Important Banking Terms - 1
WHAT - Amortization is a method of spreading the cost (writing off) of an intangible asset (copyrights, goodwill, software, agreements, license) over a specific period of
WHY – To prorate (allocate) the cost of Intangible asset over its useful (estimated) life.
TELL ME MORE –
- In banking terms, Amortization is the elimination of debt by repaying it on periodic payments.
- This payment covers the interest levied on the principle amount along with the principle amount as long as, you pay the periodic installment.
- For Example – If the insurance premium is Rs 6000 annually, then it would be distributed as Rs 500 each month.
WHAT - Depreciation is a method of spreading the cost of a tangible asset over a specified period of time.
WHY - The purpose of depreciation is to match the expense of obtaining an asset to the income it helps a company earn.
TELL ME MORE - Tangible assets are the one which are physical or can be touched like building, furniture, equipment, vehicles, etc.
ASSETS OF BANK
WHAT - Bank assets are the physical and financial "property" of a bank, what a bank
TELL ME MORE - A bank can have different types of assets, including physical assets (buildings, land, furniture), loans, including interest from consumer and business loans; reserves, or holdings of deposits of the central bank. Loans taken from a bank are considered as assets for that bank as it is bound to get it back with interest from the debtor.
LIABILITIES OF BANK
WHAT – Any legal debts or obligations that arise during the course of the bank.
TELL ME MORE –
- Deposits (Current or Saving) done by the customer, Borrowings made from the other banks including RBI.
- Assets and liabilities of bank can be calculated to find the bank’s capital.
- Bank Capital = Total Assets – Total Liabilities; as the total amount of money the bank has and the money which is to be kept aside to be given to customers and lenders.
WHAT - Bancassurance means selling insurance product through banks.
WHY - Banks and insurance company come up in a partnership wherein the bank sells the tied insurance company's insurance products to its clients.
TELL ME MORE – The concept of bancassurance was introduced in 2000 when insurance sector was opened for the private sector. This channel enables banks, which have trusted relationship with the customers, to provide them various financial products through a single-window service.
WHAT - E-Lobby is a facility which is now provided by banks so that their customers can do their banking transactions as per their convenience 24×7e. without any time restriction.
WHY - It saves their time as customers need not stand in queue to get their work completed and also offers additional several banking service facilities that ATMs don’t offer.
TELL ME MORE – Available on Bank holidays as well. Self service facilities which can be done at banking e-lobbies include ATM withdrawals, cash deposits, card-to-card transfers, mobile phone top-ups, railway booking, passbook printing, NEFT, opening of FD/RD accounts, SMS alerts, cheque drop box, bill payments, mini statements, etc.
WHAT - The Banking Ombudsman is a senior official appointed by the Reserve Bank of India to redress customer complaints against deficiency in certain banking services rendered by banks.
WHY - Banking Ombudsman Scheme, 2006 is introduced with the objective of enabling resolution of complaints relating to certain services rendered by banks and to facilitate the satisfaction or settlement of such complaints.
TELL ME MORE - Banking Ombudsman Scheme, 2006 is introduced with the objective of enabling resolution of complaints relating to certain services rendered by banks and to facilitate the satisfaction or settlement of such complaints.
- As on date, twenty Banking Ombudsmen have been appointed with their offices located mostly in state capitals (As per RBI Website Updated on July 14, 2017). All Scheduled Commercial Banks, Regional Rural Banks and Scheduled Primary Co-operative Banks are covered under the Scheme.
- One can file a complaint before the Banking Ombudsman if the reply is not received from the bank within a period of one month after the bank concerned has received one's complaint, or the bank rejects the complaint, or if the complainant is not satisfied with the reply given by the bank.
- No Charge for filing complaint
- The amount, if any, to be paid by the bank to the complainant by way of compensation for any loss suffered by the complainant is limited to the amount arising directly out of the act or omission of the bank or ₹20 lakhs (₹ Two Million), whichever is lower.
- If unsatisfied with Ombudsman, then he/she can approach the appellate authority against the Banking Ombudsmen’s decision. Appellate Authority is vested with a Deputy Governor of the RBI.
