Indian Banking System

Banking
Banking refers to the system of financial institutions, such as banks and credit unions, that
provide various financial services to individuals, businesses, and governments. Banking
services mainly include accepting deposits, lending money, facilitating transactions, and
offering various financial products like savings accounts, loans, and credit cards.
Banking plays a crucial role in the economy by facilitating the flow of money and enabling
economic activities.

History of Banking in India

Banking in India forms the base for the economic development of the country. Major changes
in the banking system and management have been seen over the years with the advancement
in technology, considering the needs of people.
The History of Banking in India dates back to before India got independence in 1947 and is a
key topic in terms of questions asked in various Government exams. In this article, we shall
discuss in detail the evolution of the banking sector in India.
The banking sector development can be divided into three phases:
Phase I: The Early Phase which lasted from 1770 to 1969
Phase II: The Nationalisation Phase which lasted from 1969 to 1991
Phase III: The Liberalisation or the Banking Sector Reforms Phase which began in 1991 and
continues to flourish till date

Given below is a pictorial representation of the evolution of the Indian banking system over
the years:

Pre Independence Period (1786-1947)

The first bank of India was the “Bank of Hindustan”, established in 1770 and located in the
then Indian capital, Calcutta. However, this bank failed to work and ceased operations in
1832.
During the Pre Independence period over 600 banks had been registered in the country, but
only a few managed to survive.
Following the path of Bank of Hindustan, various other banks were established in India. They
were:

PROF. ANIL KUMAR BHUYAN

  The General Bank of India (1786-1791)
 Oudh Commercial Bank (1881-1958)
 Bank of Bengal (1809)
 Bank of Bombay (1840)
 Bank of Madras (1843)

During the British rule in India, The East India Company had established three banks: Bank
of Bengal, Bank of Bombay and Bank of Madras and called them the Presidential Banks.
These three banks were later merged into one single bank in 1921, which was called the
“Imperial Bank of India.”

The Imperial Bank of India was later nationalised in 1955 and was named The State Bank of
India, which is currently the largest Public sector Bank. Given below is a list of other banks
which were established during the Pre-Independence period:
Pre-Indepence Banks in India
Bank Name Year of Establishment
Allahabad Bank 1865
Punjab National Bank 1894
Bank of India 1906
Central Bank of India 1911
Canara Bank 1906
Bank of Baroda 1908
If we talk of the reasons as to why many major banks failed to survive during the pre-
independence period, the following conclusions can be drawn:

 Indian account holders had become fraud-prone

 Lack of machines and technology
 Human errors & time-consuming
 Fewer facilities
 Lack of proper management skills
Following the Pre-Independence period was the post-independence period, which observed
some significant changes in the banking industry scenario and has till date developed a lot.

Post Independence Period (1947-1991)

At the time when India got independence, all the major banks of the country were led
privately which was a cause of concern as the people belonging to rural areas were still
dependent on money lenders for financial assistance.
With an aim to solve this problem, the then Government decided to nationalise the Banks.
These banks were nationalised under the Banking Regulation Act, 1949. Whereas, the
Reserve Bank of India was nationalised in 1949.
Following it was the formation of State Bank of India in 1955 and the other 14 banks were
nationalised between the time duration of 1969 to 1991. These were the banks whose national
deposits were more than 50 crores.
Given below is the list of these 14 Banks nationalised in 1969:

1. Allahabad Bank
2. Bank of India
3. Bank of Baroda
4. Bank of Maharashtra
5. Central Bank of India

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 6. Canara Bank
7. Dena Bank
8. Indian Overseas Bank
9. Indian Bank
10. Punjab National Bank
11. Syndicate Bank
12. Union Bank of India
13. United Bank
14. UCO Bank
In the year 1980, another 6 banks were nationalised, taking the number to 20 banks. These
banks included:

1. Andhra Bank
2. Corporation Bank
3. New Bank of India
4. Oriental Bank of Comm.
5. Punjab & Sind Bank
6. Vijaya Bank
Apart from the above mentioned 20 banks, there were seven subsidiaries of SBI which were
nationalised in 1959:

1. State Bank of Patiala

2. State Bank of Hyderabad
3. State Bank of Bikaner & Jaipur
4. State Bank of Mysore
5. State Bank of Travancore
6. State Bank of Saurashtra
7. State Bank of Indore
All these banks were later merged with the State Bank of India in 2017, except for the State
Bank of Saurashtra, which merged in 2008 and State Bank of Indore, which merged in 2010.
Note: The Regional Rural Banks in India were established in the year 1975 for the
development of rural areas in India. Candidates can get the list of RRBs in India at the linked
article.

