BANKING TERMS

1. National Electronic Funds Transfer (NEFT) Transfer of funds initiated by electronic means such as an electronic terminal, telephone, computer, or ATM. The NEFT facilitates the process of fund transfer within the same bank or inter-bank transfers. The minimum amount that can be transferred is as low as Rs 100. 2. Linked Account Any account linked to another account in the same bank where funds can be transferred electronically between accounts and carry out other specified services as well.

 3. Travellers' Cheque Cheques issued by a bank and function as cash but are protected against loss or theft when travelling. 4. Base Rate It is the minimum rate a bank charges its most credit worthy customer. The bank cannot lend below this rate (with an exception to banks employees, loans to bank's depositors against their own deposits, albeit with the subvention of the central bank). For a retail customer, the Base Rate will cover all loans from auto, personal to home loans effective from July 1, 2010

 5. Balance Transfer Balance transfer is an option included under credit card payments and is useful for persons holding more than one card. On availing this facility, the cardholder can transfer the balance amount outstanding on card one to card two and vice versa, if he/she is not able to make full payment that is due on a particular card. In any case, the payment due date is only delayed but the payment has to be made at the scheduled time as stated in card two. Balance transfer facility is useful in reducing the interest outgo (on card one) and extending the payment due date on the original card. 6. Banking Ombudsman Banking Ombudsman is an unbiased forum formed to resolve complaints registered by bank customers with respect to the services provided by banks. The RBI introduced this scheme under Section 35A of Banking Regulation Act, 1949. In case one has not been satisfactorily serviced by their bank, they should first register a complaint with the bank customer service department. If they are not happy with the bank's response, then they can approach the banking ombudsman for an unbiased resolution.

 7. Cashback The term 'cashback' is used with reference to credit cards. Cashback means giving back some portion of money (spent by the cardholder through the credit card) to the cardholder himself. The cashback is made in terms of points earned; for example, the bank may say one point will be earned for every Rs 100 spent by the cardholder and at the end of the year, the money worth of the points earned (say Rs 1 for 1 point) will be credited back into the cardholder's account. 8. Credit History Credit history is an account of an individual's past borrowings by way of loans, credit cards and all other debt that needs to be repaid/has been repaid. Credit history in India is currently being provided by CIBIL (Credit Information Bureau of India Limited) and contains records of an individual's open and past accounts of loans and credit cards. Through the CIBIL report, the bank (lender) can know if the individual (borrower) had made any late payments or defaults. You can get your own credit history report from CIBIL for a nominal fee.

 9. Collateral A borrower needs to provide some kind of security to the bank in case of high ticket loans (except home loans where the property is the security). Such security is called 'collateral'. In case the borrower fails to repay the loan, the bank has the authority to attach the collateral to the loan and claim its dues. 10. Documentation/Processing Fee Bank requires certain documents from the borrower to look into his creditworthiness and charges a fee for the same. These charges are known as documentation charges. Processing Fee is charged by the bank upon sanctioning of loan to the borrower.

 11. Dormant/Inactive Account If an individual has not made any transactions in his/her account (except for interest payments credited by the bank) for more than two years, the savings/current account is declared as dormant/inactive. 12. Fixed Rate Fixed rate is the interest rate that remains constant for the full term of the loan.

 13. Floating Rate An interest rate that is referenced to a market rate and is revised as per the change in the interest rates in the economy. When interest rates in the economy rise, floating rates rise and vice versa. 14. MICR Code MICR stands for Magnetic Ink Character Recognition. MICR Code comprises 9 digits given at the bottom (right side) of the cheque number. It is a unique code and varies between each bank branch. MICR Code is required for cheque clearance. MICR Code is different from the IFSC code, which is also mentioned on a cheque.

 15. No-frills Account This account is a basic savings account provided by banks to make banking simpler and more accessible for all customers. In a no-frills account, you do not have to maintain minimum balance and enjoy basic banking facilities such as electronic funds transfer (EFT), netbanking, free cheque book issuance. 16. Electronic Clearing Service (ECS) It is a service provided by the banks to facilitate direct debit from your bank account towards an investment account (such as a mutual fund SIP) and/or paying regular loan EMIs. One can give a standing instruction (SI) to the bank to transfer the specified amount every month for a specified period. Alternatively, you can direct a one-time transfer of funds through NEFT/RTGS (explained next).

 17. Processing Fee Bank levies processing fee in order to process the loan application of the borrower. This fee is a small percentage (example: 2.5 per cent) of the loan amount sanctioned and is usually waived off during festival time to attract more borrowers. 18. RTGS The RTGS or Real Time Gross Settlement System facilitates fund transfer within same bank or inter-bank transfers, but unlike NEFT, RTGS ensures the fund transfer fast and smooth in 'real-time' for a nominal fee. The minimum transfer amount is higher than NEFT (usually Rs 2 lakh and above).

