Important Banking Notes

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Here I am sharing some banking notes which are important for bank exams.
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GDP: It is the money value of all the final goods and services produced within the geographical boundaries of the country during a given period of time.

GNP: It refers to the money value of total output or production of find goods and service produced by the nationals of a country during a given period of time.

Producers Price Index: It is the cost incurred by the producer in producing single unit in terms of GDP. It does not include any indirect taxes.

Credit Control: By credit control we mean to regulate the volume of credit created by banks in India. It is the principal function of Reserve Bank of India. The basic objective of credit control mechanism is to realize both price stability and exchange stability in the economy. RBI uses two types of methods to control credit: (i) Quantitative Methods, and (ii) Qualitative Methods.

Quantitative Measures are used to control the volume of credit or indirectly to control inflationary and deflationary pressures caused by expansion and contraction of credit. These are also known as general credit measures. These consist of Bank Rate, Cash Reserve Ratio, Statutory Liquidity Ratio and Open Market Operations.
Qualitative Measures are used to control the quantum as well as purpose for which credits are given by banks. RBI uses measures like Publicity, Rationing of Credit, Regulation of consumer credit, Moral suasion and Variation in margin requirement for qualitative credit control.

Bank Rate: Bank rate is the rate at which the RBI is prepared to buy or re-discount eligible bills of exchange or other commercial papers. In simple words, bank rate is the rate at which RBI extends advises (Credit) to commercial banks. A change in the bank rate will result in a change in the prime lending rate of banks and thus act as an independent instrument of monetary control.

Cash Reserve Ratio (CRR): Cash reserve ratio is the cash parked by the banks in their specified current account maintained with RBI. In other words, it is the percentage of deposit (both demand and time deposit) which a bank has to keep with the RBI. RBI was empowered to vary the CRR between 3% to 15%. But now there is no minimum limit of CRR in India but the maximum limit is still retained at 15%. The purpose of reducing CRR is to leave large cash reserve with banks so as to enable them to expand bank credit. Similarly increasing of CRR means squeezing the cash reserve of the banks and limits their credit providing capacity.

Statutory liquidity Ratio (SLR): Statutory liquidity ratio is the liquid assets commercial banks maintain with the RBI in the form of cash (book value), gold (current market value) and balances in unencumbered approved securities. The maximum limit of SLR is 40% and minimum limit of SLR is 23% In India. RBI can change SLR from time to time. Both CRR and SLR reduce or increase the capacity to expand credit to business and industry. Thus both of these are anti-inflationary.
O pen Market Operations (OMO): The buying and selling of eligible securities in the money market by RBI for the purpose of curtailing or expanding the volume of credit. By selling securities the RBI can absorb funds, and buying the securities can release funds also into the market. The purpose of OMO is to influence the volume of cash reserves with the commercial banks and thus influence the volume of loans and advances they can make to the industrial and commercial sector.

Selective Credit Controls: Under the Banking Regulation Act 1949, section 21 empowers RBI to issue directives to the banking companies regarding their advance in order to check speculation and rising prices. The controls are selective as they are used to control and check the rising tendency of price and hording of certain individual commodities of common use. However, while imposing selective control, RBI takes care that bank credit for production and transportation of commodities and exports is not affected. These are mainly focused on credit to traders who use such credit for financing hoarding and speculation. Since 1956-57 RBI is employing this method.

Prime Lending Rate (PLR): It is rate of interest of which commercial banks lend to their prime high profile blue chip corporate borrowers. (From 1990’s banks are free to determine PLR).

Repo Rate: Repurchasing option is traded in this market for a short time periods.
Repo is Repurchasing by RBI.

Priority Sector Lending: Priority sector refers to those sectors of the economy which may not get timely and adequate credit in the absence of this special dispensation. Typically, these are small value loans to farmers for agriculture and allied activities, micro and small enterprises, poor people for housing, students for education and other low income groups and weaker sections.

Market Stabilization Scheme: It is a scheme under which RBI buys and sells Government of India securities in order to control liquidity.

Money in Circulation: Money in use to finance current transactions as distinct from idle money.

Investment Bank: A Bank that provides long term fixed capital for industry, generally by taking up shares in limited companies.

Regional Rural Bank: It was established in 1975 under the provision of RRB Act 1976, with a view to develop rural economy.

Lead Banking Scheme: Under this scheme all the nationalized banks and few private sector banks were allowed specially and were asked to play the “Lead Role”. The lead banks act as a leader to bring about co-ordination of cooperative banks, commercial banks and other financial institutions in their respective demises to bring about rapid economic development.

CAMELS: Capital Adequacy, Asset Quality, Management, Earnings Liquidity and Systems.

Capital Adequacy Ratio (CAR): It is the ratio of total capital fund of a bank to its risk weighted assets. It is an indicator of banks financial health.

Over Heating of Economy: When the supply is not able to keep phase with demand, it is as called over heating of economy. It leads to inflation and shortage goods.

Cost-push Inflation: General prices of goods and services in the economy rises due to an increase in production cost. Such types of Inflation are caused by three factors (i) an increase in wages, (ii) an increase in profit and (iii) imposition of heavy tax.

Demand- pull inflation: The most common cause of inflation is the pressure of ever-rising demand on a less rapidly increasing supply of goods and services. The expansion in aggregate demand may be the result of rapidly increasing private investment and/or spending government money for war or for economic development.

Forward Market Commission: It is a regulatory body for commodity futures, and forward trade in India. It was set up under Forward Contract (Regulation) Act 1952. It’s headquarter is in Mumbai.

CARE: Credit Analysis and Research Ltd. It was started in November 1993. It was set up by IDBI.

ICRA: Investment Information and Credit Rating Agents of India Limited. It was established in 1991. It primarily rates short, medium and long debt instruments. But, since 1995 it has been doing equity rating also.

NSDL: National Securities Depository Limited

CDSL: Central Depository Services Limited.

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