Impact of Nationalisation
There were various reasons why the Government chose to nationalise the banks. Given below
is the impact of Nationalising Banks in India:

 This lead to an increase in funds and thereby increasing the economic condition of the
country
 Increased efficiency
 Helped in boosting the rural and agricultural sector of the country
 It opened up a major employment opportunity for the people
 The Government used profit gained by Banks for the betterment of the people
 The competition decreased, which resulted in increased work efficiency
This post Independence phase was the one that led to major developments in the banking
sector of India and also in the evolution of the banking sector.
Refer to the Government exam preparation links below:

PROF. ANIL KUMAR BHUYAN

Liberalisation Period (1991-Till Date)
Once the banks were established in the country, regular monitoring and regulations need to
be followed to continue the profits provided by the banking sector. The last phase or the
ongoing phase of the banking sector development plays a hugely significant role.
To provide stability and profitability to the Nationalised Public sector Banks, the Government
decided to set up a committee under the leadership of Shri. M Narasimham to manage the
various reforms in the Indian banking industry.
The biggest development was the introduction of Private sector banks in India. RBI gave
license to 10 Private sector banks to establish themselves in the country. These banks
included:

1. Global Trust Bank

2. ICICI Bank
3. HDFC Bank
4. Axis Bank
5. Bank of Punjab
6. IndusInd Bank
7. Centurion Bank
8. IDBI Bank
9. Times Bank
10. Development Credit Bank
The other measures taken include:

 Setting up of branches of the various Foreign Banks in India

 No more nationalisation of Banks could be done
 The committee announced that RBI and Government would treat both public and
private sector banks equally
 Any Foreign Bank could start joint ventures with Indian Banks
 Payments banks were introduced with the development in the field of banking and
technology
 Small Finance Banks were allowed to set their branches across India
 A major part of Indian banking moved online with internet banking and apps available
for fund transfer
Thus, the history of banking in India shows that with time and the needs of people, major
developments have been brought about in the banking sector with an aim to prosper it.

Indian Banking Structure

The Indian Banking Structure is broadly classified into Scheduled Banks and Non-scheduled
banks. The scheduled banks are further divided into cooperative banks and commercial
banks. While, under the commercial banks, we have Public Sector Banks, Regional Rural
Banks (RRBs), and Foreign Banks. The below-mentioned table provides more details about
the various types of banks in India.

 Central Bank
 Cooperative Banks
 Commercial Banks
 Regional Rural Banks (RRB)

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  Local Area Banks (LAB)
 Specialized Banks
 Small Finance Banks
 Payments Banks

Central Bank
The Reserve Bank of India is the central bank of our country. Each country has a central bank
that regulates all the other banks in that particular country.
The main function of the central bank is to act as the Government’s Bank and guide and
regulate the other banking institutions in the country. Given below are the functions of the
central bank of a country:

 Guiding other banks

 Issuing currency
 Implementing the monetary policies
 Supervisor of the financial system
In other words, the central bank of the country may also be known as the banker’s bank as it
provides assistance to the other banks of the country and manages the financial system of the
country, under the supervision of the Government.

Scheduled Banks
o They are described in the Reserve Bank of India Act as banks that are listed in the 2nd
schedule of the RBI Act of 1934.
o All the RRBs, Indian and foreign commercial banks, and cooperative banks are
considered scheduled banks.
o Scheduled banks must have a minimum paid-up capital and reserves of up to INR 25
lakh.

Non-Scheduled Banks
o These banks do not follow the 2nd schedule of the RBI Act of 1934, and hence they
are not bound to the RBI guidelines.
o They are required to maintain a Cash Reserve Ratio (CRR), not with the RBI but by
themselves.
o Non-scheduled banks have a paid-up capital of less than INR 5 lakhs.

