up equity capital of such payments bank shall at least be 40 per cent for the first five years from the commencement of its business.

The RBI has given licences to11 payment bank of which Six payment  banks has so far established –India Post Payment Bank , Airtel Payments Bank, Fino Payment Bank ,  Paytm Payment Bank,Jio Payment Bank, Aditya Birla idea payment bank. Cholamandlam Investment & Finance ,Dilip Shanghvi and Tech Mahindra abandoned plans to launch PBs within months of getting approval and Aditya Birla idea payment bank recently decided to shut shop.           

Small Finance Banks: As per licensing guidelines they need to give 75%  of their lending to priority sector , up to Rs 10 lac of such loan do not need to be backed up by any collateral security.50% of their loan portfolio should constitute small loans of not more than Rs 25 lacs. After reviewing the performance of SFB , RBI has announced in its  Second Bi-monthly Monetary Policy Statement, 2019-20 dated June 06, 2019, that  ‘on tap’ Licensing of such banks will be issued. Accordingly, RBI released the on tap  licensing guidelines . As per guidelines capital requirement of SFBs has been raised from Rs 200 cr to Rs 300 cr. Payment Banks can apply for conversion into  SBFs after 5 years of operations.

DOOR STEP BANKING: As per regulation 23 of banking regulation act , Banks are allowed on 30.04.2005 to  offer doorstep banking services to its customers. The services can be delivered by the banks through own employees or through agents.

The services should be offered at either residence or office address.The bank will be responsible for the act on omission and commission of its agent.The scheme should not be restricted to any specific client/customers or class of customers.

Services to be offered : Prior to Sep 2020 only non financial services including  pick up of  negotiable instrument (i.e. cheque,DD ,Pay order etc) , request for account statement , delivery of non personalised cheque book, DD ,pay order and delivery of term deposit receipt were available .However with the introduction of the doorstep banking  initiative under EASE by finance ministry  financial services including limited withdrawal of monely have also been made available.

According to target set by PSB alliance a company setup jointly by PSBs , every branch of state run bank in the country will have to entertain at least three requests for offering doorstep banking per month till march 2023.

VOLUNTARY RETENTION ROUTE: The Reserve Bank, in consultation with the Government of India and Securities and Exchange Board of India (SEBI), introduces a separate channel, called the ‘Voluntary Retention Route’ (VRR), to enable FPIs to invest in debt markets in India. Broadly, investments through the Route will be free of the macro-prudential and other regulatory norms applicable to FPI investments in debt markets, provided FPIs voluntarily commit to retain a required minimum percentage of their investments in India for a period. Participation through this Route will be entirely voluntary.

Liquidity Coverage Ratio: To promote short term resilience of banks to potential liquidity disruptions by ensuring that banks have sufficient

Leverage Ratio-BASEL III, a simple transaction non-risk-based Leverage ratio has been introduced to act as a credible supplementary measure to the risk-based capital requirement. Basel committee tested a minimum Tier I leverage ratio of 3% during 1/1/2013 to 01/01/2017.In India the average of LR of commercial bank is above 5%, which is to be maintained regularly, No bank should allow the ratio to be kept below 4.5%. The ratio is calculated on quarterly basis as average of the month end LR over the quarter based on the definition of capital & total specified exposure. Leverage Ratio=Tier 1 Capital/Total asset.

Forex Transaction – Deemed Export: Deemed exports are those transaction in which goods exported does not leave the country and payment of such export is received either in any freely convertible currencies or Indian rupee. These transactions are considered equal to exports and eligible are the incentives and other facilities applicable for export.Examples of Deemed export are – 1. Supply of goods to Export Oriented Units (EOU), Units located in EPZs/SEZs/STPs/EHTPs/BTPs etc, 2. Supply to projects funded by UN agencies. 3. Supply of capital goods under Export Promotion Capital Goods Scheme.These transactions also covered by banks under Whole Turnover Packing Credit Guarantee Scheme and Whole Turnover Post Shipment Guarantee Scheme of ECGC.

SECTION 8 COMPANY: Companies Act, 2013 deals with the procedure of Incorporation of a Section 8 Company and as per this section “A company is referred to as Section 8 Company when it registered as a Non-Profit Organization (NPO) i.e. when it has motive of promoting arts, commerce, education, charity, protection of environment, sports, science, research, social welfare, religion and intends to use its profits (if any) or other income for promoting these objectives”.

START UP: To bring uniformity in the identified enterprises, an entity shall be considered as a “Start- Up” if

o Up to 10 (Ten) years from the date of its incorporation/registration,

o If its turnover for any of the financial year has not exceeded Rs. 100 crore.

o It is working towards innovation, development, or commercialization of new products, processes or services driven by technology or intellectual property; Provided that any such entity formed by splitting up or reconstruction of a business already in existence shall not be considered a “Start-up”.

MARK TO MARKET: The banks are required to invest 18% of their deposits in Govt securities but their average investment is little over 25% now(04.07.2022).Theoretically 23% is covered from any notional losses as they can be kept in the held to held to maturity (HTM ) basket but most banks have been keeping less than 21% in HTM.For the rest , when the price drops , they need to book mark to market losses.

MTM is an accounting practice whereby an asset is valued at the market price and not at the price it is bought. So when the prices drop, the difference between the purchase price and market price has to be provided for.

Other than MTM , there are two other bond baskets that are subject to MTM –available for sale or AFS and held for trading or HFT.While bonds from AFS basket can be sold anytime, those in the HFT basket need to be sold within 90 days of buying.

