Banking Basics

1. Financial System : a structure that is available in an economy to mobilize the

capital from various surplus sectors of the economy and allocate and
distribute the same to the various needy sectors. It provides a system by
which savings are transformed into investments. It includes :-
 Money Market
 Debt Market
 FOREX Market
 Capital Market

2. Roles & function of RBI

 Monetary control
 Supervision over commercial banks, NBFC, Primary Dealers,
Financial Institutions, Cooperative Banks
 Management of govt debts
 Banker to govt
 Lender of last resort to banks
 Regulating of money markets through monetary instruments(CRR,
SLR, Bank Rate, Repo Rate, MSF)

3. Commercial Banks : includes public sector banks, foreign banks and private
banks. Acceptance of deposit from public for the purpose of lending or
investment is the main area of activity.
4. NBFC : Non-banking financial company is a company registered under the
Companies Act 1956 of India, engaged in the business of loans and advances,
acquisition of shares, stocks, bonds, hire-purchase insurance business, or chit
fund business but does not include any institution whose principle business
include agriculture, industrial activity, or the sale , purchase or construction
of immovable property.
5. Difference between NBFCs & Banks

NBFCs perform functions similar to that of banks but there are a few
differences-

 Provides Banking services to People without holding a Bank license,

 An NBFC cannot accept Demand Deposits,
  An NBFC is not a part of the payment and settlement system and as such,
 An NBFC cannot issue Cheques drawn on itself, and
 Deposit insurance facility of the Deposit Insurance and Credit Guarantee
Corporation is not available for NBFC depositors, unlike banks,
 An NBFC is not required to maintain Reserve Ratios (CRR, SLR etc.)
 An NBFC cannot indulge Primarily in Agricultural, Industrial Activity,
Sale-Purchase, Construction of Immovable Property
 Foreign Investment allowed up to 100%.