Cooperative Banks
These banks are organised under the state government’s act. They give short term loans to the
agriculture sector and other allied activities.
The main goal of Cooperative Banks is to promote social welfare by providing concessional
loans
They are organised in the 3 tier structure

 Tier 1 (State Level) – State Cooperative Banks (regulated by RBI, State Govt,
NABARD)

 Funded by RBI, government, NABARD. Money is then distributed to the

public

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  Concessional CRR, SLR applies to these banks. (CRR- 3%, SLR- 25%)

 Owned by the state government and top management is elected by members

 Tier 2 (District Level) – Central/District Cooperative Banks

 Tier 3 (Village Level) – Primary Agriculture Cooperative Banks

Commercial Banks

 Organised under the Banking Companies Act, 1956

 They operate on a commercial basis and its main objective is profit.
 They have a unified structure and are owned by the government, state, or any private
entity.
 They tend to all sectors ranging from rural to urban
 These banks do not charge concessional interest rates unless instructed by the RBI
 Public deposits are the main source of funds for these banks
The commercial banks can be further divided into three categories:

1. Public sector Banks – The government owns the majority of the shares of such
banks. The ownership of the government is generally more than 50%. For instance,
the government share of the State Bank of India (SBI) is 58.60%, while that of the
Punjab National Bank (PNB) is 58.87%. These banks are further classified into
Nationalized Banks and State Bank and its Associates.
2. Private sector Banks – The majority of the equity is held by private entities,
corporations, institutions, or individuals along with the government. Banking in India
has been dominated by public sector banks since 1969 when all the major banks were
nationalized by the Indian government.After liberalization in the 1990s, banks like
ICICI, HDFC, etc. became the new age private sector banks.Currently, there are 22
private-sector banks operational in the country.
3. Foreign Banks – These banks are compelled to follow the guidelines of both the
home as well as the host countries. Such banks tend to be more effective in countries
with high taxes and nations where it is easy for international firms to enter the market.
Currently, there are a total of 46 foreign banks operational in India.

Given below is the list of commercial banks in our country:

Commercial Banks in India

Public Sector Banks Private Sector Banks Foreign Banks
State Bank of India Catholic Syrian Bank Australia and New
Allahabad Bank City Union Bank Zealand Banking
Andhra Bank Dhanlaxmi Bank Group Ltd.
Bank of Baroda Federal Bank National Australia
Bank of India Jammu and Kashmir Bank Bank
Bank of Maharashtra Karnataka Bank Westpac Banking
Canara Bank Karur Vysya Bank Corporation
Central Bank of India Lakshmi Vilas Bank Bank of Bahrain &
Corporation Bank Nainital Bank Kuwait BSC
Dena Bank Ratnakar Bank AB Bank Ltd.
Indian Bank South Indian Bank HSBC
Indian Overseas Bank Tamilnad Mercantile Bank CITI Bank

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 Oriental Bank of Axis Bank Deutsche Bank
Commerce Development Credit Bank DBS Bank Ltd.
Punjab National Bank (DCB Bank Ltd) United Overseas Bank
Punjab & Sind Bank HDFC Bank Ltd
Syndicate Bank ICICI Bank J.P. Morgan Chase
Union Bank of India IndusInd Bank Bank
United Bank of India Kotak Mahindra Bank Standard Chartered
UCO Bank Yes Bank Bank
Vijaya Bank IDFC There are over 40
IDBI Bank Ltd. Bandhan Bank of Bandhan Foreign Banks in India
Financial Services.

Nationalized Banks (Government Shareholding %, as at end-March 2023)

1. State Bank of India (57.59%)

2. Canara Bank (62.93%)
3. Bank of Baroda (63.97%)
4. Punjab National Bank (73.15%)
5. Indian Bank (79.86%)
6. Bank of India (81.41%)
7. Union Bank of India (76.99%)
8. Bank of Maharashtra (90.90%)
9. Central Bank of India (93.08%)
10. UCO Bank (95.39%)
11. Indian Overseas Bank (96.38%)
12. Punjab and Sind Bank (98.25%)

Regional Rural Banks (RRB)

 These are special types of commercial Banks that provide concessional credit to
agriculture and rural sector.
 RRBs were established in 1975 and are registered under a Regional Rural Bank Act,
1976.
 RRBs are joint ventures between the Central government (50%), State government
(15%), and a Commercial Bank (35%).
 196 RRBs have been established from 1987 to 2005.
 From 2005 onwards government started merger of RRBs thus reducing the number of
RRBs to 82
 One RRB cannot open its branches in more than 3 geographically connected districts.

