The basic banking terms are frequently asked
in all the Bank Interviews. These terms are useful not only for your interview
but also for your general knowledge. Knowledge and Understanding of Important
Banking terms play a very crucial role in the final selection. Also these
banking terms are useful for Banking Aspirants, Economics & Commerce
students, MBA aspirants and students preparing for other similar level Exams.Knowing basic banking terms not only gives
you an edge over other candidates but also shows your interest level for the
job.
Account Agreement: The contract governing your open-end credit account, it provides
information on changes that may occur to the account.
Account History: The payment history of an account over a specific period of time,
including the number of times the account was past due or over limit.
Account Holder: Any and all persons designated and authorized to transact business
on behalf of an account. Each account holder's signature needs to be on file
with the bank. The signature authorizes that person to conduct business on
behalf of the account.
Acquiring Bank: In a merger, the bank that absorbs the bank acquired.
Accrued interest: Interest due from issue
date or from the last coupon payment date to the settlement date. Accrued
interest on bonds must be added to their purchase price.
Adjustable-Rate Mortgages (ARMS): Also known as variable-rate mortgages. The initial interest rate
is usually below that of conventional fixed-rate loans. The interest rate may
change over the life of the loan as market conditions change. There is
typically a maximum (or ceiling) and a minimum (or floor) defined in the loan
agreement. If interest rates rise, so does the loan payment. If interest rates
fall, the loan payment may as well.
Arbitrage: Buying a financial instrument in one market in order to sell the
same instrument at a higher price in another market.
Adverse Action: Under the Equal Credit Opportunity Act, a creditor's refusal to
grant credit on the terms requested, termination of an existing account, or an
unfavorable change in an existing account.
Adverse Action Notice: The notice required by the Equal Credit Opportunity Act advising a
credit applicant or existing debtor of the denial of their request for credit
or advising of a change in terms considered unfavorable to the account holder.
AER: Annual earnings rate on an investment.
Affidavit: A sworn statement in writing before a proper official, such as a
notary public.
Alteration: Any change involving an erasure or rewriting in the date, amount,
or payee of a check or other negotiable instrument.
Amortization: The
process of reducing debt through regular installment payments of principal and
interest that will result in the payoff of a loan at its maturity.
Anytime Banking: With introduction of ATMs, Tele-Banking and internet banking,
customers can conduct their business anytime of the day and night. The 'Banking
Hours' is not a constraint for transacting banking business.
Anywhere Banking : Refers to banking not only by ATMs, Tele-Banking and internet
banking, but also to core banking solutions brought in by banks where customer
can deposit his money, cheques and also withdraw money from any branch
connected with the system. All major banks in India have brought in core
banking in their operations to make banking truly anywhere banking.
Annual Percentage Rate (APR): The cost of credit on a yearly basis, expressed as a percentage.
Annual Percentage Yield (APY): A percentage rate reflecting the total amount of interest paid on
a deposit account based on the interest rate and the frequency of compounding
for a 365-day year.
Annuity : A life insurance product which pays income over the course of a
set period. Deferred annuities allow assets to grow before the income is
received and immediate annuities (usually taken from a year after purchase)
allow payments to start from about a year after purchase.
APR: The annual percentage rate of interest, usually on a loan or
mortgage, usually displayed in brackets and representing the true cost of the
loan or mortgage as it shows any additional payments beyond the interest rate.
Application: Under the Equal Credit Opportunity Act (ECOA), an oral or written
request for an extension of credit that is made in accordance with the
procedures established by a creditor for the type of credit requested.
Appraisal: The act of evaluating and setting the value of a specific piece of
personal or real property.
Ask Price: The lowest price at which a dealer is willing to sell a given
security.
Asset-Backed Securities (ABS): A type of security that is backed by a pool of bank loans, leases,
and other assets. Most ABS are backed by auto loans and credit cards – these
issues are very similar to mortgage-backed securities.
At-the-money: The exercise price of a derivative that is closest to the market
price of the underlying instrument.
ATM: ATMs are Automatic Teller Machines, which do the job of a
teller in a bank through Computer Network. ATMs are located on the branch
premises or off branch premises. ATMs are useful to dispense cash, receive
cash, accept cheques, give balances in the accounts and also give
mini-statements to the customers.
Authorization: The issuance of approval, by a credit card issuer, merchant, or
other affiliate, to complete a credit card transaction.
Automated Clearing House (ACH): A computerized facility used by member depository institutions to
electronically combine, sort, and distribute inter-bank credits and debits.
ACHs process electronic transfers of government securities and provided
customer services, such as direct deposit of customers' salaries and government
benefit payments (i.e., social security, welfare, and veterans' entitlements),
and preauthorized transfers.
Automated Teller Machine (ATM): A machine, activated by a magnetically encoded card or other
medium that can process a variety of banking transactions. These include
accepting deposits and loan payments, providing withdrawals, and transferring
funds between accounts.
Automatic Bill Payment: A checkless system for paying recurring bills with one
authorization statement to a financial institution. For example, the customer
would only have to provide one authorization form/letter/document to pay the
cable bill each month. The necessary debits and credits are made through an
Automated Clearing House (ACH).
