Basic Banking Terminologies
1. NEFT (National Electronic Funds Transfer) – NEFT is an electronic means to transfer
money from one bank to another or within the same branch. Depending on the bank,
NEFT charges and the minimum amount that can be transferred may vary.
2. Linked Account – An account that is linked to your account for the purpose of fund
transfer is called a linked account.
3. Base Rate – This is the minimum rate at which a bank can lend to its customers. It
cannot lend below the base rate. All interest rates determined for various loans will use
the base rate as the benchmark.
4. Balance Transfer – This is a credit card payment option for people using more than one
credit card. Like the name suggests, balance transfer is when you transfer the balance of
one credit card to another. This is useful when a card holder is unable to make full
payment on his/her card, or if the second credit card offers a lesser rate of interest.
5. Cashback – Cashback is an offer provided primarily by credit card companies where
they offer some amount of money back to the cardholder that he/she has spent on the
card. Each spend made on the card will be rewarded with points, and the pints can then
later be redeemed for money.
6. Credit History – Credit history is the past behavioural patterns of a customer with regard
to loans. A credit bureau will collect the information of a customer and then translate it to
a number between 300 and 900. This is known as your credit score and the higher the
credit score, the better your chances are to avail a loan or a credit card.
7. Collateral – Any security provided to the bank in exchange for a loan is known as
collateral. A collateral can be in the form of land, gold, etc. This is called a secured loan
and is less risky than an unsecured loan for the lender. In case of secured loans, the lender
may auction off the collateral if the borrower fails to pay off his/her loan.
8. Documentation Fee – Before lending money, lenders have to gauge the credit
worthiness of a customer. Customers will usually be charged for this service, also known
as documentation fee.
9. Fixed Rate – A fixed rate is when the rate of interest for a loan remains constant
throughout the entire tenure.
10. Floating Rate – Opposite of fixed rate, a floating rate of interest are interest rates that
change during the tenure of the loan. These interest rates change as per the changes of
interest rates in the economy.
11. MICR Code – This is a nine digit code found in the bottom right hand corner of a cheque
leaf. This code varies from bank to bank and is an acronym for Magnetic Ink Character
Recognition.
12. No-frills Account – This is a rudimentary savings account that requires no minimum
balance to enjoy benefits like net banking, online fund transfer, etc.
13. Electronic Clearing Service – This is a technology used by banks wherein a certain
amount of money is directly debited from your account on a specified date every month
towards the payment of a loan, mutual fund account, etc.
14. Processing Fee – In order to process a loan application of a customer, banks usually
charge a fee. This fee is known as a processing fee.
15. RTGS – RTGS (Real Time gross Settlement) is a fund transfer technology used by banks
for same bank or interbank fund transfer. Contrasting NEFT or RTGS, transferring funds
with RTGS is instantaneous and more nominal with regard to the costs incurred.
16. KYC – KYC (Know Your Customer) is a procedure that all banks undergo in order to
establish the correct identity of a customer. This is to ensure that no fraudulent operations
are taking place in the bank.
17. Routing Number – This is a number that can identify your bank based on the
geographical location of the institution. Bigger banks may have several routing numbers
while smaller ones have only one.
18. APR – Annual Percentage Rate (APR) is the yearly interest you earn by depositing your
money your money into an account. This does not take into consideration the compound
interest.
19. Compound Interest – Simple interest is the interest earned on a deposit. Compound
interest is the interest earned on the deposit plus the interest earned on the same deposit
previously. For example, if you’ve deposited Rs.1 lakh into a bank, and the bank
promises to pay you a 10% interest, you will earn an interest of Rs.10,00. The next year
however, you will be receiving an interest on Rs.1, 10, 000, i.e., the initial amount
deposited plus the interest earned on that amount.
20. Returned Item Fee – In case a cheque has bounced due to insufficient funds or another
reason, the account holder will be penalized with a fee. This fee is called returned item
fee.
(For Educational Purpose only.)
