Some Important Banking Terms

FRP: Fair and Remunerative Price, a term related to sugarcane. FRP is the minimum price that a sugarcane farmer is legally guaranteed. However sugar Mills Company gives more than FRP price.

STCI: Securities Trading Corporation of India Limited was promoted by the Reserve Bank of India (RBI) in 1994 along with Public Sector Banks and All India Financial Institutions with the objective of developing an active, deep and vibrant secondary

debt market.

IRR: Internal Rate of Return. It is a rate of return used in capital budgeting to measure and compare the profitability of investments.

CMIE: Centre for Monitoring Indian Economy. It is India’s premier economic research organisation. It provides information solutions in the form of databases and research reports. CMIE has built the largest database on the Indian economy and companies.

TIEA: Tax Information Exchange Agreement. TIEA allows countries to check tax evasion and money laundering. Recently India has signed TIEA with Cayman Islands.

Contingency Fund: It’s a fund for emergencies or unexpected outflows, mainly economic crises. A type of reserve fund which is used to handle unexpected debts that are outside the range of the usual operating budget.

FII: Foreign Institutional Investment. The term is used most commonly in India to refer to outside companies investing in the financial markets of India. International institutional investors must register with the Securities and Exchange Board of India to participate in the market.

P-NOTES: “P” means participatory notes.

MSF: Marginal Standing Facility. Under this scheme, banks will be able to borrow upto 1% of their respective net demand and time liabilities. The rate of interest on the amount accessed from this facility will be 100 basis points (i.e. 1%) above the repo rate. This scheme is likely to reduce volatility in the overnight rates and improve monetary transmission.

IMPORTANT BANKING TERMS

MAT: Minimum Alternate Tax is the minimum tax to be paid by a company even though the company is not making any profit.

Future trading: It’s a future contract/agreement between the buyers and sellers to buy and sell the underlying assets in the future at a predetermined price.

Reverse mortgage: It’s a scheme for senior citizens.

Basel 2nd norms: BCBS has kept some restrictions on bank for the maintenance of minimum capital with them to ensure level playing field. Basel II has got three pillars:

Pillar 1- Minimum capital requirement based on the risk profile of bank.

Pillar 2- Supervisory review of banks by RBI if they go for internal ranking.

Pillar 3- Market discipline.

Microfinance institutions: Those institutions that provide financial services to low income clients. Microfinance is a broad category of services, which includes microcredit. Microcredit is provision of credit services to poor clients.

NPCI: National Payments Corporation of India.

DWBIS: Data Warehousing and Business Intelligence System, a type of system which is launched by SEBI. The primary objective of DWBIS is to enhance the capability of the investigation and surveillance functions of SEBI.

TRIPS: Trade Related Intellectual Property Rights is an international agreement administered by the World Trade Organisation (WTO) that sets down minimum standards for many forms of intellectual property (IP) regulation as applied to nationals of other WTO Members.

TRIMs: Trade Related Investment Measures. A type of agreement in WTO.

Key Financial Terms

CAMELS: CAMELS is a type of Bank Rating System. (C) stands for Capital Adequacy, (A) for Asset Quality, (M) for Management ,(E) for Earnings, (L) for Liquidity and (S) for Sensitivity to Market Risk.

OSMOS: Off-site Monitoring and Surveillance System.

Free market: A market economy based on supply and demand with little or no government control.

Retail banking: It is mass-market banking in which individual customers use local branches of larger commercial banks.

Eurobond: A bond issued in a currency other than the currency of the country or market in which it is issued.

PPP: Purchasing Power Parity is an economic technique used when attempting to determine the relative values of two currencies.

FEMA Act: Foreign Exchange Management Act, it is useful in controlling HAWALA.

Hawala transaction: It’s a process in which large amount of black money is converted into white.

Teaser Loans: It’s a type of home loans in which the interest rate is initially low and then grows higher. Teaser loans are also called terraced loans.

ECB: External Commercial Borrowings, taking a loan from another country. Limit of ECB is $500 million, and this is the maximum limit a company can get.