Availability Date: Bank's policy as to when funds deposited into an account will be
available for withdrawal.
Availability Policy: Bank's policy as to when funds deposited into an account will be
available for withdrawal.
Available Balance: The balance of an account less any hold, uncollected funds, and
restrictions against the account.
Available Credit: The
difference between the credit limit assigned to a cardholder account and the
present balance of the account.
Banking: Accepting for the purpose of lending or investment of deposits of
money from Public, Repayable on demand or otherwise and withdraw able by
cheques, drafts, order, etc.
Bank Ombudsman: Bank
Ombudsman is the authority to look into complaints against Banks in the main
areas of collection of cheque / bills, issue of demand drafts, non-adherence to
prescribed hours of working, failure to honour guarantee / letter of credit
commitments, operations in deposit accounts and also in the areas of loans and
advances where banks flout directions / instructions of RBI. This Scheme was
announced in 1995 and is functioning with new guidelines from 2007. This scheme
covers all scheduled banks, the RRBs and co-operative banks.
Bancassurance: Bancassurance refers to the distribution of insurance
products and the insurance policies of insurance companies which may be life
policies or non-life policies like home insurance - car insurance,
medi-policies and others, by banks as corporate agents through their branches
located in different parts of the country by charging a fee.
Banker's Lien: Bankers lien is a special right of lien exercised by the bankers,
who can retain goods bailed to them as a security for general balance of
account. Bankers can have this right in the absence of a contract to the
contrary.
Basel-II: The Committee on Banking Regulations and Supervisory Practices,
popularity known as Basel Committee, submitted its revised version of norms in
June, 2004. Under the revised accord the capital requirement is to be calculated
for credit, market and operational risks. The minimum requirement continues to
be 8% of capital fund (Tier I & II Capital) Tier II shall continue to be
not more than 100% of Tier I Capital.
Brick & Mortar Banking: Brick and Mortar Banking refers to traditional system of banking
done only in a fixed branch premises made of brick and mortar. Now there are
banking channels like ATM, Internet Banking, tele banking etc.
Business of Banking : Accepting deposits, borrowing money, lending money, investing, dealing
in bills, dealing in Foreign Exchange, Hiring Lockers, Opening Safe Custody
Accounts, Issuing Letters of Credit, Travelers’ Cheques, doing Mutual Fund
business, Insurance Business, acting as Trustee or doing any other business
which Central Government may notify in the official Gazette.
Bouncing of a cheque: Where an account does not have sufficient balance to honour the
cheque issued by the customer, the cheque is returned by the bank with the
reason "funds insufficient" or "Exceeds arrangement”. This is
known as 'Bouncing of a cheque’.
Basis Point: One hundredth of 1%. A measure normally used in the statement of
interest rate e.g., a change from 5.75% to 5.81% is a change of 6 basis points.
Bear Markets: Unfavorable markets associated with falling prices and investor
pessimism.
Bid-ask Spread: The difference between a dealers’s bid and ask price.
Bid Price: The highest price offered by a dealer to purchase a given
security.
Blue Chips: Blue chips are unsurpassed in quality and have a long and stable
record of earnings and dividends. They are issued by large and well-established
firms that have impeccable financial credentials.
Bond: Publicly traded long-term debt securities, issued by corporations
and governments, whereby the issuer agrees to pay a fixed amount of interest
over a specified period of time and to repay a fixed amount of principal at
maturity.
Book Value: The amount of stockholders’ equity in a firm equals the amount of
the firm’s assets minus the firm’s liabilities and preferred stock.
Broker: Individuals licensed by stock exchanges to enable investors to buy
and sell securities.
Brokerage Fee: The commission charged by a broker.
Bull Markets: Favorable
markets associated with rising prices and investor optimism.
Call Option: The right to buy the underlying securities at a specified exercise
price on or before a specified expiration date.
Callable Bonds: Bonds that give the issuer the right to redeem the bonds before
their stated maturity.
Capital Gain: The amount by which the proceeds from the sale of a capital asset
exceed its original purchase price.
Capital Markets: The market in which long-term securities such as stocks and
bonds are bought and sold.
Certificate of Deposits (CDs): Savings instrument in which funds must remain on deposit for a
specified period and premature withdrawals incur interest penalties.
Certificate of Deposit:. Certificate of Deposits are negotiable receipts in bearer form
which can be freely traded among investors. This is also a money market
instrument,issued for a period ranging from 7 days to f one year .The minimum
deposit amount is Rs. 1 lakh and they are transferable by endorsement and
delivery.
Cheque: Cheque is a bill of exchange drawn on a specified banker ordering
the banker to pay a certain sum of money to the drawer of cheque or another
person. Money is generally withdrawn by clients by cheques. Cheque is always
payable on demand.
Cheque Truncation: Cheque
truncation truncates or stops the flow of cheques through the banking system.
Generally truncation takes place at the collecting branch, which sends the
electronic image of the cheques to the paying branch through the clearing house
and stores the paper cheques with it.
Closed-end (Mutual) Fund: A fund
with a fixed number of shares issued, and all trading is done between investors
in the open market. The share prices are determined by market prices instead of
their net asset value.
