Glossary of Terms Used in Banks

(1)        Acceleration–A standard clause in a mortgage instrument permitting the lender to demand full payment of principal from the borrower upon default of the obligation

(2)        Account History–The payment history of an account over a specified period of time, including the number of times the account was past due or over limit.

(3)        Bank Guarantee–Bank Guarantee could be a finance guarantee or a performance guarantee. Under finance guarantee, the bank guarantees the beneficiaries (The person named in the guarantee to receive the guaranteed sum under stated circumstances), certain amount on behalf of its customers who has commercial relationship with the beneficiary. Under performance guarantee, the bank guarantees performance of a contract or goods/ services supplied under a contract by its customers. However, even in the later case, if its customers fail to deliver, it settles the claim of the beneficiary in money terms only; the bank does not fulfill the contract, obligation of its customer.

(4)        Bank Statement–A periodic record of a customer’s account that is issued at regular intervals, showing all transactions recorded for the period in question.

(5)        Bill–Usually mistaken for commercial invoice. Actually bill in the banking parlance means a bill of exchange drawn by a seller on the buyer whenever he sells goods or services on “payment later” basis. Such a transaction is also referred to as a credit transaction. The bill is routed through the bank for collection of amount from the buyer. Commercial invoice is a part of the document submitted to the bank by the seller. A bill of exchange is an order made to the buyer by the seller that in exchange for the goods or services sold by him on credit, the buyer is required to pay on a specific date a certain amount with or without interest to him or to any other directed party.

(6)        Cash Credit–A credit facility under which a customer draws up to the preset limit, subject to availability of sufficient security with the bank. The difference between an overdraft and cash credit account is that while the former is extended more to individuals, and less for business, the latter is extended only to business bodies. The cash credit facility is unique to India, as in most of the countries it is called overdraft.

Further the cash credit facility is more or less on a permanent basis so long as the business is going on. Internationally at the end of specific period the overdraft facility is withdrawn and the customer is required to pay back the amount lent by the bank. The purpose of cash credit is for working capital. The operations are similar to overdraft.

(7)        Cash Reserve Ratio–Called in short CRR. Suppose a bank has total deposits of Rs.100 Bn and is required to maintain a CRR of say 5%. This means that the bank should maintain in current accounts with the central bank or any other approved bank balances, not less than Rs. 5 Bn. This much amount is impounded and kept in the free form. And the bank cannot lend this money. This acts as a buffer to the bank. In India, RBI decides from time to time and at present it is 5% of the deposits, held by the bank.

(8)        Credit Report–It is called by different names. At times it is referred to as credit information report. At other times it is also called customer’s confidential report. Bankers report also means the same. With the growth of commerce within a country and abroad, most of the times, trade is done with the organizations about which you are in the dark. The banker provides good platform for knowing something about the business enterprise with which you are likely to deal. There are accepted abbreviations internationally for denoting the soundness or the lack of it of a business enterprise. These abbreviations are commonly used in such reports. You can seek confidential information about your prospective customers about whom you do not have sufficient knowledge. The banker provides this information for a fee, which includes the fees that they have to remit to international credit agencies.

(9)        Daily Product Basis–This is the basis on which interest is usually determined on credit facilities, like loan, overdraft, cash credit etc. for this; the basis is 365 days in a year. Some banks do take 360 days in a year also. There is no hard and fast rule in this behalf. e.g. A bank has given a customer an overdraft facility to the extent of Rs.10,000/- for 45 days at 6% p.a. on a daily product basis the interest is determined as under.

Step No 1. 10000*45 days= known as product= 450000

Step No 2. Determination of annual average as rate of Interest is on annual basis i.e. 450000/365=Rs. 1233/-.

This means that on a 365 days per year basis, drawing Rs. 10000/- for 45 days is equivalent to drawing Rs. 1233/- through out the year, i.e. on annual basis.

Step No 3. Calculation of interest at 6% p.a is equal to 1233*0.06= Rs. 73.98.

This means that by adopting daily product basis we are converting the amount drawn for a period less than a year to its annual equivalent so that the rate of Interest, which is universally on annual basis can be applied to determine the quantum of interest.