Local Area Banks (LAB)

 Introduced in India in the year 1996

 These are organized by the private sector
 Earning profit is the main objective of Local Area Banks
 Local Area Banks are registered under Companies Act, 1956/2013
 At present, there are only 4 Local Area Banks in India

Local Area Banks in India

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 As per the latest information available, four LAB (Local area banks) are known
in India. Below are four local area banks:

1. Coastal Local Area Bank Ltd

 It was the first local area bank to get a licence from the Reserve Bank of India
in 1999.
 The bank was established on December 27, 1999, and started its operations in
the same year. It has been providing its services for the past two decades in the
areas it is allowed to provide financial services.
 It is a non-government company registered with the Registrar of Companies
with an authorised share capital of Rs. 450,000,000.
 The bank has its headquarters in Vijayawada, Andhra Pradesh.
 Its areas of operations (contiguous districts) include Krishna, Guntur and West
Godavari.

2. Krishna Bhima Samruddhi Local Area Bank Ltd

 Krishna Bhima Samruddhi Local Area Bank Ltd is a public company

incorporated as a local area bank in 1999.
 Krishna Bhima Samruddhi Local area bank was incorporated on February 19,
1999, and is registered with the Registrar of Companies as a non-government
company.
 The company has an authorised share capital of Rs. 25,00,00,000.
 Its headquarters are located in Hyderabad, Telangana.
 As of today, the bank operates in 12 districts in Telangana, Andhra Pradesh
and Karnataka.
 The bank has 14 correspondent outlets and 29 branches spread across the three
core areas of its operations.

3. Capital Local Area Bank Ltd

 It is regarded as the largest local area bank in India, and its operations are
based in Jalandhar, Punjab.
 The bank completed its 16 years of operations in the year 2016.
 The three major contiguous districts of Capital Local Area Bank Ltd include
Jalandhar, Kapurthala and Hoshiarpur.
 It extended its operations in the districts of Ludhiana and Amritsar in January
2013 after getting approval from RBI.
 Approximately 80% of its fore business is based in semi-urban and rural areas.

Note: As per the details outlined in an official press release by the Reserve Bank
of India on 27 April 2016, the bank ceased to exist as a local area bank. It was
because the bank was converted into a small finance bank upon getting approval
from RBI to carry on its operations in the new venture. Here are a few more
essential points to note concerning this conversion:

 The bank got its licence on 4 March 2016 to begin its operations as a small
finance Bank.
 India’s first local area bank to get converted into a small finance bank.

PROF. ANIL KUMAR BHUYAN

 The Reserve Bank of India granted in-principle approval to allow ten other
entities to start their operations at small finance banks.

4. Subhadra Local Area Bank Ltd. Kolhapur

 On April 10, 2001, the bank was incorporated as a registered non-scheduled

public company with the Registrar of Companies.
 The bank has its head office in Kolhapur.

A few important points to note:

 In one of its official press releases in December 2020, the Reserve Bank of
India cancelled the banking licence of Subhadra Local Area Bank Limited
Kolhapur.
 The main reason RBI cancelled the bank’s licence is that its activities were
detrimental to the interest of its depositors.
 The central bank also notified that the bank is likely to affect the public
interest if it continues to carry on its business in the same manner.
 Although the liquidity status of the bank was found satisfactory to pay all the
existing depositors, the licence was still cancelled due to the ongoing
allegations.

Specialized Banks
Certain banks are introduced for specific purposes only. Such banks are called specialized
banks. These include:

 Small Industries Development Bank of India (SIDBI) – Loan for a small scale
industry or business can be taken from SIDBI. Financing small industries with
modern technology and equipments is done with the help of this bank
 EXIM Bank – EXIM Bank stands for Export and Import Bank. To get loans or other
financial assistance with exporting or importing goods by foreign countries can be
done through this type of bank
 National Bank for Agricultural & Rural Development (NABARD) – To get any
kind of financial assistance for rural, handicraft, village, and agricultural
development, people can turn to NABARD.
There are various other specialized banks and each possesses a different role in helping
develop the country financially.