Collateral: A specific asset pledged against possible default on a bond.
Mortgage bonds are backed by claims on property. Collateral trusts bonds are
backed by claims on other securities. Equipment obligation bonds are backed by
claims on equipment.
Commercial Paper: Short-term and unsecured promissory notes issued by corporations
with very high credit standings.
Common Stock: Equity investment representing ownership in a corporation; each
share represents a fractional ownership interest in the firm.
Compound Interest: Interest
paid not only on the initial deposit but also on any interest accumulated from
one period to the next.
Contract Note: A note which must accompany every security transaction which
contains information such as the dealer’s name (whether he is acting as
principal or agent) and the date of contract.
Controlling Shareholder: Any person who is, or group of persons who together are, entitled
to exercise or control the exercise of a certain amount of shares in a company
at a level (which differs by jurisdiction) that triggers a mandatory general
offer, or more of the voting power at general meetings of the issuer, or who is
or are in a position to control the composition of a majority of the board of
directors of the issuer.
Convertible Bond: A bond with an option, allowing the bondholder to exchange the
bond for a specified number of shares of common stock in the firm. A conversion
price is the specified value of the shares for which the bond may be exchanged.
The conversion premium is the excess of the bond’s value over the conversion
price.
Corporate Bond: Long-term debt issued by private corporations.
Coupon: The feature on a bond that defines the amount of annual interest
income.
Coupon Frequency: The number of coupon payments per year.
Coupon Rate: The annual rate of interest on the bond’s face value that a bond’s
issuer promises to pay the bondholder. It is the bond’s interest payment per
dollar of par value.
Covered Warrants: Derivative call warrants on shares which have been
separately deposited by the issuer so that they are available for delivery upon
exercise.
Credit Rating: An assessment of the likelihood of an individual or business being
able to meet its financial obligations. Credit ratings are provided by credit
agencies or rating agencies to verify the financial strength of the issuer for
investors.
Collecting Banker: Also called receiving banker, who collects on instruments like a
cheque, draft or bill of exchange, lodged with himself for the credit of his
customer's account.
Consumer Protection Act: It is implemented from 1987 to enforce consumer rights through a
simple legal procedure. Banks also are covered under the Act. A consumer can
file complaint for deficiency of service with Consumer District Forum for
amounts upto Rs.20 Lacs in District Court, and for amounts above Rs.20 Lacs to
Rs.1 Crore in State Commission and for amounts above Rs.1 Crore in National
Commission.
Co-operative Bank : An
association of persons who collectively own and operate a bank for the benefit
of consumers / customers, like Saraswat Co-operative Bank or Abhyudaya
Co-operative Bank and other such banks.
Co-operative Society : When an
association of persons collectively own and operate a unit for the benefit of
those using its services like Apna Bazar Co-operative Society or Sahakar
Bhandar or a Co-operative Housing Society.
Core Banking Solutions (CBS): Core Banking Solutions is a buzz word in Indian banking at
present, where branches of the bank are connected to a central host and the
customers of connected branches can do banking at any breach with core banking
facility.
Creditworthiness: It is the capacity of a borrower to repay the loan / advance in
time along with interest as per agreed terms.
Crossing of Cheques: Crossing refers to drawing two parallel lines across the face of
the cheque. A crossed cheque cannot be paid in cash across the counter, and is
to be paid through a bank either by transfer, collection or clearing. A general
crossing means that cheque can be paid through any bank and a special crossing,
where the name of a bank is indicated on the cheque, can be paid only through
the named bank.
Customer: A person who maintains any type of account with a bank is a bank
customer. Consumer Protection Act has a wider definition for consumer as the
one who purchases any service for a fee like purchasing a demand draft or a pay
order. The term customer is defined differently by Laws, softwares and
countries.
Current Account: Current account with a bank can be opened generally for business
purpose. There are no restrictions on withdrawals in this type of account. No
interest is paid in this type of account.
Currency Board: A monetary system in which the monetary base is fully backed by
foreign reserves. Any changes in the size of the monetary base have to be fully
matched by corresponding changes in the foreign reserves.
Current Yield: A return measure that indicates the amount of current income a
bond provides relative to its market price. It is shown as: Coupon Rate divided
by Price multiplied by 100%.
Custody of Securities: Registration of securities in the name of the person to whom a
bank is accountable, or in the name of the bank’s nominee; plus deposition of
securities in a designated account with the bank’s bankers or with any other
institution providing custodial services.
Debit Card: A plastic card issued by banks to customers to withdraw money
electronically from their accounts. When you purchase things on the basis of
Debit Card the amount due is debited immediately to the account. Many banks
issue Debit-Cum-ATM Cards.
Debtor: A person
who takes some money on loan from another person.
Demand Deposits: Deposits which are withdrawn on demand by customers. E.g.
savings bank and current account deposits.
Demat Account: Demat Account concept has revolutionized the capital market of
India. When a depository company takes paper shares from an investor and converts
them in electronic form through the concerned company, it is called
Dematerialization of Shares. These converted Share Certificates in Electronic
form are kept in a Demat Account by the Depository Company, like a bank keeps
money in a deposit account. Investor can withdraw the shares or purchase more
shares through this demat Account.