 19. IFSC IFSC code is useful in bank fund transfers and cheque clearance. It is an 11 character code assigned by RBI to identify every bank branch uniquely. The first part is the first 4 alphabet characters representing the bank. Next character is 0 (zero) and is reserved for future use. The last 6 characters is the branch code. 20. KYC KYC or Know Your Customer norms are imposed by RBI on banks and other financial institutions to ensure that the correct identity of the banks' customers is established and to ensure that banks deal only in legitimate banking operations and not in money laundering or frauds.

 CASA ratio : The CASA (current and savings account)

ratio is the ratio of deposits in the current and savings accounts of a bank to its total deposits.[1] A high CASA ratio indicates that a higher portion of the banks deposits come from current and savings accounts. This means that the bank is getting money at low cost, since no interest is paid on the current accounts and the interest paid on savings account is usually low. Current and Saving Accounts are demand deposits and therefore pay lower interest rates compared to term deposits where the rates are higher. Thus higher CASA ratio means that more of the money deposited in the bank is in the demand deposits i.e. the CASA, thus bank is getting the money at lower cost.

 Capital Adequacy Ratio (CAR), also called Capital to Risk (Weighted) Assets Ratio (CRAR),is a ratio of a bank's capital to its risk. National regulators track a bank's CAR to ensure that it can absorb a reasonable amount of loss and complies with statutory Capital requirements. Formula
Capital adequacy ratios (CARs) are a measure of the amount of a bank's core capital expressed as a percentage of its risk-weighted asset. Capital adequacy ratio is defined as: TIER 1 CAPITAL = (paid up capital + statutory reserves + disclosed free reserves) - (equity investments in subsidiary + intangible assets + current & b/f losses)

 TIER 2 CAPITAL = A) Undisclosed Reserves + B) General Loss reserves + C) hybrid debt capital instruments and subordinated debts where Risk can either be weighted assets () or the respective national regulator's minimum total capital requirement. If using risk weighted assets, 10%. The percent threshold varies from bank to bank (10% in this case, a common requirement for regulators conforming to the Basel Accords) is set by the national banking regulator of different countries. Two types of capital are measured: tier one capital ( above), which can absorb losses without a bank being required to cease trading, and tier two capital ( above), which can absorb losses in the event of a winding-up and so provides a lesser degree of protection to depositors

 Capital adequacy ratio is the ratio which determines the bank's capacity to meet the time liabilities and other risks such as credit risk, operational risk etc. In the most simple formulation, a bank's capital is the "cushion" for potential losses, and protects the bank's depositors and other lenders. Banking regulators in most countries define and monitor CAR to protect depositors, thereby maintaining confidence in the banking system.[1] CAR is similar to leverage; in the most basic formulation, it is comparable to the inverse of debt-to-equity leverage formulations (although CAR uses equity over assets instead of debt-to-equity; since assets are by definition equal to debt plus equity, a transformation is required). Unlike traditional leverage, however, CAR recognizes that assets can have different levels of risk.

Risk weighting
Since different types of assets have different risk profiles, CAR primarily adjusts for assets that are less risky by allowing banks to "discount" lower-risk assets. The specifics of CAR calculation vary from country to country, but general approaches tend to be similar for countries that apply the Basel Accords. In the most basic application, government debt is allowed a 0% "risk weighting" - that is, they are subtracted from total assets for purposes of calculating the CAR. Risk weighting example Risk weighted assets - Fund Based : Risk weighted assets mean fund based assets such as cash, loans, investments and other assets. Degrees of credit risk expressed as percentage weights have been assigned by RBI to each such assets.

 Non-funded (Off-Balance sheet) Items : The credit risk exposure attached to off-balance sheet items has to be first calculated by multiplying the face amount of each of the off-balance sheet items by the Credit Conversion Factor. This will then have to be again multiplied by the relevant weightage. Local regulations establish that cash and government bonds have a 0% risk weighting, and residential mortgage loans have a 50% risk weighting. All other types of assets (loans to customers) have a 100% risk weighting. Bank "A" has assets totaling 100 units, consisting of: Cash: 10 units Government bonds: 15 units Mortgage loans: 20 units Other loans: 50 units Other assets: 5 units

 Bank "A" has debt of 95 units, all of which are deposits. By definition, equity is equal to assets minus debt, or 5 units. Bank A's risk-weighted assets are calculated as follows Cash = 10*0% =0 Government securities = 15*0%=0 Mortgage loans =20*50%=10 Other loans =50*100% =50 Other assets =5*100%=5 Weighted Assets = 65 Equity =5 CAR (Equity/RWA) = 7.69%

Even though Bank "A" would appear to have a debt-toequity ratio of 95:5, or equity-to-assets of only 5%, its CAR is substantially higher. It is considered less risky because some of its assets are less risky than others.