CBS: Core Banking Solution. All the banks are connected through internet, meaning we can have transactions from any bank and anywhere. (e.g. deposit cash in PNB, Delhi branch and withdraw cash from PNB, Gujarat)

CRAR: For RRB’s it is more than 9% (funds allotted 500 cr) and for commercial banks it is greater than 8% (6000 cr relief package).

NBFCs: NBFC is a company which is registered under Companies Act, 1956 and whose main function is to provide loans. NBFC cannot accept deposit or issue demand draft like other commercial banks. NBFCs registered with RBI have been classified as AssetFinance Company (AFC), Investment Company (IC) and Loan Company (LC).

Objectives of FRBM Act

EASIEST: Electronic Accounting System in Excise and Service Tax.

SOFA: Status of Forces Agreement, SOFA is an agreement between a host country and a foreign nation stationing forces in that country.

CALL MONEY: Money loaned by a bank that must be repaid on demand. Unlike a term loan, which has a set maturity and payment schedule, call money does not have to follow a fixed schedule. Brokerages use call money as a short-term source of funding to cover margin accounts or the purchase of securities. The funds can be obtained quickly.

Scheduled bank: Scheduled Banks in India constitute those banks which have been included in the Second Schedule of RBI Act, 1934 as well as their market capitalisation is more than Rs 5 lakh. RBI in turn includes only those banks in this schedule which satisfy the criteria laid down vide section 42 (6) (a) of the Act.

FEDAI: Foreign Exchange Dealers Association of India. An association of banks specialising in the foreign exchange activities in India.

PPF: Public Provident Fund. The Public Provident Fund Scheme is a statutory scheme of the Central Government of India. The scheme is for 15 years. The minimum deposit is Rs 500 and maximum is Rs 70,000 in a financial year.

SEPA: Single Euro Payment Area.

GAAP: Generally Accepted Accounting Principles. The common set of accounting principles, standards and procedures that companies use to compile their financial statements.

Indian Depository Receipt: Foreign companies issue their shares and in return they

get the depository receipt from the National Security Depository in return of investing

in India.

Fiscal Responsibility and Budget Management act

AAA: A type of grade that is used to rate a particular bond. It is the highest rated bond that gives maximum returns at the time of maturity.

DSCR: Debt Service Coverage Ratio, DSCR is a financial ratio that measures the company’s ability to pay their debts

FSDC: Financial Stability and Development Council, India’s apex body of the financial sector.

ITPO: India Trade Promotion Organisation is the nodal agency of the Government of India for promoting the country’s external trade.

FLCC: Financial Literacy and Counseling Centres.

ANBC: Adjusted Net Bank Credit is Net Bank Credit added to investments made by banks in non-SLR bonds.

Priority sector lending: Some areas or fields in a country depending on its economic condition or government interest are prioritised and are called priority sectors i.e. industry, agriculture.

M0, M1, M2 AND M3: These terms are nothing but money supply in banking field. 

BIFR: Bureau of Industrial and Financial Reconstruction.

FRBM Act 2003: Fiscal Responsibility and Budget Management act was enacted by the Parliament of India to institutionalise financial discipline, reduce India’s fiscal deficit, improve macroeconomic management and the overall management of the

public funds by moving towards a balanced budget.

BANCASSURANCE

Is the term used to describe the partnership or relationship between a bank and an insurance company whereby the insurance company uses the bank sales channel in order to sell insurance products

Balloon payment: Is a specific type of mortgage payment, and is named “balloon payment” because of the structure of the payment schedule. For balloon payments, the first several years of payments are smaller and are used to reduce the total debt remaining in the loan. Once the small payment term has passed (which can vary, but

is commonly 5 years), the remainder of the debt is due - this final payment is the one known as the “balloon” payment, because it is larger than all of the previous payments.

CPSS: Committee on Payment and Settlement Systems

FCNR Accounts: Foreign Currency Non-Resident accounts are the ones that are maintained by NRIs in foreign currencies like USD, DM, and GBP.

M3 in banking: It’s a measure of money supply. It is the total amount of money available in an economy at a particular point in time.