Derivative Call (Put) Warrants: Warrants issued by a third party which grant the holder the right
to buy (sell) the shares of a listed company at a specified price.
Derivative Instrument: Financial
instrument whose value depends on the value of another asset.
Discount Bond: A bond selling below par, as interest in-lieu to the
bondholders.
Dishonour of Cheque: Non-payment of a cheque by the paying banker with a return memo
giving reasons for the non-payment. Default Risk: The possibility that a bond
issuer will default ie, fail to repay principal and interest in a timely
manner.
Diversification: The
inclusion of a number of different investment vehicles in a portfolio in order
to increase returns or be exposed to less risk.
Duration: A measure
of bond price volatility, it captures both price and reinvestment risks to
indicate how a bond will react to different interest rate environments.
Earnings: The total profits of a company after taxation and interest.
Earnings per Share (EPS): The amount of annual earnings available to common stockholders as
stated on a per share basis.
Earnings Yield: The ratio
of earnings to price (E/P). The reciprocal is price earnings ratio (P/E).
E-Banking : E-Banking or electronic banking is a form of banking where funds
are transferred through exchange of electronic signals between banks and
financial institution and customers ATMs, Credit Cards, Debit Cards,
International Cards, Internet Banking and new fund transfer devices like SWIFT,
RTGS belong to this category.
EFT - (Electronic Fund Transfer): EFT is a
device to facilitate automatic transmission and processing of messages as well
as funds from one bank branch to another bank branch and even from one branch
of a bank to a branch of another bank. EFT allows transfer of funds
electronically with debit and credit to relative accounts.
Either or Survivor: Refers to
operation of the account opened in two names with a bank. It means that any one
of the account holders have powers to withdraw money from the account, issue
cheques, give stop payment instructions etc. In the event of death of one of
the account holder, the surviving account holder gets all the powers of
operation.
Electronic Commerce (E-Commerce): E-Commerce is the paperless commerce where the exchange of
business takes place by Electronic means.
Endorsement: When a Negotiable Instrument contains, on the back of the
instrument an endorsement, signed by the holder or payee of an order
instrument, transferring the title to the other person, it is called
endorsement.
Bouncing of a cheque: Where the name of the endorsee or transferee is not mentioned on
the instrument.
Endorsement in Full: Where the name of the endorsee or transferee appears on the
instrument while making endorsement.
Equity: Ownership of the company in the form of shares of common stock.
Equity Call Warrants: Warrants issued by a company which give the holder the right to
acquire new shares in that company at a specified price and for a specified
period of time.
Ex-dividend (XD): A security which no longer carries the right to the most recently
declared dividend or the period of time between the announcement of the
dividend and the payment (usually two days before the record date). For
transactions during the ex-dividend period, the seller will receive the
dividend, not the buyer. Ex-dividend status is usually indicated in newspapers
with an (x) next to the stock’s or unit trust’s name.
Execution of Documents: Execution of documents is done by putting signature of the person,
or affixing his thumb impression or putting signature with stamp or affixing
common seal of the company on the documents with or without signatures of
directors as per articles of association of the company.
Face Value/ Nominal Value: The value of a financial instrument as stated on the instrument.
Interest is calculated on face/nominal value.
Fixed-income Securities: Investment vehicles that offer a fixed periodic return.
Fixed Rate Bonds: Bonds bearing fixed interest payments until maturity date.
Floating Rate Bonds: Bonds
bearing interest payments that are tied to current interest rates.
Factoring: Business of buying trade debts at a discount and making a profit
when debt is realized and also taking over collection of trade debts at agreed
prices.
Foreign Banks: Banks incorporated outside India but operating in India and
regulated by the Reserve Bank of India (RBI),. e..g., Barclays Bank, HSBC,
Citibank, Standard Chartered Bank, etc.
Forfeiting: In International Trade when an exporter finds it difficult to
realize money from the importer, he sells the right to receive money at a
discount to a forfaiter, who undertakes inherent political and commercial risks
to finance the exporter, of course with assumption of a profit in the venture.
Forgery: when a material alteration is made on a document or a Negotiable
Instrument like a cheque, to change the mandate of the drawer, with intention
to defraud.
Fundamental Analysis: Research to predict stock value that focuses on such determinants
as earnings and dividends prospects, expectations for future interest rates and
risk evaluation of the firm.
Future Value: The amount to which a current deposit will grow over a period of
time when it is placed in an account paying compound interest.
Future Value of an Annuity: The
amount to which a stream of equal cash flows that occur in equal intervals will
grow over a period of time when it is placed in an account paying compound
interest.
Futures Contract: A commitment to deliver a certain amount of some specified item at
some specified date in the future.
Garnishee Order: When a Court directs a bank to attach the funds to the credit of
customer's account under provisions of Section 60 of the Code of Civil
Procedure, 1908.
General Lien: A right of the creditors to retain possession of all goods given
in security to him by the debtor for any outstanding debt.
Guarantee: A contract between guarantor and beneficiary to ensure performance
of a promise or discharge the liability of a third person. If promise is broken
or not performed, the guarantor pays contracted amount to the beneficiary.
