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.