Small Finance Banks

As the name suggests, this type of bank looks after the micro industries, small farmers, and
the unorganized sector of the society by providing them loans and financial assistance. These
banks are governed by the central bank of the country.
Given below is the list of the Small Finance Banks in our country:
AU Small Finance Equitas Small Jana Small Finance Northeast Small
Bank Finance Bank Bank Finance Bank

Capital Small Fincare Small Suryoday Small Ujjivan Small

Finance Bank Finance Bank Finance Bank Finance Bank

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 Esaf Small Utkarsh Small
Finance Bank Finance Bank

Payments Banks
A newly introduced form of banking, the payments bank have been conceptualized by the
Reserve Bank of India. People with an account in the payments bank can only deposit an
amount of up to Rs.1,00,000/- and cannot apply for loans or credit cards under this account.
Options for online banking, mobile banking, the issue of ATM, and debit card can be done
through payments banks. Given below is a list of the few payments bank in our country:

 Airtel Payments Bank

 India Post Payments Bank
 Fino Payments Bank
 Jio Payments Bank
 Paytm Payments Bank
 NSDL Payments Bank

Functions of Banks
Banks in India offer a wide range of banking services, such as savings and checking accounts,
loans (personal, business, and mortgages), credit cards, investment services, and electronic
banking options like online and mobile banking.
Some of the major functions of banks are mentioned below:
 Accepting Deposits: Banks provide a safe place for individuals and businesses to
deposit their money, which can be withdrawn when needed.
 Providing Loans: Banks lend money to individuals and businesses for various
purposes, such as home mortgages, business expansion, or personal loans.
 Payments and Settlements: Banks enable transactions through various payment
methods, like checks, debit/credit cards, and electronic transfers.
 Currency Exchange: Many banks offer foreign exchange services, allowing customers
to buy, sell, or exchange foreign currencies.
 Safekeeping of Valuables: Some banks offer safe deposit boxes for customers to
securely store valuable items and documents.
 Investment Services: Banks also provide investment products like mutual funds,
stocks, and bonds, helping customers grow their wealth.
 Internet Banking Services: Banks offer online and mobile banking services, making it
convenient for customers to access their accounts, pay bills, and transfer funds.

BASEL NORMS
An Introduction to the Basel Norms

Basel norms, also known as Basel accords, are the international banking regulations issued
by the Basel Committee. The Basel Committee was established in 1974. This Committee
set standards regarding various banking supervisory matters. The main aim of these standards
is to ensure the coordination of banking regulations worldwide. Read ahead to know about
the three Basel norms and how they affect Indian economy.

PROF. ANIL KUMAR BHUYAN

 An Introduction to Basel Norms

Basel Norms I
Basel norms are also referred to as banking supervision accords. These are simple standards
aimed at increasing the capital ratios of various banks. Basel norms also provided a
benchmark for analytical comparative assessment.

Why Basel Norms?

Banks around the world lend to different types of borrowers having different
creditworthiness. They lend the deposits of the public and money raised from the market.
This exposes the banks to a variety of risks of default. As a result, banks have to keep a
certain percentage of capital as security in case of risk of non-recovery. The Basel Committee
has created various norms to tackle this risk.

Basel Norms Types

The Basel Committee has issued the following sets of regulations.
1. Basel I: Basel I was introduced in 1988. This Basel norm focused on credit risk. Credit
risk arises when a borrower fails to repay a loan or meet contractual obligations. This norm
defined the capital and structure of risk weights for banks. The minimum capital requirement
was set as 8% of risk-weighted assets. Risk-weighted assets mean a bank's assets are
weighted according to risk.

2. Basel II: Basel II guidelines were issued in 2004. These norms were refined versions of
Basel-I norms. These norms were based on the following three parameters.
 Banks should retain a minimum capital adequacy requirement of 8% of risk assets.
 Banks were advised to develop and use better risk management techniques.
 Banks must disclose their capital adequacy requirement and risk exposure to the
central bank.

Basel II

3. Basel III: Basel III guidelines were issued in 2010. These norms were introduced in
response to the financial crisis of 2008. A need was felt to strengthen the banking system
across the globe. It was also felt that the quantity and quality of capital under Basel II were
considered insufficient.

Basel Regulations
The following are some regulations followed by banks regarding Basel norms:
 Increasing capital requirements ensures that banks are strong enough to combat
losses.
 Improving the quality of bank regulatory capital in the form of Common Equity Tier 1
capital.
 Specifying a minimum leverage ratio requirement to curb excess leverage in the
banking system.
 Introducing capital buffers that are maintained in good times and can be used in times
of crisis.

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The Basel Committee also introduced an international framework for mitigating excessive
liquidity risk through the Liquidity Coverage Ratio.