Hedge: A combination of two or more securities into a single investment
position for the purpose of reducing or eliminating risk.
Holder: Holder
means any person entitled in his own name to the possession of the cheque, bill
of exchange or promissory note and who is entitled to receive or recover the
amount due on it from the parties. For example, if I give a cheque to my friend
to withdraw money from my bank,he becomes holder of that cheque. Even if he
loses the cheque, he continues to be holder. Finder cannot become the holder.
Holder in due course : A person who receives a Negotiable Instrument for value, before it
was due and in good faith, without notice of any defect in it, he is called
holder in due course as per Negotiable Instrument Act. In the earlier example
if my friend lends some money to me on the basis of the cheque, which I have
given to him for encashment, he becomes holder-in-due course.
Hypothecation: Charge against property for an amount of debt where neither
ownership nor possession is passed to the creditor. In pledge, possession of
property is passed on to the lender but in hypothecation, the property remains
with the borrower in trust for the lender.
Identification: When a person provides a document to a bank or is being identified
by a person, who is known to the bank, it is called identification. Banks ask
for identification before paying an order cheque or a demand draft across the
counter.
Indemnifier: When a person indemnifies or guarantees to make good any loss
caused to the lender from his actions or others' actions.
Indemnity: Indemnity is a bond where the indemnifier undertakes to reimburse
the beneficiary from any loss arising due to his actions or third party
actions.
Income: The amount of money an individual receives in a particular time
period.
Index Fund: A mutual fund that holds shares in proportion to their
representation in a market index, such as the S&P 500.
Initial Public Offering (IPO): An event where a company sells its shares to the public for the
first time. The company can be referred to as an IPO for a period of time after
the event.
Inside Information: Non-public knowledge about a company possessed by its officers,
major owners, or other individuals with privileged access to information.
Insider Trading: The illegal use of non-public information about a company to make
profitable securities transactions
Insolvent: Insolvent is a person who is unable to pay his debts as they
mature, as his liabilities are more than the assets . Civil Courts declare such
persons insolvent. Banks do not open accounts of insolvent persons as they
cannot enter into contract as per law.
Interest Warrant: When cheque is given by a company or an organization in payment of
interest on deposit , it is called interest warrant. Interest warrant has all
the characteristics of a cheque.
International Banking: involves more than two nations or countries. If an Indian Bank has
branches in different countries like State Bank of India, it is said to do
International Banking.
Introduction: Banks are careful in opening any account for a customer as the
prospective customer has to be introduced by an existing account holder or a staff
member or by any other person known to the bank for opening of account. If bank
does not take introduction, it will amount to negligence and will not get
protection under law.
Intrinsic Value: The
difference of the exercise price over the market price of the underlying asset.
Investment: A vehicle for funds expected to increase its value and/or generate
positive returns.
Investment Adviser: A person who carries on a business which provides investment
advice with respect to securities and is registered with the relevant regulator
as an investment adviser.
IPO price: The price of share set before being traded on the stock exchange.
Once the company has gone Initial Public Offering, the stock price is
determined by supply and demand.
JHF Account : Joint Hindu Family Account is account of a firm whose business is
carried out by Karta of the Joint family, acting for all the family members..
The family members have common ancestor and generally maintain a common
residence and are subject to common social, economic and religious regulations.
Joint Account: When two or more individuals jointly open an account with a bank.
Junk Bond: High-risk securities that have received low ratings (i.e. Standard
& Poor’s BBB rating or below; or Moody’s BBB rating or below) and as such,
produce high yields, so long as they do not go into default.
Karta: Manager of a Hindu Undivided Family (HUF) who handles the family
business. He is usually the eldest male member of the undivided family.
Kiosk Banking: Doing banking from a cubicle from which food, newspapers, tickets
etc. are also sold.
KYC Norms: Know your customer norms are imposed by R.B.I. on banks and other
financial institutions to ensure that they know their customers and to ensure
that customers deal only in legitimate banking operations and not in money
laundering or frauds.
Law of Limitation: Limitation
Act of 1963 fixes the limitation period of debts and obligations including
banks loans and advances. If the period fixed for particular debt or loan
expires, one cannot file a suit for is recovery, but the fact of the debt or
loan is not denied. It is said that law of limitation bars the remedy but does
not extinguish the right.
Lease Financing: Financing for the business of renting houses or lands for a
specified period of time and also hiring out of an asset for the duration of
its economic life. Leasing of a car or heavy machinery for a specific period at
specific price is an example.
Letter of Credit: A document issued by importers bank to its branch or agent abroad
authorizing the payment of a specified sum to a person named in Letter of
Credit (usually exporter from abroad). Letters of Credit are covered by rules
framed under Uniform Customs and Practices of Documentary Credits framed by
International Chamber of Commerce in Paris.
Limited Companies Accounts: Accounts of companies incorporated under the
Companies Act, 1956 .
A company may be private or public. Liability of the shareholders of a company
is generally limited to the face value of shares held by them.
Leverage Ratio: Financial ratios that measure the amount of debt being used to
support operations and the ability of the firm to service its debt.