OMO: Open Market Operations. The buying and selling of government securities in the open market in order to expand or contract the amount of money in the banking system. Open market operations are the principal tools of monetary policy. RBI uses

this tool in order to regulate the liquidity in economy.

Umbrella Fund: A type of collective investment scheme. A collective fund containing several sub-funds, each of which invests in a different market or country.

ECS: Electronic Clearing Facility is a type of direct debit.

Tobin tax: Suggested by Nobel Laureate economist James Tobin, was originally defined as a tax on all spot conversions of one currency into another. Z score is a term widely used in the banking field. 

POS: Point Of Sale, also known as Point Of Purchase, a place where sales are made and also sales and payment information are collected electronically, including the amount of the sale, the date and place of the transaction, and the consumer’s account number.

LGD: Loss Given Default. Institutions such as banks will determine their credit losses through an analysis of the actual loan defaults.

STRIPS: Separate Trading for Registered Interest & Principal Securities.

MSME and SME: Micro Small and Medium Enterprises (MSME), and SME stands for Small and Medium Enterprises. This is an initiative of the government to drive and encourage small manufacturers to enjoy facilities from banks at concessional

rates.

LIBOR: London InterBank Offered Rate. An interest rate at which banks can borrow funds, in marketable size, from other banks in the London interbank market.

LIBID: London Interbank Bid Rate. The average interest rate at which major London banks borrow Eurocurrency deposits from other banks.

ECGC: Export Credit Guarantee Corporation of India. This organisation provides risk as well as insurance cover to the Indian exporters.

SWIFT: Society for Worldwide Interbank Financial Telecommunication. It operates a worldwide financial messaging network which exchanges messages between banks and other financial institutions.

STRIPS: Separate Trading for Registered Interest & Principal Securities.

CIBIL: Credit Information Bureau of India Limited. CIBIL is India’s first credit information bureau. Whenever a person applies for new loans or credit card(s) to a financial institution, they generate the CIBIL report of the said person or concern to judge the credit worthiness of the person and also to verify their existing track record. CIBIL actually maintains the borrower’s history.

Key financial terms

FPO: Follow on Public Offerings: An issuing of shares to investors by a public company that is already listed on an exchange. An FPO is essentially a stock issue of supplementary shares made by a company that is already publicly listed and has gone through the IPO process.

Difference: IPO is for the companies which have not been listed on an exchange and FPO is for the companies which have already been listed on an exchange but want to raise funds by issuing some more equity shares.

RTGS: Real Time Gross Settlement systems is a funds transfer system where transfer of money or securities takes place from one bank to another on a “real time”. (‘Real time’ means within a fraction of seconds.) The minimum amount to be transferred

through RTGS is Rs 2 lakh. Processing charges/Service charges for RTGS transactions vary from bank to bank.

NEFT: National Electronic Fund Transfer. This is a method used for transferring funds across banks in a secure manner. It usually takes 1-2 working days for the transfer to happen. NEFT is an electronic fund transfer system that operates on a Deferred Net Settlement (DNS) basis which settles transactions in batches. (Note: RTGS is much faster than NEFT.).

CAR: Capital Adequacy Ratio. It’s a measure of a bank’s capital. Also known as “Capital to Risk Weighted Assets Ratio (CRAR)”, this ratio is used to protect depositors and promote the stability and efficiency of financial systems around the world. It is decided by the RBI.

Direct Instruments

Cash Reserve Ratio (CRR): The share of net demand and time liabilities that banks must maintain as cash balance with the Reserve Bank.

Statutory Liquidity Ratio (SLR): The share of net demand and time liabilities that banks must maintain in safe and liquid assets, such as government securities, cash and gold.

Refinance facilities: Sector-specific refinance facilities (e.g., against lending to export sector) provided to banks.

Indirect instruments

Liquidity Adjustment Facility (LAF): Consists of daily infusion or absorption of liquidity on a repurchase basis, through repo (liquidity injection) and reverse repo (liquidity absorption) auction operations, using government securities as collateral.

