Basic Banking Terms

Hello friends! In this post I have briefly discussed some of the common terms related to Banking.

Cash Reserve Ratio (CRR): A portion of the deposits made in a bank is required to be kept aside in the form of cash. This ratio of money kept aside and the Net Demand and Time Liabilities is called Cash Reserve ratio. CRR is extensively used to alter liquidity in the market. Recently, a 0.5% reduction in the CRR led an increase in money supply worth Rs32,000 in the Indian Econmomy!

Statutory Liquidity Ratio (SLR): Every bank is required to maintain a minimum proportion of their Net Demand and Time Liabilities as liquid assets in the form of cash, gold and approved securities. The ratio of liquid assets to demand and time liabilities is known as Statutory Liquidity Ratio (SLR). 

Bank Rate: The interest rate at which the central bank lends money to domestic banks is called the Bank rate. Bank Rates are altered to impact inflation and growth in the economy. Lower bank rates can help increase the money supply and thus they help to expand the economy. Conversely, higher bank rates help to reign in the economy, when inflation is higher than desired.

Repo Rate and Reverse Repo Rate: The term Repo refers to Repurchase Agreement. The banks borrow money from Reserve Bank to meet short term needs have to sell securities, usually bonds to Reserve Bank with an agreement to repurchase the same at a predetermined rate and date. This rate is called repo rate. In a reverse repo, the Central Bank borrows money from banks by lending securities. The interest paid by Reserve Bank in this case is called reverse repo rate. In India, the Repo Rate is always one percent higher than the Reverse Repo Rate.

If the central bank wants to reduce inflation, these rates and increased, while on the other hand if the central bank wishes to give some stimulus to growth, these rates are reduced.

Often we come across the term Non Banking Financial Institution (NBFC). NBFCs and Banks are perceived to have the same functions, but this is not the case. Some differences between Banks and NBFCs are:

Banks are formed under the Banking Act whereas NBFCs are formed under the Indian Companies Act 1956.

1. A NBFC cannot accept demand deposits (demand deposits are funds deposited at a depository institution that are payable on demand -- immediately or within a very short period -- like your current or savings accounts.)
2. An NBFC is not a part of the payment and settlement system and as such an NBFC cannot issue cheques drawn on itself; and
3. The deposit insurance facility of Deposit Insurance and Credit Guarantee Corporation is not available for NBFC depositors unlike in case of banks.
4. Also, it should be noted that NBFCs registered with RBI are classified as Asset Finance Company, Investment Company and Loan Company.

Before I conclude this post, I would briefly write on two more commonly used terms RTGS and NEFT. To keep it simple, I have discussed them in tabular form to make comparison easy.

RTGS	NEFT
RTGS stands for Real Time Gross Settlement	NEFT stands for National Electronics Funds Transfer
The minimum limit for RTGS is rupees one lakh.	There is no minimum limit for NEFT
Under RTGS, the settlement of funds is done on a real time and individual basis.	Under NEFT, the settlement of funds is done in batches.

I have tried my best to keep this post precise and brief. Some other technical terms like Non Performing Assets, Basel Norms, etc will be taken up later. I hope the readers found this post useful and feedback, as always, is welcome.

On the 17^th of March I will post a summary of the Union Budget. The highlights of the last budget are here.

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