Libor: The
London Interbank Offered Rate (or LIBOR) is a daily reference rate based on the
interest rates at which banks offer to lend unsecured funds to other banks in
the London wholesale money market (or interbank market). The LIBOR rate is
published daily by the British Banker’s Association and will be slightly higher
than the London Interbank Bid Rate (LIBID), the rate at which banks are
prepared to accept deposits.
Limit Order: An order to buy (sell) securities which specifies the highest
(lowest) price at which the order is to be transacted.
Limited Company: The passive investors in a partnership, who supply most of the
capital and have liability limited to the amount of their capital
contributions.
Liquidity: The ability to convert an investment into cash quickly and with
little or no loss in value.
Listing: Quotation
of the Initial Public Offering company’s shares on the stock exchange for
public trading.
Listing Date: The date on which Initial Public Offering stocks are first traded
on the stock exchange by the public
Margin Call: A notice
to a client that it must provide money to satisfy a minimum margin requirement
set by an Exchange or by a bank / broking firm.
Market Capitalization: The
product of the number of the company’s outstanding ordinary shares and the
market price of each share.
Market Maker: A dealer who maintains an inventory in one or more stocks and
undertakes to make continuous two-sided quotes.
Market Order: An order to buy or an order to sell securities which is to be
executed at the prevailing market price.
Money Market: Market in which short-term securities are bought and sold.
Marginal Standing Facility Rate: MSF scheme has become effective from 09th May, 2011 launched by
the RBI. 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.
Mandate: Written authority issued by a customer to another person to act on
his behalf, to sign cheques or to operate a bank account.
Material Alteration: Alteration in an instrument so as to alter the character of an
instrument for example when date, amount, name of the payee are altered or
making a cheque payable to bearer from an order one or opening the crossing on
a cheque.
Merchant Banking : When a bank provides to a customer various types of financial
services like accepting bills arising out of trade, arranging and providing
underwriting, new issues, providing advice, information or assistance on
starting new business, acquisitions, mergers and foreign exchange.
Micro Finance: Micro
Finance aims at alleviation of poverty and empowerment of weaker sections in
India. In micro finance, very small amounts are given as credit to poor in rural,
semi-urban and urban areas to enable them to raise their income levels and
improve living standards.
Minor Accounts: A minor is a person who has not attained legal age of 18 years. As
per Contract Act a minor cannot enter into a contract but as per Negotiable
Instrument Act, a minor can draw, negotiate, endorse, receive payment on a
Negotiable Instrument so as to bind all the persons, except himself. In order
to boost their deposits many banks open minor accounts with some restrictions.
Mobile Banking : With the help of M-Banking or mobile banking customer can check
his bank balance, order a demand draft, stop payment of a cheque, request for a
cheque book and have information about latest interest rates.
Money Laundering: When a customer uses banking channels to cover up his suspicious
and unlawful financial activities, it is called money laundering.
Money Market: Money market is not an organized market like Bombay Stock Exchange
but is an informal network of banks, financial institutions who deal in money
market instruments of short term like CP, CD and Treasury bills of Government.
Moratorium: R.B.I. imposes moratorium on operations of a bank; if the affairs
of the bank are not conducted as per banking norms. After moratorium R.B.I. and
Government explore the options of safeguarding the interests of depositors by
way of change in management, amalgamation or take over or by other means.
Mortgage: Transfer of an interest in specific immovable property for the
purpose of offering a security for taking a loan or advance from another. It
may be existing or future debt or performance of an agreement which may create
monetary obligation for the transferor (mortgagor).
Mutual Fund: A company that invests in and professionally manages a diversified
portfolio of securities and sells shares of the portfolio to investors.
NABARD: National Bank for Agriculture & Rural Development was setup in
1982 under the Act of 1981. NABARD finances and regulates rural financing and
also is responsible for development agriculture and rural industries.
Negotiation: In the context of banking, negotiation means an act of
transferring or assigning a money instrument from one person to another person
in the course of business.
Net Asset Value: The underlying value of a share of stock in a particular mutual
fund; also used with preferred stock.
Non-Fund Based Limits: Non-Fund Based Limits are those type of limits where banker does
not part with the funds but may have to part with funds in case of default by
the borrowers, like guarantees, letter of credit and acceptance facility.
Non-Resident: A person who is not a resident of India is a non-resident.
Non-Resident Accounts: Accounts of non-resident Indian citizens opened and maintained as
per R.B.I. Rules.
Notary Public: A Lawyer who is authorized by Government to certify copies of
documents .
NPA Account: If
interest and instalments and other bank dues are not paid in any loan account
within a specified time limit, it is being treated as non-performing assets of
a bank.
Off Balance Sheet Items: Those
items which affect the financial position of a business concern, but do not
appear in the Balance Sheet E,g guarantees, letters of credit . The mention
"off Balance Sheet items" is often found in Auditors Reports or
Directors Reports.
Offer for Sale: An offer to the public by, or on behalf of, the holders of
securities already in issue.
Offer for Subscription: The offer
of new securities to the public by the issuer or by someone on behalf of the
issuer.
Online Banking: Banking through internet site of the bank which is made
interactive.
