The banking industry uses a wide range of terms and terminologies. In this article, we have created a list of basic banking terminology that a firm must know.
Here we have arranged the banking terminology alphabetically for easy reference.
While we all know what an account balance is, in the banking parlance, it is the total amount of money in an account. Also, the bank calculates the balance after taking all debits and credits into consideration.
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Accrued interest is the interest accumulated over an investment but not yet paid. It is also termed as interest receivable. Some banks call it ‘Interest earned but not yet paid’.
From a banking perspective, annuities are contracts. These contracts guarantee income or returns in exchange for a huge sum of money. This money is either deposited as a lump sum or with the help of periodic payments.
Automated Clearing House (ACH)
This is a nation-wide electronic clearinghouse that monitors and manages the process of cheque and fund clearance between banks. In simple words, when you deposit a cheque issued on a different bank into your bank account, the ACH manages the clearing process. Further, being electronic, it reduces manual work and distributes the credit and debit balances automatically.
Automated Teller Machines (ATMs)
Before the computerization of banking processes, account holders would visit the branch, fill a withdrawal slip or a self-cheque, go to the teller counter, and withdraw money from their account. However, the automated teller machines (ATMs) have now made that process outdated. You can conduct transactions with your bank electronically using ATMs.
A bank account allows the account holder to deposit, safeguard his money, earn interest, and make cheque payments.
Bank Rate is the rate at which the RBI lends funds to commercial banks. This is usually a long-term loan. RBI’s long-term monetary policies govern the Bank Rate.
A bounced cheque is a normal cheque which a bank refuses to pay. The reasons for refusing it include insufficient funds, signature mismatch, or some other valid reason.
A cheque is a negotiable instrument. By definition, a negotiable instrument is a document that includes a promise to pay a certain amount of money to the intended beneficiary. A cheque instructs the bank to pay a certain amount of money from the issuer’s bank to the receiver of the cheque.
Clearing of a cheque is done by the Clearing House. Further, in this process, the amount of the cheque is debited from the issuer’s account and credit to the beneficiary’s account.
A debit card allows you to access the funds available in your account either from an ATM or a point of sale (Pos). The amount used by you is instantly debited from your account. Also, there is no credit available on a debit card.
A guarantor creates a trust which takes the responsibility of repayment of a loan. Usually, a guarantor is not liable for the repayment of the loan. However, in some cases, the liability and responsibility of repaying the loan lie with the guarantor.
Most banks allow account holders to access their accounts using the internet. You can also perform certain transactions using this system. This is internet banking or online banking or e-banking.
Letter of Credit (Loc)
A bank issues a letter of credit on behalf of a buyer or an importer of goods. The Loc states the bank’s commitment to pay the seller or exporter a specific amount for the purchase of goods by the buyer.
In order to receive the payment, the seller must fulfill the conditions specified in the Loc and submit the required documents. Usually, Locs are used in international trade transactions of huge amounts.
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A mortgage is related to real estate. It is a legal agreement between a lender and a borrower. Further, the real estate property of the borrower is used as collateral for the loan.
This also helps in securing the payment of the debt. Usually, in a mortgage agreement, the lender has a right to confiscate the property if the borrower stops paying the installments.
It is the amount of cheque above the balance in the account of the issuer. Further, some banks allow certain account holders to overdraft up to a certain limit.
Repo Rate or the Repurchase Rate is the rate at which a bank borrows money from the Reserve Bank of India (RBI). The bank pledges or sells government securities to the RBI for the same.
Also, these loans are usually for a period of up to two weeks. Hence, it refers to short-term loans. It is different from the Bank Rate with respect to the tenure of the loan.
Reverse Repo Rate
When banks have surplus funds and they deposit them with the RBI for short periods, the RBI offers them a Reverse Repo Rate.
A time deposit is a type of a bank deposit. In this deposit, the investor cannot withdraw his funds before a fixed time elapses.
Many banks offer banking services to corporate entities, large institutions, and even other financial institutions. This segment forms the Wholesale Banking segment of a bank.
Usually, account holders are required to maintain a certain minimum or average balance in their account. However, banks at times offer accounts which do not have this minimum or average balance requirement. This is a zero-balance account.
Now, as we have discussed the basic banking terminology well enough let’s look at an example to make it more clear.
Solved Question on Banking Terminology
Q1. The RBI charges _________ Rate for long-term loans and ________ Rate for short-term loans to banks.
- Repo and Reverse Repo
- Bank and Reverse Repo
- Bank and Repo
- Reverse Repo and Repo
Answer: As we saw various banking terminology, we know that the RBI’s long-term monetary policies govern the Bank Rate. Also, Repo Rates are usually for a period of up to two weeks. Therefore, the correct answer to the question is Option c – Bank and Repo. With this, we conclude our discussion on banking terminology.