Open Market Operations (OMO): Outright sales/purchases of government securities, in addition to LAF, as a tool to determine the level of liquidity over the medium term.

Market Stabilisation Scheme (MSS): This instrument for monetary management was introduced in 2004. Liquidity of a more enduring nature arising from large capital flows is absorbed through sale of short-dated government securities and treasury bills.

The mobilised cash is held in a separate government account with the Reserve Bank 

Repo/reverse repo rate: These rates under the Liquidity Adjustment Facility (LAF) determine the corridor for short-term money market interest rates. In turn, this is expected to trigger movement in other segments of the financial market and the real

economy.

Bank rate: It is the rate at which the Reserve Bank is ready to buy or rediscount bills of exchange or other commercial papers. It also signals the medium-term stance of monetary policy.

Functions of Banks

Secondary functions

Agency functions

 Funds transfer

 Cheques collection

 Periodic payments/collection

 Portfolio management

Utility functions

 Issue of draft, letter of credit etc :-Letter of credit acts as an assurance that in case the borrower defaults in making the payment, bank will make the payment up to the amount mentioned in letter of credit

 Locker facility

 Underwriting of shares

 Dealing in foreign exchanges

 Project reports

 Social welfare programs

RBI: The Reserve Bank of India was established on April 1, 1935 in accordance with the provisions of the RBI Act, 1934. RBI was nationalized in 1949 and it is fully owned by the Government of India. RBI was established on the recommendation of the Hilton Young Commission.

RBI’s FUNCTIONS:

1. Issue of currency notes

2. Controlling the monetary policy

3. Regulator and supervisor of the financial system

4. Banker to other banks

5. Banker to the government

6. Granting licenses to banks

7. Control over NBFIs (Non Banking Financial Institutions)

8. Manager of Foreign Exchange of India (also known as FOREX)

Banking Basics

Functions of Banks

Primary Functions

Accepting deposits

Most important function of a bank is to mobilize public funds. Bank provides safe custody as well as interest to the depositors.

Saving deposit

Saving deposit account meant for those people who wants to save for future needs and uncertainties. There is no restriction on number and amount of withdrawals. Bank provides cheque book, ATM cum debit card and Internet banking facility. Depositors

need to maintain minimum balance which varies across different banks.

Fixed deposit or Term deposit

In fixed deposit account, money is deposited for a fixed tenure. Banks issues a deposit certificate which contains name, address, deposit amount, withdrawal date, depositor signatures and other important information.

Depositor can't withdraw money during this period. In case depositor want to withdraw before maturity, banks levy pre-mature withdrawal penalty.

Current account

Current accounts are normally opened by businesses. Banks provide overdraft facility for these accounts by which account holder can withdraw more money than available bank balance. This act as a short term loan to meet urgent needs. Bank charges high

rate on interest and charges for overdraft facility because bank need to maintain a reserve for unknown demands for overdraft.

Recurring deposit

In this type of account depositors deposits certain sum of money at regular period of time. Benefit of recurring account is that it provides benefit of compounded rate of interest and enables depositors to collect big sum of money.

Granting Loans and advances

Cash credit

It is a short term loan facility under which banks allows its customers to take loan up to a certain limit, normally bank grants this loan against mortgage of certain property.

Prohibited Current Account transactions

Prohibited Current Account transactions (V.Imp!!!!) – you can’t draw foreign

exchange for:-

1. Forex can’t be drawn for making payment to any person in Nepal or Bhutan! Use Rupees!

2. Remitting lottery winnings outside India.

Remitting any income from winning in any races/ horse races/ hobbies etc.

3. You can’t remit any money outside India for the purchase of lottery tickets, or banned magazines, sweepstakes, betting etc.

4. You can’t draw forex for making payments on any ‘Call Back Services’ on telephone calls – call back is when you call and then immediately get a call back being routed through the telephone services of a company where charges are lower

Approval of Central Government needed for:

1. Drawal of forex for taking cultural tours outside India.

2. If state government or its undertakings advertise in foreign print media (for any purpose other than promotion of tourism, investments – exceeding USD 10,000) – then CG approval needed!