(10)      Discount–Less than face value. If the value of the bill is Rs. 100/- and in case the bank gives the finance against the same, the amount of finance will be less than Rs. 100/-, say Rs. 98/-. Rs 98 is the discounted value of the bill for Rs. 100/-, while the difference of Rs. 2/- is known as “discount”. Discount is the interest recovered upfront, especially in the case of those bills for which payment will be forthcoming after a specific or extended period.

(11)      Letter of Credit–Seller “A” enters into contract with Buyer “B”. One of the terms of supply is that buyer will establish a letter of credit in favour of the seller through his bank. The buyer approaches his bank, which, on certain conditions, agrees to extend this facility. Under this facility, the buyer’s bank gives commitment of payment to the seller through his bank. The commitment is dependent upon the seller fulfilling specific conditions as per the L/C. The conditions are:

The seller should furnish proof of dispatch of goods or services and submit all the documents required under the L/C.

Then, the buyer’s bank will pay the amount of bill drawn by the seller on the buyer under this agreement. International letter of credit are by and large, “irrevocable” (cannot be cancelled by the buyer without the consent from the seller).

(12)      Loan–A lump-sum amount given to the customers, either in one installment or in two or three installments, and repayment over a period of time in monthly or quarterly, or half yearly or annual (very rarely) installments. Interest may be recovered separately from the customer who is called borrower or combined with the installment. In case it is combined with the installment it is called equated installment. If interest is recovered separately it is usually on a quarterly basis. Loans against property and for the purpose of owning flats/ apartments/ houses are known as mortgage loans.

(13)      Margin Money–Margin money is like a security deposit retained by the bank till the loan is fully settled. The banks sanction the credit limit after retaining a margin on the value of the security offered. The percentage of margin requirements varies as per RBI guidelines.

(14)      Monthly Product Basis–In India, in the savings account, the product is taken on a monthly basis; the rule is interest is paid on the minimum balance in the account between the 10th and the last day of every month. This means that any credit to the account after the tenth of the month is ignored for the particular month, while debit is taken into account. Accordingly let us say for example. The following minimum credit balances in the savings account earning 3.5 % pa interest in India

January, 2005                                  1000

February, 2005                                   800

March, 2005                                         150

April, 2005                                            250

May, 2005                                             300

June, 2005                                            300

Suppose the Interest is payable every half-year and accordingly this customer will be entitled to 1.75 % for the half year ending June 2005. In order to determine the correct half yearly interest, you need to find out the annual equivalent of the deposit that the customer has kept in his savings account. Then divide the sum of the monthly products by 12. The annual equivalent amount is RS 233.33 and the interest at 3.5% p.a. for the half year on this work out to be Rs 8.17. This is the way the interest is found out on a monthly product basis.

(15)      Overdraft–An extension of current account in which the customer is allowed to withdraw more than the credit balance lying in the account. This may be a temporary accommodation to tide over temporary cash crunch or on a regular basis. If permitted on a regular basis, withdrawals are allowed up to a ceiling (called “a limit”), subject to availability of sufficient security with the bank. In case the overdraft is given to the business enterprises and it is for day-to-day operations, it is known as “working capital”.

(16)      Remittance–A facility, by which its customers at one place makes funds available to the bank and the bank in exchange, makes the funds available to the customer or any other specified party at the required place, within the same country or abroad.

Remittance can be in the form of Demand Draft (DD), mail Transfer (MT), Telegraphic Transfer (TT), Electronic mail transfer (EMT) through computer networking (or satellite channel), International Money Order (IMO) etc.

(17)      Repayment Holiday–Whenever a loan is taken especially for acquiring fixed assets, the repayment does not start immediately. It starts after the fixed assets starts giving a return especially in the case of business enterprises. This is not so in the case of personal loans. The period during which there is no repayment is known as repayment holiday period. This is also known as moratorium period. The period is longer in the case of industrial loans and minimum or absent in case of personal loans.