6. Cooperative Banks : mostly serve the needs of agriculture and allied

activities, rural based industries and to a lesser extent, trade and industry in
urban centers.
Urban Cooperative banks are controlled by State Govt and RBI, while other
cooperative banks are controlled by NABARD and State Govt.
7. Cash Reserve Ratio (CRR) : it is the amount of funds that all Scheduled
Commercial Banks are required to maintain with RBI. It is the percentage of
their Net Demand and Time Liabilities. CRR enables RBI to control liquidity
in the system, and thereby controlling inflation and bank lending.
8. Statutory Liquidity Ratio (SLR) : It is the prescribed percentage of Net
Demand and Time Liabilities of a bank to be held in prescribed securities,
mostly govt securities. The increase or decrease in CRR and SLR , contracts
or expands credit creation.
9. Bank Rate : also referred as the discount rate, is the rate of interest which a
central bank charges on its loans and advances to a commercial bank.
10. Repo and Reverse Repo Rate : repo rate is the rate at which RBI lends
money to it’s clients against govt securities. Reduction in repo rate helps
commercial banks to get more money at a cheaper rate. Reverse repo rate is
the rate at which RBI borrows money from commercial banks. The increase
in repo rate will increase the cost of borrowing and lending of the banks
which will discourage the public to borrow money and will encourage them
to deposit. As the rates are high the availability of credit and demand
decreases resulting to decrease in inflation.
11. Retail Banking : retail banking, also known as consumer banking, refers to
the offering of banking services to retail customers instead of institutional
customers, such as companies, corporations and/or financial institutions. It
refers to the dealing of commercial banks with individual customers, both on
liabilities and assets sides of the balance sheet. Fixed deposits,
 current/savings accounts on the liabilities side; and personal loans, housing,
auto loans and educational loans on the assets side, are important products
offered by banks.
12. Wholesale Banking : refers to doing banking business with industrial and
business entities – mostly corporates and trading houses, including
multinationals. This is also known as Corporate Banking/Commercial
Banking.
13. Money Market : Money Market can be understood as the market for short
term funds, wherein lending and borrowing of funds varies from overnight to
a year. It is an important part of the financial system that helps in fulfilling
the short term and very short term requirements of the companies, banks,
financial institution, government agencies and so forth.
14. Call Money/Notice Money and Term Money : In the money market, a
financial institution which has surplus funds may lend them on an
uncollateralized basis to an institution which is short of funds. The period of
lending may be for a period of 1 day which is known as call money and
between 2 days and 14 days which is known as notice money. Term money
refers to borrowing /lending of funds for a period exceeding 14 days.
15. Treasury Bills : treasury bills are money market instruments offered to
finance short term debt obligations of the Govt of India. Three types of T-
Bills are issued, namely 91-day, 182 days and 364-days.
16. Certificates of Deposit : COD is a negotiable money market instrument
issued in dematerialized form or as a Usance Promissory notes by scheduled
commercial banks. The tenor may range from 7 days to 1 year.
17. Commercial Paper : CP is an unsecured money market instrument issued in
the form of promissory note. Corporates and primary dealers and the all-India
financial institutions that have been permitted to raise short term resources by
RBI are eligible to issue CP. Tenor 7-days to 1-year.
18. FOREX(Foreign Exchange Market) : is an inter-bank market that took
shape in 1971 when global trade shifted from fixed exchange rated to floating
ones. This is a set of transactions among forex market agents involving
exchange of specified sums of money in a currency unit of any given nation
for currency of another nation at an agreed rate as of any specified date.
The FOREX market is a 24-hour market that does not depend on certain
business hours of foreign exchanges; trade takes place among banks located
in different corners of the globe.
 Benefits:-
 Liquidity : the market operates the enormous money supply and gives
absolute freedom in opening or closing a position in the current market
quotation.
 Promptness : 24-hour work schedule.
 Flexible regulation of the trade arrangement system
 One-valued quotations: with high market liquidity, most sales may be
carried out at the uniform market price.
19. Capital Market : Capital market is a market for long-term debt and equity
shares. In this market, capital funds comprising both equity and debt are
issued and traded. SEBI has prescribed certain rules and regulations and by
complying with the same, the promoters can raise their financial
requirements in the capital market. Capital market can be further divided into
Primary and Secondary market.
20. Primary Market : in the primary market,
securities(shares/bonds/debentures) are offered to the public for subscription,
for the purpose of raising capital or fund. There are number of intermediaries
in the primary market such as merchant banker, issue managers, lead
arrangers, etc.
21. Secondary Market : it is a market where securities are traded after being
initially offered to the public in the primary market and/or listed on the Stock
Exchange. Secondary market comprises equity markets and debt markets.
22. Debentures : bonds issued by a company bearing a fixed interest rate
usually payable half-yearly, on specific dates and the principal amount
repayable on a particular date on redemption of the debentures.
23. Bonds : a bond(debt security) security is generally issued by a company,
municipality or a government agency. A bond investor lends money to the