Open-end (Mutual) Fund: There is no limit to the number of shares the fund can issue. The
fund issues new shares of stock and fills the purchase order with those new
shares. Investors buy their shares from, and sell them back to, the mutual fund
itself. The share prices are determined by their net asset value.
Open Offer: An offer to current holders of securities to subscribe for
securities whether or not in proportion to their existing holdings.
Option: A
security that gives the holder the right to buy or sell a certain amount of an
underlying financial asset at a specified price for a specified period of time.
Oversubscribed: When an
Initial Public Offering has more applications than actual shares available.
Investors will often apply for more shares than required in anticipation of
only receiving a fraction of the requested number. Investors and underwriters
will often look to see if an IPO is oversubscribed as an indication of the
public’s perception of the business potential of the IPO company.
Pass Book: A record of all debit and credit entries in a customer's account.
Generally all banks issue pass books to Savings Bank/Current Account Holders.
Par Bond: A bond selling at par (i.e. at its face value).
Par Value: The face value of a security.
Perpetual Bonds: Bonds which have no maturity date.
Placing: Obtaining subscriptions for, or the sale of, primary market, where
the new securities of issuing companies are initially sold.
Personal Identification Number
(PIN): Personal Identification Number is a number which an ATM card
holder has to key in before he is authorized to do any banking transaction in a
ATM .
Plastic Money: Credit Cards, Debit Cards, ATM Cards and International Cards are
considered plastic money as like money they can enable us to get goods and
services.
Pledge: A bailment of goods as security for payment of a debt or
performance of a promise, e.g pledge of stock by a borrower to a banker for a
credit limit. Pledge can be made in movable goods only.
Post-Dated Cheque: A Cheque which bears the date which is subsequent to the
date when it is drawn. For example, a cheque drawn on 8th of February, 2007
bears the date of 12th February, 2007.
Power of Attorney: It is a
document executed by one person - Donor or Principal, in favour of another
person, Donee or Agent - to act on behalf of the former, strictly as per
authority given in the document.
Portfolio: A collection of investment vehicles assembled to meet one or more
investment goals.
Preference Shares: A
corporate security that pays a fixed dividend each period. It is senior to
ordinary shares but junior to bonds in its claims on corporate income and
assets in case of bankruptcy.
Premium (Warrants): The difference of the market price of a warrant over its intrinsic
value.
Premium Bond: Bond selling above par.
Present Value: The
amount to which a future deposit will discount back to present when it is
depreciated in an account paying compound interest.
Present Value of an Annuity: The
amount to which a stream of equal cash flows that occur in equal intervals will
discount back to present when it is depreciated in an account paying compound
interest.
Price/Earnings Ratio (P/E): The measure to determine how the market is pricing the company’s
common stock. The price/earnings (P/E) ratio relates the company’s earnings per
share (EPS) to the market price of its stock.
Privatization: The sale of government-owned equity in nationalized industry or
other commercial enterprises to private investors.
Prospectus: A
detailed report published by the Initial Public Offering company, which
includes all terms and conditions, application procedures, IPO prices etc, for
the IPO
Put Option: The right to sell the underlying securities at a specified exercise
price on of before a specified expiration date.
Premature Withdrawals: Term deposits like Fixed Deposits, Call Deposits, Short Deposits
and Recurring Deposits have to mature on a particular day. When these deposits
are sought to be withdrawn before maturity , it is premature withdrawal.
Prime Lending Rate (PLR): The rate at which banks lend to their best (prime) customers.
Priority Sector Advances : consist of loans and advances to Agriculture, Small Scale
Industry, Small Road and Water Transport Operators, Retail Trade, Small
Business with limits on investment in equipments, professional and self
employed persons, state sponsored organisations for lending to SC/ST,
Educational Loans, Housing Finance up to certain limits, self-help groups and
consumption loans.
Promissory Note: Promissory Note is a promise / undertaking given by one person in
writing to another person, to pay to that person , a certain sum of money on
demand or on a future day.
Provisioning: Provisioning is made for the likely loss in the profit and loss
account while finalizing accounts of banks. All banks are supposed to make
assets classification and make appropriate provisions for likely losses in
their balance sheets.
Public Sector Bank: A bank
fully or partly owned by the Government.
Rate of Return: A percentage showing the amount of investment gain or loss against
the initial investment.
Real Interest Rate: The net interest rate over the inflation rate. The growth rate of
purchasing power derived from an investment.
Redemption Value: The value
of a bond when redeemed.
Reinvestment Value: The rate at which an investor assumes interest payments made on a
bond which can be reinvested over the life of that security.
Relative Strength Index (RSI): A stock’s price that changes over a period of time relative to
that of a market index such as the Standard & Poor’s 500, usually measured
on a scale from 1 to 100, 1 being the worst and 100 being the best.
Repurchase Agreement: An
arrangement in which a security is sold and later bought back at an agreed
price and time.
Resistance Level: A price at which sellers consistently outnumber buyers, preventing
further price rises.
Return: Amount of investment gain or loss.
Rescheduling of Payment: Rearranging the repayment of a debt over a longer period
than originally agreed upon due to financial difficulties of the borrower.