(18)      RTGS–refers to the settlement system where, settlements of payments on an individual order basis are done on continuous basis, without netting debits with credits across the books of a central bank.  RTGS system is also defined as a gross settlement system, in which both processing and final settlement of funds transfer instructions take place continuously (i.e. on real time basis). Thus we can say that RTGS system reduces settlement risk because inter-bank settlements are done throughout the day, rather than just at the end of the day.  One of the main attractions of the RTGS systems is that payee banks and their customers receive funds with certainty, or so-called finality, during the day, enabling them to use the funds immediately without exposing themselves to risk. RTGS is a system where both the processing and final settlement takes place on real time basis. RTGS is regarded as the centerpiece of an integrated payments system. Settlement risk refers to the risk when a settlement (in a transfer system) does not take place as expected.  This can happen due to various reasons, e.g. one party may default on its clearing obligations to one or more counter parties. Thus, settlement risk consists of two components namely credit and liquidity risks. Credit risk arises when a counter party fails to meet an obligation for full value on due date and thereafter


(19)      Statutory Reserve Ratio–Called in short SLR. In the above example, suppose the bank is supposed to maintain SLR of 25%, this means that over and above CRR the bank is expected to keep aside an amount of Rs. 25 Bn. This will be kept in easy-to–encash securities like, treasury bills of the government and any other approved securities. In India at present it is 25%. This again acts as buffer to the bank and prevents the bank from lending the entire amounts of deposits kept with it by various customers.

(20)      Stock and Receivables Audit is one of the most important aspects of the overall exercise of audit of any organization. In stock and receivable audit, auditor ensures himself about the quantity, quality, composition and actual value of the stock and the debtors.

(21)      Syndication–Making arrangement for loans for borrowers. It should not be confused with granting of loans. The bank may or may not participate in the loan process, but would assume responsibility for getting “in principle” sanction from all participating banks and financial institutions. Syndication fees are part of non-interest income as no funds are involved in the activity. For example- An Indian Company wants a foreign currency loan of 100 mn Rs. Making arrangement for this is known as syndication. Even if the arranging bank participates in the loan, by granting a portion of it, syndication is different from it. It gets paid separately for this activity. 

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Laws Applicable to Banks

There is an elaborate legal framework governing the functioning of banks in India. The principal enactments, which govern the functioning of various types of banks, are:

1. Banking regulation act, 1949

It is an Act that consolidates the law relating to banking and provide for the nature of transaction carried on by banks in India. It contains the provisions of power of RBI to control advances by banking companies, accounts and audit of banks, restrictions as to minimum paid up capital and reserves, restrictions as to payment of dividends, validation of license granted by RBI to multi state co-operative societies. It also contains provisions of suspension of business and winding up of banking business. It contains 10 parts and 56 sections and 5 schedules 

2. Banking companies (acquisition and transfer of undertakings) act, 1970

This Act provide provisions for the acquisition and transfer of the undertakings of certain banking companies, having regard to their size, resources, coverage and organization, in order to control the heights of the economy and to meet progressively, and serve better, the needs of development of the economy in conformity with national policy and objectives and for matter connected therewith or incidental thereto. It contains 5 chapters, 3 schedules and 21 sections

3. Banking companies (acquisition and transfer of undertakings) act, 1980

This Act provides provisions for the acquisition and transfer of the undertakings of certain banking companies, having regard to their size, resources, coverage and organisation, in order further to control the heights of the economy, to meet progressively, and serve better, the needs of the development of the economy and to promote the welfare of the people, in the conformity with the policy of the State towards securing the principles laid down in clauses (b) and (c) of article 39 of the Constitution and for matters connected therewith or incidental thereto. It contains 5 chapters, 3 schedules and 21 sections

4. State bank of india act, 1955

It is an Act that constituted State Bank for India and transferred to it the undertaking of the Imperial Bank of India and to provide for other matters connected therewith or incidental thereto. Its purpose is to extend the banking facilities on a large scale, more particularly in the rural and semi-urban areas, and for diverse other public purposes. It has 8 Chapters, 53 sections and 4 schedules

5. State bank of india (subsidiary banks) act, 1959

It is an Act that provides for the formation of certain Government or Government-associated bank as subsidiaries of the State Bank of India and for the constitution, management and control of the subsidiary banks so formed, and for matters connected therewith, or incidental thereto. It contains 8 chapters 65 sections and 1 schedule