Basel 3 Guidelines
Basel 3 guidelines promote a strong banking system by focusing on four important banking
parameters.
 Capital - The capital adequacy ratio should be maintained at 12.9%. The minimum
tier 1 capital ratio should be 10.5%, and the tier 2 capital ratio should be 2% of risk-
weighted assets. Banks are also required to maintain a capital conservation buffer of
2.5%. Counter-cyclical buffers should also be maintained at 0-2.5%.
 Leverage - The leverage rate should be at least 3%. The leverage ratio is a bank's tier
1 capital to average total consolidated assets.
 Funding And Liquidity - Basel 3 created two liquidity ratios :

i) Liquidity coverage ratio will require banks to hold a buffer of high-quality liquid
assets to deal with the cash outflows. The goal is to ensure banks have enough funds.
ii) Net stable funds rate requires banks to maintain a stable funding profile for their
off-balance sheet assets and activities. The minimum net stable fund rate requirement
is 100%.

Basel 3 Guidelines

India on Basel Norms

 The deadline for implementing Basel-III norms was March 2019, but it was pushed to
March 2020.
 Due to the pandemic, the Reserve Bank of India postponed the implementation of
Basel norms for another 6 months.
 This resulted in a lower capital burden on banks regarding provisioning requirements.
 This extension would have an impact on how RBI and Indian banks are perceived by
global players.

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 BANKING TERMINOLOGY
1. NEFT (National Electronic Funds Transfer) - NEFT is an electronic means to transfer
money from one bank to another or within the same branch. Depending on the bank,
NEFT charges and the minimum amount that can be transferred may vary.
2. Linked Account - An account that is linked to your account for the purpose of fund
transfer is called a linked account.
3. Base Rate - This is the minimum rate at which a bank can lend to its customers. It
cannot lend below the base rate. All interest rates determined for various loans will
use the base rate as the benchmark.
4. Balance Transfer - This is a credit card payment option for people using more than
one credit card. Like the name suggests, balance transfer is when you transfer the
balance of one credit card to another. This is useful when a card holder is unable to
make full payment on his/her card, or if the second credit card offers a lesser rate of
interest.
5. Cashback - Cashback is an offer provided primarily by credit card companies where
they offer some amount of money back to the cardholder that he/she has spent on the
card. Each spend made on the card will be rewarded with points, and the pints can
then later be redeemed for money.
6. Credit History - Credit history is the past behavioural patterns of a customer with
regard to loans. A credit bureau will collect the information of a customer and then
translate it to a number between 300 and 900. This is known as your credit score and
the higher the credit score, the better your chances are to avail a loan or a credit card.
7. Collateral - Any security provided to the bank in exchange for a loan is known as
collateral. A collateral can be in the form of land, gold, etc. This is called a secured
loan and is less risky than an unsecured loan for the lender. In case of secured loans,
the lender may auction off the collateral if the borrower fails to pay off his/her loan.
8. Documentation Fee - Before lending money, lenders have to gauge the credit
worthiness of a customer. Customers will usually be charged for this service, also
known as documentation fee.
9. Fixed Rate - A fixed rate is when the rate of interest for a loan remains constant
throughout the entire tenure.
10. Floating Rate - Opposite of fixed rate, a floating rate of interest are interest rates that
change during the tenure of the loan. These interest rates change as per the changes of
interest rates in the economy.
11. MICR Code - This is a nine digit code found in the bottom right hand corner of a
cheque leaf. This code varies from bank to bank and is an acronym for Magnetic Ink
Character Recognition.
12. No-frills Account - This is a rudimentary savings account that requires no minimum
balance to enjoy benefits like net banking, online fund transfer, etc.
13. Electronic Clearing Service - This is a technology used by banks wherein a certain
amount of money is directly debited from your account on a specified date every
month towards the payment of a loan, mutual fund account, etc.
14. Processing Fee - In order to process a loan application of a customer, banks usually
charge a fee. This fee is known as a processing fee.
15. RTGS - RTGS (Real Time gross Settlement) is a fund transfer technology used by
banks for same bank or interbank fund transfer. Contrasting NEFT or RTGS,

