Important Banking Terms

Being a bank customer, you would have noticed that banks often use terms and phraseology which are very confusing to interpret. Some people even argue that they are purposely made complicated so only the person in-charge of it can understand and do transactions with it. But you got to know that these phrases were intentionally made this way because of their interpretation in different languages, the legal rights behind them and of course, the security and privacy issues involved when these banking terms are applied. In this article, you will be learning about most common banking terms used by banks so you will be able to manage your finances in a more efficient way.

What are Banking Terminologies?

Bank terminologies are the words that are used in the banking sector. This terminology is helpful for an individual to understand the changes and reforms made in banking system. These terms are used by the regulatory authorities, banks, and other financial bodies. Such terms define the term bank more briefly as a financial institution or sometimes as a service provider. It defines the main features of the banking sector such as primary deposits, currency and coins, security, money and coin issuance, dispensing of money in different forms. Such terminologies also define the terms that are required for performing banking activities properly.

The most often used and heard banking terminologies are shown here

Repo Rate

This is the rate that the Reserve Bank of India fixes to facilitate the borrowing of money by banks. The rate is decided at the time of meeting with the banking regulator, and it helps in accommodating the short-term liquidity needs of banks. It promotes liquidity in the banking system and helps in providing a viable solution to short-term funding concerns. These rates are provided to commercial banks in such a manner as they can use them for raising funds from other deposit-taking institutions, or fund dealers by selling off securities. Typically, funding done by repo is done on a bid basis or sale basis; if a bank sells a security then it comes under this category.

Reverse Repo Rate

This is the rate that the Reserve Bank of India fixes to facilitate the lending of money by banks. The rate is decided at the time of meeting with the banking regulator, and it helps in accommodating short-term cash needs of banks that arise from their investments in government securities. It promotes liquidity in banking system and helps in providing a viable solution to short-term cash injections concerns. These rates are provided to commercial banks in such a manner as they can use them for raising funds from other deposit-taking institutions or money market dealers by buying off securities. Typically, funding done by repo is done on a bid basis or purchase basis; if a bank buys a security then it comes under this category.

Statutory Liquidity Ratio (SLR)

It is one of the major regulations made by the Reserve Bank of India. It defines that how much amount banks are required to invest in such assets as approved securities and government bonds. These assets are short-term.

Cash Reserve Ratio (CRR)

It is also one of the major regulations made by the Reserve Bank of India that provides for how much cash reserves needs to be maintained with their respective central bank. This is usually decided by the government; it helps in arranging money for banks to lend. It also determines the proportion of part of total deposits that need to be kept as cash.

Repo (Repurchase) and Reverse Repo (Repurchase)

The government is often in need of money while the policy is to provide liquidity in the economy. The Reserve Bank of India is responsible for taking this responsibility and creates this useful terminology as a way to fund such requirements. These are essentially two types of deals with which banks can raise funds, or sell securities to pay off their liabilities and earn interest.

Pledging 

Banks can use third-party loans to raise funds by pledging certain assets. The assets can be shares, bonds or guaranteed securities.

Call Money Market 

With the help of call money market, banks are provided short-term loans and they earn interest on this loan. With this terminology, term call loan is not confused with the term fixed deposit. Call money loans are generally used for short-term requirements of funds and helps in meeting liquidity needs. This loan is given by one bank to another bank against collateral securities through the inter-bank market. It is given in a very short time frame generally overnight or within the same working day and it is a flexible sort of money market instrument.

Conclusion

Banking terminologies are must learn terms in the banking sector. These terminologies help in understanding of business operations, certain banking policies and current affairs relating to the banking sector. It also helps one in grasping what is happening around him/her. Learning these terminologies also helps one in easily comprehending news and updates related to the banking sector. This article encompasses all such terminologies that are used frequently by the public and by bankers themselves.