Basic Banking Terminology & Concepts : Learn Now

Basic Banking Terminology & Concepts

Banking surely is a beat with a language all its own. This is a list of some of the key terms you’ll need to know and will come across frequently. The three sites I consulted in the arrangement of this glossary, are named below.

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.

1. Account Agreement: The contract governing your open-end credit account, it provides information on changes that may occur to the account.
2. 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.
3. 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.
4. Acquiring Bank: In a merger, the bank that absorbs the bank acquired.
5. 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.
6. 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.
7. Arbitrage: Buying a financial instrument in one market in order to sell the same instrument at a higher price in another market.
8. 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.
9. 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.
10. AER: Annual earnings rate on an investment.
11. Affidavit: A sworn statement in writing before a proper official, such as a notary public.
12. Alteration: Any change involving an erasure or rewriting in the date, amount, or payee of a check or other negotiable instrument.
13. 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.
14. 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.
15. 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.
16. Annual Percentage Rate (APR): The cost of credit on a yearly basis, expressed as a percentage.
17. 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.
18. 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.
19. 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.
20. 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.
21. Appraisal: The act of evaluating and setting the value of a specific piece of personal or real property.
22. Ask Price: The lowest price at which a dealer is willing to sell a given security.
23. 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.
24. At-the-money: The exercise price of a derivative that is closest to the market price of the underlying instrument.
25. 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.
26. Authorization: The issuance of approval, by a credit card issuer, merchant, or other affiliate, to complete a credit card transaction.
27. 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.
28. 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.
29. 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).
30. Availability Date: Bank’s policy as to when funds deposited into an account will be available for withdrawal.
31. Availability Policy: Bank’s policy as to when funds deposited into an account will be available for withdrawal.
32. Available Balance: The balance of an account less any hold, uncollected funds, and restrictions against the account.
33. Available Credit: The difference between the credit limit assigned to a cardholder account and the present balance of the account.
34. 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.
35. 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.
36. 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.
37. 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.
38. 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.
39. 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.
40. 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.
41. 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’.
42. 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.
43. Bid-ask Spread: The difference between a dealers’s bid and ask price.
44. Bid Price: The highest price offered by a dealer to purchase a given security.
45. 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.
46. 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.
47. 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.
48. Broker: Individuals licensed by stock exchanges to enable investors to buy and sell securities.
49. Brokerage Fee: The commission charged by a broker.
50. Bull Markets: Favorable markets associated with rising prices and investor optimism.
51. Call Option: The right to buy the underlying securities at a specified exercise price on or before a specified expiration date.
52. Callable Bonds: Bonds that give the issuer the right to redeem the bonds before their stated maturity.
53. Capital Gain: The amount by which the proceeds from the sale of a capital asset exceed its original purchase price.
54. Capital Markets: The market in which long-term securities such as stocks and bonds are bought and sold.
55. Certificate of Deposits (CDs): Savings instrument in which funds must remain on deposit for a specified period and premature withdrawals incur interest penalties.
56. 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.
57. 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.
58. 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.
59. 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.
60. 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.
61. Commercial Paper: Short-term and unsecured promissory notes issued by corporations with very high credit standings.
62. Common Stock: Equity investment representing ownership in a corporation; each share represents a fractional ownership interest in the firm.
63. Compound Interest: Interest paid not only on the initial deposit but also on any interest accumulated from one period to the next.
64. 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.
65. 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.
66. 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.
67. Corporate Bond: Long-term debt issued by private corporations.
68. Coupon: The feature on a bond that defines the amount of annual interest income.
69. Coupon Frequency: The number of coupon payments per year.
70. 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.
71. Covered Warrants:  Derivative call warrants on shares which have been separately deposited by the issuer so that they are available for delivery upon exercise.
72. 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.
73. 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.
74. 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.
75. 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.
76. 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.
77. 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.
78. Creditworthiness: It is the capacity of a borrower to repay the loan / advance in time along with interest as per agreed terms.
79. 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.
80. 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.
81. 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.
82. 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.
83. 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%.
84. 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.
85. 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.
86. Debtor: A person who takes some money on loan from another person.
87. Demand Deposits: Deposits which are withdrawn on demand by customers. E.g.  savings bank and current account deposits.
88. 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.
89. 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.
90. Derivative Instrument: Financial instrument whose value depends on the value of another asset.
91. Discount Bond:  A bond selling below par, as interest in-lieu to the bondholders.
92. 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.
93. Diversification: The inclusion of a number of different investment vehicles in a portfolio in order to increase returns or be exposed to less risk.
94. 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.
95. Earnings: The total profits of a company after taxation and interest.
96. Earnings per Share (EPS): The amount of annual earnings available to common stockholders as stated on a per share basis.
97. Earnings Yield: The ratio of earnings to price (E/P). The reciprocal is price earnings ratio (P/E).
98. 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.
99. 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.
100. 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.
101. Electronic Commerce (E-Commerce): E-Commerce is the paperless commerce where the exchange of business takes place by Electronic means.
102. 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.
103. Bouncing of a cheque: Where the name of the endorsee or transferee is not mentioned on the instrument.
104. Endorsement in Full: Where the name of the endorsee or transferee appears on the instrument while making endorsement.
105. Equity: Ownership of the company in the form of shares of common stock.
106. 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.
107. 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.
108. 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.
109. Face Value/ Nominal Value: The value of a financial instrument as stated on the instrument. Interest is calculated on face/nominal value.
110. Fixed-income Securities: Investment vehicles that offer a fixed periodic return.
111. Fixed Rate Bonds:  Bonds bearing fixed interest payments until maturity date.
112. Floating Rate Bonds: Bonds bearing interest payments that are tied to current interest rates.
113. 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.
114. 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.
115. 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.
116. 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.
117. 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.
118. 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.
119. 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.
120. Futures Contract: A commitment to deliver a certain amount of some specified item at some specified date in the future.
121. 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.
122. 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.
123. 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.
124. Hedge: A combination of two or more securities into a single investment position for the purpose of reducing or eliminating risk.
125. 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.
126. 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.
127. 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.
128. 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.
129. Indemnifier: When a person indemnifies or guarantees to make good any loss caused to the lender from his actions or others’ actions.
130. 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.
131. Income: The amount of money an individual receives in a particular time period.
132. Index Fund:  A mutual fund that holds shares in proportion to their representation in a market index, such as the S&P 500.
133. 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.
134. Inside Information: Non-public knowledge about a company possessed by its officers, major owners, or other individuals with privileged access to information.
135. Insider Trading: The illegal use of non-public information about a company to make profitable securities transactions
136. 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.
137. 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.
138. 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.
139. 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.
140. Intrinsic Value: The difference of the exercise price over the market price of the underlying asset.
141. Investment: A vehicle for funds expected to increase its value and/or generate positive returns.
142. 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.
143. 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.
144. 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