PROF. ANIL KUMAR BHUYAN

 transferring funds with RTGS is instantaneous and more nominal with regard to the
costs incurred.
16. KYC - KYC (Know Your Customer) is a procedure that all banks undergo in order to
establish the correct identity of a customer. This is to ensure that no fraudulent
operations are taking place in the bank.
17. Routing Number - This is a number that can identify your bank based on the
geographical location of the institution. Bigger banks may have several routing
numbers while smaller ones have only one.
18. APR - Annual Percentage Rate (APR) is the yearly interest you earn by depositing
your money your money into an account. This does not take into consideration the
compound interest.
19. Compound Interest - Simple interest is the interest earned on a deposit. Compound
interest is the interest earned on the deposit plus the interest earned on the same
deposit previously. For example, if you've deposited Rs.1 lakh into a bank, and the
bank promises to pay you a 10% interest, you will earn an interest of Rs.10,00. The
next year however, you will be receiving an interest on Rs.1, 10, 000, i.e., the initial
amount deposited plus the interest earned on that amount.
20. Returned Item Fee - In case a cheque has bounced due to insufficient funds or another
reason, the account holder will be penalized with a fee. This fee is called returned
item fee.
21. Overdraft Fee - In the event, that you run out of money in your account, certain banks
under certain schemes allow you to withdraw more money than you have in your
account. This is a loan, in a sense, and the bank will charge you a fee on repayment.
This fee is called overdraft fee.
22. Liquidity - The ability to sell an asset in the market without affecting its price is called
liquidity.
23. Monetary Policies - This refers to the rules and regulations that the Reserve Bank of
India have put in place in order to standardize banking procedures in the nation.
24. Plastic Money - This is a reference to currency used by individuals other than hard
cash. Mostly it is used to refer to debit and credit cards.
25. Cash Reserve Ratio (CRR) - RBI has mandated all banks to maintain a certain
percentage of the total bank deposits in cash. This percentage with regard to the total
deposits is called cash reserve ratio.
26. Statutory Liquidity Ratio (SLR) - The minimum reserve required by the bank to
maintain in the form of gold is called statutory liquidity ratio.
27. Bank Rate - This is the rate of interest that the RBI levies on banks if they wish to
borrow money.
28. Basis Point - This is one hundredth of a percentage. This is usually used to indicate
change in interest rates.
29. Capital Gain - This is a profit or gain attained by a bank by sale of investments or
properties.
30. Debtor - A debtor is an individual or organization that owes money to the bank or any
other financial institution.
31. Joint Account - A joint account is an account where in two or more people have equal
rights and liabilities of a single account.
32. APY - Annual percentage yield (APY) is the percentage of interest you gain on
interest every year, excluding compound interest. This is the same as Annual
Percentage Rate (APR).
33. Bank Ombudsman - A bank ombudsman is the authority to look into complaints if in
case other modes of complaints haven't worked out for the customer.

PROF. ANIL KUMAR BHUYAN

 34. Credit Rating - This is an assessment of an individual's past credit history equated into
a number between 300 and 900. This is usually the main determinant of whether an
individual attains a loan or not. Credit bureaus collect this data on all individuals that
have a history of credit.
35. Micro Finance - Small loans provided to the poor in urban, rural and sub-urban parts
of the country in order to help them raise their income level is known as micro
financing.
36. Mobile Banking - Availing banking services with the help of a mobile phone is
referred to as mobile banking.
37. Repo Rate- It is seen that the commercial banks borrow funds from the RBI if there is
any shortage in their reserves. If the REPO rate increases, it becomes expensive to
borrow money from the RBI and vice versa.
38. Reverse Repo Rate- It is the opposite of repo rate as it is the rate at which the RBI
borrows money from the banks when it observes that too much money is floating in
the banking system.
39. Special Drawing Rights (SDR)- It is a reserve asset (Paper Gold) created within the
framework of the IMF in a bid to increase international liquidity.
40. Teller- It is a staff member of the bank who cashes cheques, accepts deposits, and
performs various banking services for the bank’s customers.
41. Universal Banking- When financial institutions and banks undertake activities related
to banking, like an investment, issue of debit and/ or credit card, etc. then it is
generally known as universal banking.
42. Virtual Banking- Internet banking is also called virtual banking as there are no bricks
or boundaries involved. It is mainly operated by the internet.
43. Wholesale Banking- It is similar to retail banking with a slight difference that it is
mainly focused on the financial needs of the institutional clients and the industry.
44. Zero Coupon Bond- They are sold at a good discount as they have no coupon.
45. Non Performing Asset (NPA) A non performing asset (NPA) is a loan or advance for
which the principal or interest payment remained overdue for a period of 90 days.

PROF. ANIL KUMAR BHUYAN