Definitions of Commonly Used Banking Terms
This page has the definitions of some commonly used banking terms such as NEFT, RTGS, Credit History, MICR Code, IFSC Code, ECS, KYC etc. Understanding these seemingly difficult terms will help you navigate the complex world of banking with ease.
Commonly Used Banking Terms
Demand Deposit - A Demand deposit is the one which can be withdrawn at any time, without any notice or penalty; e.g. money deposited in a checking account or savings account in a bank.
Time Deposit - Time deposit is a money deposit at a banking institution that cannot be withdrawn for a certain "term" or period of time. When the term is over it can be withdrawn or it can be held for another term.
Fixed Deposits - FDs are the deposits that are repayable on fixed maturity date along with the principal and agreed on an interest rate for the period. Banks pay higher interest rates on FDs than the savings bank account.
Recurring Deposits - These are also called cumulative deposits and in recurring deposit accounts, a certain amount of saving is required to be compulsorily deposited at specific intervals for a specified period.
Current Accounts - These accounts are maintained by the corporate clients that may be operated any number of times in a day. There is a maintenance charge for the current accounts
FCNR Accounts - Foreign Currency Non-Resident accounts are the ones that are maintained by the NRIs in foreign currencies like USD, DM, and GBP etc. The account is a term deposit with interest rates linked to the international rates of interest of the respective currencies.
NRE Accounts - Non-Resident External accounts are the ones in which NRIs remit money in any permitted foreign currency and the remittance is converted to Indian rupees for credit to NRE accounts. The accounts can be in the form of current, saving, FDs, recurring deposits. The interest rates and other terms of these accounts are as per the RBI directives.
National Electronic Funds Transfer (NEFT) - Transfer of funds initiated by electronic means such as an electronic terminal, telephone, computer, or ATM. The NEFT facilitates the process of fund transfer within the same bank or inter-bank transfers. The minimum amount that can be transferred is as low as Rs 100.
RTGS - The RTGS or Real Time Gross Settlement System facilitates fund transfer within same bank or inter-bank transfers, but unlike NEFT, RTGS ensures the fund transfer fast and smooth in ’real-time’ for a nominal fee. The minimum transfer amount is higher than NEFT (usually Rs 2 lakh and above).
Fixed Rate - Fixed rate is the interest rate that remains constant for the full term of the loan.
Variable Rate - Any interest rate that may fluctuate over the life of the loan is a variable rate loan. This fluctuation then causes changes in either the payments or the length of the term. This variable rate is often tied to an index that reflects changes in market rates of interest.
Travelers’ Cheque - Cheques issued by a bank and function as cash but are protected against loss or theft when traveling.
Credit History - It is an account of an individual’s past borrowings by way of loans, credit cards and all other debt that needs to be repaid/has been repaid. Credit history in India is currently being provided by CIBIL (Credit Information Bureau of India Limited) and contains records of an individual’s open and past accounts of loans and credit cards. Through the CIBIL report, the bank (lender) can know if the individual (borrower) had made any late payments or defaults. You can get your own credit history report from CIBIL for a nominal fee.
Documentation/Processing Fee - Bank requires certain documents from the borrower to look into his creditworthiness and charges a fee for the same. These charges are known as documentation charges. Processing Fee is charged by the bank upon sanctioning of the loan to the borrower.
MICR Code - MICR stands for Magnetic Ink Character Recognition. MICR Code comprises 9 digits given at the bottom (right side) of the cheque number. It is a unique code and varies between each bank branch. MICR Code is required for cheque clearance. MICR Code is different from the IFSC code, which is also mentioned on a cheque.
Electronic Clearing Service (ECS) - It is a service provided by the banks to facilitate direct debit from your bank account towards an investment account (such as a mutual fund SIP) and/or paying regular loan EMIs. One can give a standing instruction (SI) to the bank to transfer the specified amount every month for a specified period.
IFSC - IFSC code is useful in bank fund transfers and cheque clearance. It is an 11 character code assigned by RBI to identify every bank branch uniquely. The first part is the first 4 alphabet characters representing the bank. Next character is 0 (zero) and is reserved for future use. The last 6 characters are the branch code.
KYC (Know Your Customer) - KYC norms are imposed by RBI on banks and other financial institutions to ensure that the correct identity of the banks’ customers is established and to ensure that banks deal only in legitimate banking operations and not in money laundering or frauds.