Restrictive Endorsement: Where endorser desires that instrument is to be paid to particular
person only, he restricts further negotiation or transfer by such words as
"Pay to Ashok only". Now Ashok cannot negotiate the instrument
further.
Right of Appropriation: As per Section 59 of the Indian Contract Act, 1972 while making
the payment, a debtor has the right to direct his creditor to appropriate such
amount against discharge of some particular debt. If the debtor does not do so,
the banker can appropriate the payment to any debt of his customer.
Right of Set-Off : When a banker combines two accounts in the name of the same
customer and adjusts the debit balance in one account with the credit balance
in other account, it is called right of set-off. For example, debit balance of
Rs.50,000/- in overdraft account can be set off against credit balance of
Rs.75,000/- in the Savings Bank Account of the same customer, leaving a balance
of Rs.25,000/- credit in the savings account.
Rights Issue: An offer by way of rights to current holders of securities that
allows them to subscribe for securities in proportion to their existing
holdings.
Risk-Averse, Risk-Neutral,
Risk-Taking:
Risk-averse describes an investor who
requires greater return in exchange for greater risk.
Risk-neutral describes an investor who does
not require greater return in exchange for greater risk.
Risk-taking describes an investor who will
accept a lower return in exchange for greater risk.
Safe Custody: When articles of value like jewellery, boxes, shares, debentures,
Government bonds, Wills or other documents or articles are given to a bank for
safe keeping in its safe vault, it is called safe custody.. Bank charges a fee
from its clients for such safe custody.
Savings Bank Account: All banks in India are having the facility of opening savings bank
account with a nominal balance. This account is used for personal purposes and
not for business purpose and there are certain restrictions on withdrawals from
this type of account. Account holder gets nominal interest in this account.
Senior Bond: A bond that has priority over other bonds in claiming assets and
dividends.
Settlement: Conclusion of a securities transaction when a customer pays a
broker/dealer for securities purchased or delivered, securities sold, and
receive from the broker the proceeds of a sale.
Short Hedge: A
transaction that protects the value of an asset held by taking a short position
in a futures contract.
Short Position: Investors sell securities in the hope that they will decrease in
value and can be bought at a later date for profit.
Short Selling: The sale of borrowed securities, their eventual repurchase by the
short seller at a lower price and their return to the lender.
Speculation: The process of buying investment vehicles in which the future
value and level of expected earnings are highly uncertain.
Stock Splits: Wholesale changes in the number of shares. For example, a two for
one split doubles the number of shares but does not change the share capital.
Subordinated Bond: An issue that ranks after secured debt, debenture, and other
bonds, and after some general creditors in its claim on assets and earnings.
Owners of this kind of bond stand last in line among creditors, but before
equity holders, when an issuer fails financially.
Substantial Shareholder: A person acquires an interest in relevant share capital equal to,
or exceeding, 10% of the share capital.
Support Level: A price
at which buyers consistently outnumber sellers, preventing further price falls.
Teller : Teller is a staff member of a bank who accepts deposits, cashes
cheques and performs other banking services for the public.
Technical Analysis: A method of evaluating securities by relying on the assumption
that market data, such as charts of price, volume, and open interest, can help
predict future (usually short-term) market trends. Contrasted with fundamental
analysis which involves the study of financial accounts and other information
about the company. (It is an attempt to predict movements in security prices
from their trading volume history.)
Time Horizon: The duration of time an investment is intended for.
Trading Rules: Stipulation of parameters for opening and intra-day quotations,
permissible spreads according to the prices of securities available for trading
and board lot sizes for each security.
Trust Deed: A formal document that creates a trust. It states the purpose and
terms of the name of the trustees and beneficiaries.
Underwriting : is an agreement by the underwriter to buy on a fixed date and at a
fixed rate, the unsubscribed portion of shares or debentures or other issues.
Underwriter gets commission for this agreement.
Underlying Security: The security subject to being purchased or sold upon exercise of
the option contract.
Universal Banking : When Banks and Financial Institutions are allowed to undertake all
types of activities related to banking like acceptance of deposits, granting of
advances, investment, issue of credit cards, project finance, venture capital
finance, foreign exchange business, insurance etc. it is called Universal
Banking.
Valuation: Process by which an investor determines the worth of a security
using risk and return concept.
Virtual Banking: Virtual banking is also called internet banking, through which
financial and banking services are accessed via internet's World Wide Web. It
is called virtual banking because an internet bank has no boundaries of brick
and mortar and it exists only on the internet.
Warrant: An option
for a longer period of time giving the buyer the right to buy a number of
shares of common stock in company at a specified price for a specified period
of time.
Wholesale Banking: Wholesale banking is different from Retail Banking as its focus is
on providing for financial needs of industry and institutional clients.
Window Dressing: Financial adjustments made solely for the purpose of accounting
presentation, normally at the time of auditing of company accounts.
Yield (Internal rate of Return): The compound annual rate of return earned by an investment
Yield to Maturity: The rate
of return yield by a bond held to maturity when both compound interest payments
and the investor’s capital gain or loss on the security are taken into account.
Zero Coupon Bond: A bond with no coupon that is sold at a deep discount from par
value.
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