issuer and in exchange, the issuer promises to repay the loan amount in a
specified maturity date. The issuer usually pays the bond holder periodic
interest payments over the life of the loan.
24. SEBI : the Govt of India enacted the SEBI Act 1992, to provide for the
establishment of a board, called the Securities and Exchange Board of
India(SEBI) to protect the interests of investors in securities and to promote
the development of and to regulate the securities market.
25. Mutual Fund : it is a mechanism for pooling resources from the public,
issuing units to them and investing the funds so collected in securities in
 accordance with objectives as disclosed in an offer document. Mutual fund
issues units to investors in accordance with the quantum of money invested
by them. SEBI formulates the policies and regulates the mutual funds to
protect the interest of the investors.
26. A mutual fund is set-up in the form of a trust, which has sponsors, trustees,
Asset Management Companies (AMCs) and custodians. The trust is
established by a sponsor or more than one sponsor. A sponsor is like a
promoter of a company. An AMC approved by SEBI manages the funds by
making investments in various types of securities.
27. Different types of Mutual Fund : A mutual fund scheme can be classified
into an open-ended fund or a close-ended fund depending on its maturity
period.
28. Open-ended Scheme : these schemes do not have fixed maturity periods.
Investors can conveniently buy and sell units at NAV related prices which
are declared on a daily basis. An open-ended scheme/plan is one that is
available for subscription and repurchase on a continuous basis.
29. Close-ended Scheme : it has a stipulated maturity period. The fund is open
for subscription only during a specified period at the time of launch of the
scheme.
30. Equity Oriented Scheme : Such funds normally invests major part of their
corpus in equities. Such funds have comparatively higher risks.
31. Debt Oriented Scheme : Such schemes generally invest in fixed income
securities such as bonds, corporate debentures, government securities and
money market instruments. Such funds are less risky as compared to equity
schemes. These funds are not affected by fluctuations in equity markets.
32. Balanced Plan/Scheme : balanced plans are used to provide both growth
and regular income, as such schemes invest both in equities and fixed income
securities in the proportion indicated in their offer documents.
33. Gilt funds : these funds invest exclusively in government securities. Govt
securities have no default risks.
34. Credit Info Companies(India) : a credit information company (CIC) or
popularly known as credit bureau collects the credit information from banks
and other lenders, prepares a credit history, compiles credit scores and
thereafter provides the info on a particular proponent to the lender for a fee.
35. CIC(s) operating in the Country :
 CIBIL (Credit Information Bureau (India) ltd)
  Experian Credit Information Company (India) Pvt Ltd
 Equifax Credit Information Services Private Ltd
 High Mark Credit Information Company Ltd
36. Principles of Lending :
 Safety
 Liquidity
 Profitability
 Purpose
 Security
 Diversification of risks
37. Difference b/w Term Loans & Working Capital : difference lies in the
purpose of the finance, the type of assets created out of it and the form in
which the advance is made by the bank. The other differences are:-
 Term loans are utilized for establishing or modernizing a manufacturing
unit by acquisition of fixed assets, while the working capital finance is
utilized for operating purposes resulting in the creation of current assets
for production and sale of finished goods.
 Term loans are usually of medium- or long-term duration and are
repayable in quarterly or half yearly instalments over an agreed period
of time.
 The working capital finance is generally availed of in cash credit
hypothecation accounts with frequent drawings and repayments and is
payable on demand.
38. Hypothecation : The mortgage of movable property is called
“hypothecation”. It may be described as ‘a transaction whereby money is
borrowed by the debtor (owner of the goods) on the security of the moveable
property without transferring either the property or the possession to the
creditor’.
39. Hypothecation differs from mortgage in two respects. Firstly, mortgage
relates to immoveable property whereas hypothecation relates to movables.
Secondly, in a mortgage, there is transfer of interest in the property to the
creditor but in hypothecation there is only obligation to repay money and no
transfer of interest.
40. SBI Life : It’s a joint venture b/w SBI and BNP Paribas Cardif. SBI owns
74% of the total capital and BNP Paribas Cardif the remaining 26%. SBI Life
 extensively leverages the State Bank Group relationship as a platform for
cross-selling insurance products along with its numerous banking product
packages such as housing loans and personal loans.
41. SBI Life Term Plans : Poorna Suraksha Plan, Smart Shield, Saral Shield,
Sampoorn Cancer Suraksha, etc. . Provides comprehensive protection to
family in case of death or critical illness.
42. SBI Life Savings Plan : Shubh Nivesh, a with-profit endowment assurance
plan, provides insurance coverage, savings and income under a single plan.;
Smart Bachat, etc.
43. SBI General Insurance Company Ltd : a joint venture between the State
Bank of India and Insurance Australia Group (IAG). SBI owns 74% of the
total capital and IAG the remaining 26%. Current Policy offering of SBI
General covers Motor, Health, Personal Accident & Home Insurance for
Individuals and Aviation, Fire, Marine, Package, Construction &
Engineering, Liability, Group Health, Group Personal Accident &
Miscellaneous Insurance for Businesses.
44. SBI Credit Cards : SBI Card Elite, SBI Card Prime, Simply Save, etc.
45. YONO (You only need one) : SBI Digital Banking Product that facilitates
customers to Open a digital account, apply for credit card, insurance policy,
investment in mutual funds, apply for loans, etc.