Banking Terms

Repo Rate: Repo rate means a purchase and sale of agreement. It is a contract to buy securities and then sell them back at an agreed future date and price. It is thus revenue for short term investment of surplus funds. From RBI point of view it is called a short term lending and from banks point of view it is called short term borrowing.

Reverse Repo rate :  Reverse Repo Rate is an instrument of borrowing funds for a short period and involves selling a security and simultaneously agreeing to repurchase it at a stated future date for slightly higher price. From RBI point of view it is called a short term borrowing and from banks point of view it is called a short term lending.

Group Company : As per RBI for the purpose of FDI, two or more enterprise which , directly or indirectly , are in position to exercise 26% or more of voting rights in other enterprise or appoint more than 50% of the members of the board of directors in the other enterprises.

Branch Vs Subsidiary: A subsidiary is a separate legal entity from the parent company, although owned by parent company, has a same legal identity as its parent company , from liability , on the other hand branch is not a separate legal entity of the parent company and liability wise there is no limit to the parents company’s liability , RBI has permitted to Foreign Banks to change from Branch Mode to the Wholly Owned Subsidiaries.

NFS (National Financial Switch): It facilitates interconnectivity between banks’ switches and interbank payment Gateway for authentication & routing the payment details of various E-commerce & E-Govt. activities (Retail Banking). Now NFS has been overtaken by NPCI (National Payment Corporation of India).

SLR (Statutory Liquidity Ratio): This is a minimum Reserve which every bank has to maintain with itself in the most liquid form to meet any demand of the depositors. Normally Government securities are purchased to maintain SLR.

Prime Lending Rate (PLR): The term originally indicates the rate of interest at which a bank lends to favored customers, i.e. those with high credibility, though this is no longer always the case. Some variable interest rates may be expressed as a percentage above or below prime rate.

Sub Prime Rate: In India when money is lent below the PLR is known as Sub Prime Rate whereas in USA when money is lent at rate above the PLR is known as Sub Prime rate.

Base Rate: As per recommendation of Mr. Deepak Mohanty of RBI to bring a complete transparency in Bank’s lending system, in Indian Banking system the loan were sanctioned to the large corporate houses even below the PLR and some time it were fixed very low without any justification. A Base rate recommends that no bank will lend any money below the base rate. With this there shall be no extra benefits to the large corporate houses. Base rate will be beneficial for the regulator RBI. Now all Banks will either lend at Base rate or will park money with RBI, under LAF system. Base rate has been implemented from 1^st july, 2010.

GDRs (Global Depository Receipts): It is a dollor denominated instrument, an easy way of raising funds from foreign countries. It is a mechanism that allows foreign investor to invest in Indian Companies. Represents a certain number of equity shares on Indian companies. GDRs are issued by depository usually American Banks & Indian shares are held by custodian in India (like ICICI). Traded in stock exchanges in Europe or in US or both.

IPO (Initial Public Offer): 1^st sale of stock by a company to the public .IPOs offer issued by smaller younger co. seeking the capital to extend. It can also be done by large company.

FPO (Follow on Public Offer ) : A public company already listed on an exchange, a supplementary shares made by a company that is already publicly listed & has gone thru the IPO process, it is also called as secondary public offering subsequent to the company’s IPO.

Zero Liability Protection: It is a bank guarantee. If your card is lost or stolen you may not be responsible for unauthorized purchases made with your card if you report the theft promptly. The Zero liability protection facility is free & automatically available on all bank consumer Credit Cards.

Vostro Account: When a foreign Bank is opened in the India with Indian Currency is known as Vostro account e.g. Standard Chartered Bank in India.

SWAPS: It is a transaction where the bank purchases or sells the foreign currency simultaneously, for different maturities, say purchases of spot and sale of forward or vice versa. Swap contracts obligate 2 parties to swap or exchange certain specified intervals. Swaps are not the instruments for raising funds rather they allow better management of existing funds.