Important Banking Terms

1.    Balance of Trade:

The value of a country’s exports minus the value of its imports. Unless specified as the balance of merchandise trade, it normally incorporates trade in services, including earnings (interest, dividends, etc.) on financial assets.

2.    Balance of Payments:

A list of all of a country’s international transactions for a given time period, usually one year. Payments into the country (receipts) are entered as positive numbers, called credits; Payments out of the country (payments) are entered as negative numbers called debits. A single numbers summarize all of a country’s international transactions: the balance of payments surplus.

3.    MFN (Most Favoured Nation):

The principle, fundamental to the GATT, of treating imports from a country on the same basis as that given to the most favoured other nation. That is, and with some exceptions, every country gets the lowest tariff that any country gets, and reductions in tariffs to one country are provided also to others.

4.    Balanced Budget:

A government budget surplus that is zero, thus with net tax revenue equaling expenditure. A balanced budget changes in policy or behavior is one which a component of the government budget, usually taxes, is adjusted as necessary to maintain a balanced budget.

5.    Balanced Growth of an Economy:

Growth of an economy in which all aspects of it, especially factors of production, grow at the same rate.

6.    Bank Rate:

The interest rate charges by a central bank to commercial banks for very short term loans.

Current Bank Rate – 10.25%

7.    Repo:

Repo is “Repurchase Agreement”. An agreement to sell a security for a specified price and to buy it back later at another specified price. A repo is essentially a secured loan.

8.    Repo Rate:

Whenever the banks have any shortage of funds they can borrow it form RBI. Repo rate is the rate at which commercial banks borrows rupees from RBI. A reduction in the repo rate will help banks to get money at cheaper rate. When the repo rate increases borrowing form RBI becomes more expensive.

Current Repo Rate is: 7.25%

9.    Reverse Repo Rate:

Reverse Repo rate is the rate at which RBI borrows money from commercial banks. Banks are always happy to lend money to RBI since their money is in the safe hands with a good interest. An increase in reverse repo rate can cause the banks to transfer more funds to RBI due to this attractive interest rates.

Current R Repo Rate: 6.25%

10.  CRR (Cash Reverse Ratio):

CRR is the amount of funds that the banks have to keep with RBI. If RBI increases CRR, the available amount with the banks comes down. RBI is using this method (increase of CRR), to drain out the excessive money from the banks.

Current CRR – 4%

11.  SLR (Statutory Liquidity Ratio):

SLR is the amount a commercial banks needs to maintain in the form of cash, or gold, or govt. approved securities (Bonds) before providing credit to its customers. SLR rate is determined and maintained by RBI in order to control the expansion of the bank credit.

Current SLR is 23%

Need of SLR:

With the SLR, the RBI can ensure the solvency of a commercial banks. It is also helpful to control the expansion of the Bank credits. By changing SLR rates, RBI can increase or decrease bank credit expansion. Also through SLR, RBI compels the commercial banks to invest in the government securities like govt. bonds.

Main use of SLR:

SLR is used to control inflation and propel growth. Through SLR rate the money supply in the system can be controlled effectively.

12.  Fiscal Deficit:

A deficit in the government budget of a country and represents the excess of expenditure over income. So this is the amount of borrowed funds require by the government to meet its expenditures completely.

13.  Direct Tax:

A direct tax is that which is paid directly by someone to taxing authority. Income tax and property tax are an examples of direct tax. They are not shifted to somebody else.

14.  Indirect Tax:

This type of tax is not paid by someone to the authorities and it is actually passed on to the other in the form of increased cost. They are levied on goods and services produced or purchased. Excise Tax, Sales Tax, Vat, Entertainment tax are indirect taxes.

15.  NOSTRO Account:

A Nostro account is maintained by an Indian Bank in the foreign countries.

16.  VOSTRO Account:

A Vostro account is maintained by a foreign bank in India with their corresponding bank.

17.  SDR (Special Drawing Rights):

SDR are new form of International reserve assets, created by the International Monetary Fund in 1967. The value of SDR is based on the portfolio of widely used countries and they are maintained as accounting entries and not as hard currency or physical assets like Gold.