WHAT - In Consortium financing, several banks (or financial institutions) finance a single borrower. In this case there is a common documentation, joint supervision and follow-up exercises between all banks/financial institutions. So, the participating banks form a new consortium bank.
WHY – When the borrower needs large amount of funds. Under this the risk gets divided among the banks. Arrangement participating banks acquire a common interest and share equally in the risk and the profits. Upon completion of the project the consortium bank is disbanded.
TELL ME MORE - The whole loan amount is divided among those banks forming consortium, so the risk also gets divided. The bank which takes the higher risk (by giving the highest amount of loan) will act as a leader and thus it acts as an intermediary between the consortium and the borrower.
WHAT - Multiple banking is an arrangement where a borrower takes loan amount from several banks. In this case no bank knows that his borrower has taken loan from other banks too.
WHY – Multiple banking is used when the borrower needs large amount of funds. He / She acquires funds from various banks.
TELL ME MORE - There is no contractual relationship between various banks like that in consortium banking and each bank holds its individual security and own credit rates. There are various loopholes in multiple banking arrangements, and also it can lead to frauds so consortium banking is better for economy. Public Credit Registry (PCR) has been launched by RBI to tackle the issue of Multiple Banking. PCR was recommended by Deosthale Committee. You can read on PCR separately.
CROSS SELLING AND UP SELLING
WHAT – Cross selling is when banks sell any extra banking products/services to their customer along with the product the customer wants. Up selling means encouraging customers to purchase a higher-end product or we can say a more costly product than the customer has asked for.
WHY – This can be a highly effective tool for growing business, acquiring new to bank clients and enhance customer life time value by encouraging multiple product holdings by Individual customer.
TELL ME MORE – Example (Cross Selling): selling a credit card and internet banking to a savings or current account customer, selling their any bancassurance products, etc. Selling Credit Card with more and costlier facilities than what has been asked by customer is Up Selling.
WHAT – In dormant account, there is no activity from a very long time by the account holder like Debit, Credit, cheque issue or any other activity except interest posting by the bank. If An account holder doesn’t do any type of activity in period of 1 year, this account automatically becomes an inactive account and if this continues for a period of 2 year, It becomes a Dormant Account.
WHY – When people shift to new cities and open new bank accounts, leaving a job and work with a new company.
TELL ME MORE – For maintaining bank accounts, charges are levied. So, if there are many inoperative or dormant accounts, maintaining of such accounts will be an extra burden on bank. So, RBI asked banks to track dormant accounts so that the balance can either be revived, or the balance can be transferred to a new account or the legal heirs.
FREEZING OF ACCOUNT
WHAT – Freezing of account means the transactions in such account cannot be performed until further notice. No payments could be done in such accounts and even cheques drawn before freezing will not be encashed.
WHY – There could be many reasons for the same – tax dues, unpaid loans or money to any individuals/organizations, illegal or suspicious activity like money laundering, terrorist financing, etc.
TELL ME MORE – Banks by themselves cannot freeze the account. However, they can take active part in discovering the accounts that show any suspicious transactions. RBI, SEBI, Income-tax authorities, and court have the right to freeze the account.
WHAT – Grace time period refers to the time span given after the payment becomes
WHY – Sometimes people who fulfill their obligations on time may get late on rare Thus, to help them maintain their credit worthiness and avoid penalties, a grace period is given.
TELL ME MORE – No interest rates are charged during this period. Example – Grace period given for paying insurance premiums or credit card bills.
WHAT – When an asset acquired by the borrower under a loan is offered to the lender as security for the financed amount then that asset is called Primary Security or the thing which is being financed.
WHY – Securities reduces the risk of default on the part of borrower and also provides more time period to repay the loan.
TELL ME MORE – if a person has got his car financed from bank against the car itself, then it is primary security.
WHAT – When additional security or security other than the one for which loan is being granted, been kept as security against taking credit loan is known as collateral security.
WHY – Sometimes, banks don’t feel secure or satisfied with the primary security.
TELL ME MORE – Getting Jewellery mortgaged for the loan.