3. Remittance of prize money, sponsorship of sporting activities abroad by persons other than sporting bodies – if the amount being remitted exceeds USD 1,00,000.

4. Remittance for hiring of transponders by ISPs and TV channels.

Approval of RBI needed for:-

1. For infrastructure projects – if the consultancy is taken from outside India and the remittance for such exceeds USD 1,00,00,000 per project.

2. For any other projects – if the consultancy is taken from outside India and the remittance for such exceeds USD 10,00,000.

3. Approval of RBI needed to release forex in excess of USD 10,000 in one financial year.

4. Approval of RBI needed for gift/ donation remittances in excess of USD 5,000 in one financial year, per remitter or donor (the receiver of the gift remittance)

5. Exceeding USD 1,00,000 for persons going abroad for employment/ emigration.

6. Exceeding USD 25,000 for business travel, attending conference etc.

FOREIGN EXCHANGE MANAGEMENT ACT

Popularly known as FEMA – the Act is the Bible of all Forex transactions that happen in the country – it is the Holy Rule Book of foreign exchange transactions and of the administration part too.

It is important here to know a little history of FEMA:

FEMA actually has a predecessor – a stricter, meaner and a draconian predecessor, popularly called the FERA.

Foreign Exchange Regulation Act, 1974 or FERA – was introduced in the year 1974 with the prime objective of ‘conserving/ preserving’ the foreign exchange; which means the forex transactions were severely controlled to avoid misuse – as it was

considered a scarce resource.

Also – the mean part – if an offence was committed under FERA it was considered a ‘criminal offence’!

With time, economic liberalization, globalization, better forex transaction infrastructure and opening of the world market, need was felt to do away with FERA as its provision resulted in constricting the growth of forex and ultimately the economy at large.

Thus at the turn of the millennium and India’s coming of age FEMA was introduced in 2000, on 1st June, with the Foreign Exchange Management Act, 1999.

FEMA stands for:

 Facilitating foreign exchange transaction – exports, imports, and payments thereof;

 Promoting development of forex;

 Maintenance of a healthy forex market in the country.

Salient Features of FEMA:

1. FEMA is applicable to Individuals (you and me!), HUFs, companies, firms and AOPs and BOIs.

2. FEMA is applicable to a person ‘Resident’ in India – as opposed to FERA’s citizenship criteria – which means if the status of any person, who is a citizen of India or not, is ‘Resident’ he or she shall be covered under the FEMA for any forex transaction as per the given provisions.

3. Under FEMA – a person, who has been residing in India for more than 182 days, will be considered a ‘Resident’!

4. ‘Currency’ under FEMA includes debit cards, ATM cards and credit cards too!

Service Tax

What is the rate of service tax?

The rate of service tax is 14%

Swachh Bharat cess of 2% was proposed in Union Budget 2015 but it's not yet implemented. In case it is implemented then effective rate of Service tax will be 14%

+ 2% of 14% = 14.28%

Trivia:

1. Service Tax is levied in ‘taxable territory’, which includes the Indian mainland – territorial waters and the airspace above it.

2. Service Tax is NOT levied if services are provided, by anyone, in Jammu and Kashmir. So J&K and rest of the world are – not taxable territories!

3. Sometime even the service receiver has to pay the service tax – this is known as reverse charge!

Latest news on service tax:

 In budget 2015 a higher rate of 14% (inclusive of Education Cesses) was proposed which will come to effect after the approval of the finance bill; which is proposed to be pushed for approval in the second budget session starting after 20th April 2015.

 Service Tax exemption has been granted, w.e.f. 1 April 2015 to the services given byzoos, national parks, wildlife sanctuaries, tiger reserves and museums = they don’t have the obligation to deduct service tax from the public via the tickets.

 Exemption from service tax liability is also forwarded to:

i. Services by life insurance scheme – Varishtha Pension Bima Yojna, 

ii. Retail packing of fruits and vegetables,

iii. Ambulance services

iv. Construction services, when given to Government, in respect of historical monuments, irrigation work, water supply and sewage treatment plants, 

Which services are taxable?

