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Quick Revision - 08

DECEMBER 08, 2014

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Quick Revision - 08

1. Credit Rating – It evaluates the chances of default on a loan taken by a borrower.

2. CRISIL (Credit Rating Information Services India Ltd.) -Assesses the probability of default on debentures, bonds, fixed deposits and other debts of companies by giving them ratings e.g. A, AA, AAA, B, B+, BB etc. depending on their ability for timely repayment of principal and interest.


3. CIBIL – The Credit Information Bureau of India maintains a common database of all credit taken by borrowers in India (except lending in informal and unorganized sectors) and their repayment history. A bank can instantly access the credit history of a borrower to decide on a loan application. The CIBIL also generates a relative credit score based on credit repayment history.


4. Banking Ombudsman- The apex complaints resolution body to address the bank customers’ complaints. The Ombudsman can grant compensation of upto Rs. 10 lacs in banking matters and up to Rs 1 lakh in credit card cases.


5. Credit Card- Also termed plastic money. A common means of making payments or withdrawing cash. A credit card is like an unsecured (without collateral) loan limit, used to make payment only up to a limit. The credit card holder receives a monthly bill for all transactions and gets a credit-free period (max 51 days) for bill payment, after which interest is payable on the outstanding amount.


6. Debit Card- A debit card combines an ATM card and a cheque. When one pays using a debit card, the seller swipes the card through an electronic point of sale (EOS) terminal, which is directly linked to the card-issuer bank and the cardholder’s account is debited instantly. If you spend a certain amount at a store, your bank account is at once debited for the amount. There is no credit facility available in this case, unlike a credit card. Debit cards are issued by the banks, but are used at merchant establishments/shops / stores.


7. Basel Norms – The Basel Committee on Banking Supervision (BCBS) prescribes guidelines for banks on maintaining the minimum capital requirements. As per these recommendations, the capital of a bank cannot be less than 8% of its Risk Weighted Assets (RWA). This ratio is called the Capital Adequacy Ratio (CAR) or Capital to Risk Weighted Assets Ratio (CRAR).


8. Know Your Customer (KYC) - The Financial Action Task Force (FATF), Paris recommends some norms on customer identification and address verification, which are called Know Your Customer (KYC) norms. The RBI has made the KYC norms compulsory for all banks in India.


9. Financial Inclusion – Making available basic financial services to those people, who are not yet covered by them. The government’s latest initiative Jan Dhan Yojana seeks to further promote this process, under which around 7.5 crore new bank accounts have been opened by all banks since August 2014.


10. Basic Savings Account- To encourage financial inclusion, the RBI has introduced special savings accounts which come with zero balance and without restrictions on the number of deposits. The earlier No Frill Accounts are now renamed Basic Savings Accounts.


11. Micro Finance Institutions – Specialized financial institutions which give small loans to the very poor, usually by the Self-Help Group route, in backward / interior areas. The Malegam Committee reported on the working of MFIs in India.


12. Microfinance – A tool of economic development to assist the poor in getting out of poverty. It covers - credit, savings, insurance, money transfers, counseling, etc. Normally, loans up to Rs. 50,000 are covered under such micro finance schemes.


13. Non Performing Assets (NPA) - NPAs are those loans on which the borrower defaults or delays the interest / principal payments. The ratio of NPAs to the loans and advances made by Indian banks is very high compared to the banking systems in advanced economies. The banks cannot book any income from NPAs. Further, they have to make provisions for them i.e. keep money aside as reserve in case they can't recover it. All these things adversely affect the banks’ profitability.


14. Venture Capital - Venture capital is provided by professionals investment firms for young, rapidly growing companies with a high growth potential. A venture capitalist (VC) may provide capital for new ideas, products, technology or start-up firms. 


15. Bit coin – A peer-to-peer payment system introduced as open source software. The digital currency so created is called bit coin or virtual currency or crypto-currency. The bit coins are not regulated by a single entity, thereby giving them their name --- decentralized currency.


16. Mutual Fund- A common investment kitty which raises money from several people and invests it, typically in shares, bonds or other securities according to a decided goal. The benefits of this investment are distributed among all investors proportionately. A mutual fund is an ideal investment channel for small investors in today's complex investment world.


17. Open Market Operations- Buying and selling of government securities between the public and the banks. It affects the banks’ reserves, yield on government securities and the rates of interest. The RBI sells government securities to reduce credit and buys them to improve credit flow. Open market operations serve to make the bank rate policy effective and maintain stability in the government securities market.


18. Repo Rate - The rate at which the RBI gives short-terms loans to commercial banks against government securities. A low Repo Rate helps the banks access cheaper money while a higher Repo Rate discourages the banks from accessing loans as doing so gets costlier.


19. Reverse Repo - The rate at which the RBI borrows money from the commercial banks. Higher rates decrease the availability of credit and demand decreases, resulting in decreased inflation. An increase in Repo Rate and Reverse Repo Rate indicates a tightening of the monetary policy.


20. ECS – Electronic Clearing System of the RBI aimed at integrating all regular, periodic payments like mutual funds, insurance plans etc under a common electronic system, eliminating all paperwork.




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