GREEN BANKING: Green banking means promoting environmental friendly practices and reducing your carbon footprints from your banking activities.  Green banking aims at improving the operations and technology along with making the clients habits environment friendly in the banking business.  It is like normal banking along with the consideration for social as well as environmental factors for protecting the environment.

UNIT BANKING: In this type of banking banks operate only from a single branch.Unit banking refers to a single ,usually very small bank that provides financial services to its local community .typically a unit bank is independent and operates without any connecting banks branches in the area.

MASALA BOND: Masala Bonds are rupee-denominated bonds. It is a debt instrument issued by an Indian entity in foreign markets to raise money, in Indian currency, instead of dollars or local denomination. The International Finance Corporation, issued Rs 1,000 crore bonds (given named it Masala Bonds as ‘masala’ is a Hindi word for spices, it would stimulate the Indian culture at the international platform) to fund infrastructure projects in India in Nov 2014. Such bonds have been named after food stuff in the past also (Chinese bonds named Dim-Sum Bonds after a popular dish in Hong Kong, Japanese bonds name Samurai after the country’s warrior class). Benefit for India Company– An Indian company which offers bonds in foreign currency runs foreign exchange risk. By pricing or issuing bonds in Rupees, it is able to pass on the exchange risk to the investors.Benefit for Foreign Investor – An investor gains healthy gains above the globally accepted pricing benchmark.

DEPOSITORY RECEIPTS: DR is a instruments used by domestic companies to raise capital outside the country. Foreign investors who trade in Indian shares  may buy American DR or Global DR of Indian companies  overseas. Many of them convert it to back into share and sell it on the Indian exchanges. These are classified as FDI transactions and requires investors to file form FC-TRS(foreign currency transfer of shares) with RBI on a portal called FIRMS(Foreign investment reporting and management system) within 60 days.

SUSTAINABLE FINANCING: It is any form of financial product/service that promotes environmental ,social and governance purpose while contributing to the achievement of relevant  targets adopted  by countries under framework, including the Paris agreement on climate and the Sustainable Development Goals of UN.Under this financial support is provided to Green Power, Green Hydrogen , Electric Vehicle or other sustainable projetcs.

MARKET INFRASTRUCTUR INSTITUTIONS (MIIs):Institutions like stock exchange, clearing corporations and depositories are known as market infrastructure institutions precisely they form the backbone of capital market. They provide the necessary infrastructure for trading ,clearing settling and record keeping and thereby play a significant role in ensuring that capital market are carried out efficiently.MIIs are unique institutions providing vital infrastructure for trading, settlement and record keeping.They are vested with regulatory responsibilities while also pursuing commercial interests like other profit oriented entities.

NON FUNGIBLE TOKEN (NFT): Fungible means any asset or goods that can be interchanged with other assets or goods of a similar type. Money is fungible  because whether you have a single 2000 rupee note or four 500 rupee notes or ten 200 rupee notes  the value is still same for everyone. Gold, silver, bronze and metals of the same type  are also all fungible , as are other commodities and even bonds and shares. Non Fungible on other hand  means something  that is unique and can not be replaced with something else. NFTs are non fungible meaning they represent  a unique underlying asset.Non fiungibility as a concept in economics is used  to describe things that can not be  replaced or interchange owing to their unique properties.NFTs are in simple terms digital representation of ownership of such an item recorded on a blockchain.An NFT could be digital or physical asset or anything else which has value.While ownership of an NFT can give the owner control over the qork, the copyright rests primarily with the creator unless such rights have also been transferred.Therefore, there is an element of copyright and intellectual property also involved. NFT can be used as a digital ownership record for authenticating ownership of both digital as well as physical assets.NFTs may be awarded without any monetary consideration or may be bought and sold using traditional fiat currency like the INR.

FISCAL COUNCIL: A fiscal council is an agency created by Government to access the sustainability of government finances, macroeconomic stability and other official objectives. Such an agency periodically review the various government policies and publishes the in public domain for further discussion. As per IMF , 49 countries have fiscal councils as of 2021.Another statistics is that 105 countries have fiscal rules that are frameworks adopted by the governments to keep a check on their fiscal positions.India has a fiscal rules in the form of FISCAL Responsibility and Budget Management Act but there is no fiscal council.

REAL ESTATE INVESTMENT TRUSTS: It can be described as a company that owns and operates real estate to generate income. REIT companies are corporation that manages portfolios of  high value properties and mortgages. They normally lease the properties and collect rental thereon and the rent thus collected latter distributed to shareholders and income and dividend. REITs must pay out at least 90% of their taxable income to shareholders—and most pay out 100 %. In turn, shareholders pay the income taxes on those dividends.Currently RETIs are offering decent return of 6% post all deductions.

REITs invest in a wide scope of real estate property types, including offices, apartment buildings, warehouses, retail centers, medical facilities, data centers, cell towers, infrastructure and hotels. Most REITs focus on a particular property type, but some hold multiples types of properties in their portfolios.

To qualify as a REIT a company must:

Ø Invest at least 75% of its total assets in Real Estate.

Ø Drive at least  75% of its gross income from rental of real estate property , interest on mortgage financing of real estate property or from sale of real estate property.

Ø Pay at least 90% of its taxable income in the form of dividend each year to unit holders.

Ø Be an entity that is taxable as an corporation.

Ø Be managed by board of directors or trustees.

Ø Have a minimum 100 shareholders.

Ø Have not more than 50 % of its share held by five or fewer individuals.

 Three REITs listed on the exchange are Brookfield Indian Real Estate, Embassy Office Park and Mindspace Business Park.