Now, important to know – not all services are taxable. Only those which are ‘taxable services’ are taxable under service tax!

‘Taxable services’ – means those services which are taxable under the service tax net.

In other words,

Taxable Services = All services + Declared Services – Negative List – Any exemptions

Examples:

i. giving the right to use intellectual property right (declared service)

ii. Services by Chartered Accountants

iii. Services by beauty salons!

iv. Services by advertising agencies

v. Courier services

vi. Event management services etc.

Now you must be wondering if you maternal aunt, who runs a ladies beauty parlour at her home in South Delhi is liable to collect and deposit service tax – take heart!

Service tax liability arises if the total value of services provided in a financial year exceeds Rs, 10,00,000!

Service Tax

Service Tax is an indirect tax levied on taxable services; where the obligation/ liability is of the service provider to collect and deposit service tax.

History

In 1994, Service Tax was introduced in India by the then Finance Minister Dr. Manmohan Singh – who envisioned services as being a whole new sector from which tax can be collected to increase Government revenue.

At the time India needed revenue and new sources for revenue generation were being sought. Thus, finally on the recommendations of Dr. Raja Chelliah Committee on tax reforms -Service tax was been first levied at a rate of five per cent flat on 15 July 1994.

Previously until July 2012, we had the selected service approach for taxing services – i.e., only those services shall be taxed which were mentioned specifically in the list.

From July 2012 onwards, India has adopted the ‘Negative List’ system – whereby all services are taxable, except those mentioned in the Negative List. The Negative List concept was introduced during Finance Minister Pranab Ray’s regime.

How to calculate Serviec Tax

Okay just to simply a whole lot of pages worth theories, here’s a numerical example:

If say, you provide the service of preparing food and selling them in containers to office goers – if such a tiffin service is taxable – then you as the service provider are liable to pay service tax.

MUDRA BANK

What is Mudra Bank?

 MUDRA means Micro Units Development and Refinance Agency(known as the MUDRA bank)

 Mudra bank is being set up through a statutory enactment and will be responsible for developing and refinancing through a Pradhan Mantri Mudra Yojna.

 It is first set up as a subsidiary of the Small Industries Develpoment Bank of India(SIDBI). It will later be converted into full-fledged bank through an act of the parliament.

 MUDRA Bank is a public sector financial institution in India, It provides loan at low rates to small entrepreneurs.

OBJECTIVE -

 It was launched in 8th April 2015 with the objective of regulating micro and small enterprise financing business, and supporting them particularly those members who belongs from scheduled castes and scheduled tribes.

 MUDRA Bank will also register MFIs(Micro Finance Institutions) and will be responsible for accreditation and rating of MFI.

 It will also make proper last mile practices to be followed by MFI to provide proper client protection and to prevent from indebtedness.

AIM -

 The finance ministry said measures to be taken up by the MUDRA are targeted mainly on young, educated or skilled workers and entrepreneurs including women entrepreneurs.

 Basically small entrepreneurs and small businessman are often cut from banking system because of limited branch presence, so MUDRA bank will partner with local coordinators and provide finance to small and micro businesses.

SOCIAL SECURITY SCHEMES

On his first visit to West Bengal after becoming Prime Minister of India, Narendra Modi surprised financial analysts by declaring three social security schemes for 1.25 billion people. Now accidental insurance is available at mere Rs.12 for a coverage of

Rs.200,000. Read summary of schemes :

Pradhan Mantri Suraksha Bima Yojna

Eligibility

 18 to 70 years of age

 Having a savings account with a public sector bank

 Insurer allows auto withdrawal for the payment of annual premium

Policy cost and coverage

 Rs.12 per subscriber for a coverage of Rs.2,00,000

Maturity

 Death due to accident or total physical disability due to accident

Pradhan Mantri Jeevan Jyoti Yojana

Eligibility

 18 to 50 years of age

 Having a savings account with a public sector bank

 Insurer allows auto withdrawal for the payment of annual premium