6. Regional rural banks act, 1976

It is an Act that provide for the incorporation, regulation and winding up of Regional Rural Banks with a view to developing the rural economy by providing, for the purpose of development of agriculture, trade, commerce, industry and other productive activities in the rural areas, credit and other facilities, particularly to the small and marginal farmers, agricultural labourers, artisans and small entrepreneurs, and for matters connected therewith and incidental thereto. It has 7 chapters 34 sections and 1 schedule

7. Companies act, 1956

As per section 2 of Banking Regulation Act, 1949 the provisions of Banking Regulation Act, 1949 shall be in addition to, and not, save as hereinafter expressly provided, in derogation of the Companies Act, 1956 (1 of 1956), and any other law for the time being in force. The Banking Regulation Act is to be read as supplemental to the Companies Act.  Hence the provisions relating to appointment, qualification, disqualification under companies act for company auditor applies to bank auditors also.

8. Co-operative societies act, 1912/the relevant state co-operative societies act.

It is an Act to facilitate the formation of Co-operative Societies for the promotion of thrift and self-help among agriculturists, artisans and persons of limited means, and for that purpose to amend the law relating to Co-operative Societies. It contains 50 sections

9. Information technology act, 2000

This act provide legal recognition for transactions carried out by means of electronic date interchange and other means of electronic communication, commonly referred to as “electronic commerce”, which involve the use of alternative to paper-based methods of communication and storage of information to facilitate electronic filing of documents with the Government agencies and further to amend the Indian Penal Code, the India Evidence Act, 1872, the Banker’s Books Evidence Act, 1891 and the Reserve Bank of India Act, 1934 and for matters connected therewith or incidental thereto. It contains 12 chapters, 94 sections and 4 schedules

10. Prevention of money laundering act, 2002

As per the provisions of the Act, every banking company, financial institution (which includes chit fund company, a co-operative bank, a housing finance institution and a non-banking financial company) and intermediary (which includes a stock-broker, sub-broker, share transfer agent, banker to an issue, trustee to a trust deed, registrar to an issue, merchant banker, underwriter, portfolio manager, investment adviser and any other intermediary associated with securities market and registered under section 12 of the Securities and Exchange Board of India Act, 1992) shall have to maintain a record of all the transactions; the nature and value of which has been prescribed in the Rules under the PMLA. Such transactions include:

(i)            All cash transactions of the value of more than Rs 10 lakhs or its equivalent in foreign currency.

(ii)           All series of cash transactions integrally connected to each other which have been valued    below Rs 10 lakhs or its equivalent in foreign currency where such series of transactions take place within one calendar month.

(iii)          All suspicious transactions whether or not made in cash and including, inter-alia, credits or debits into from any non monetary account such as Demat account, security account maintained by the registered intermediary.

11. Credit information (companies regulation act), 2005

This Act provides provisions for regulation of credit information companies and to facilitate efficient distribution of credit and for matters connected therewith or incidental thereto. It has 8 chapters, 37 sections and 1 schedule

12. Securitisation and reconstruction of financial assets and enforcement of security interest act, 2002

It is an Act to regulate securitisation and reconstruction of financial assets and enforcement of security interest and for matters connected therewith or incidental thereto. It has 6 chapters and 42 sections

13. Banking cash transaction tax (chapter vii of finance act, 2005)

The Finance Act, 2005 introduced a new levy, namely, the Banking Cash Transaction Tax on certain banking transactions. The provisions relating to levy of this tax are contained in Chapter VII (sections 93 to 112) of the Act. This Act came into force from 1st June 2005 The tax base for the purposes of BCTT is the value of taxable banking transaction. A taxable banking transaction has been defined in clause (8) of section 94 of the Finance Act, 2005. Broadly, there are two categories of transactions:

(i)            Cash withdrawal – A cash withdrawal would fall within the scope of a taxable banking transaction if it satisfies the following conditions:

                (a)           The cash withdrawal (by whatever mode) is from an account other than a savings bank account.

                (b)           The account is maintained with any scheduled bank.

                (c)            The amount of cash withdrawn on a single day from the same account should exceed Rs. 25,000 in the case of an individual or a HUF or Rs. 1,00,000 in the case of any other person.

(ii)          Receipt of cash on encashment of term deposits.

                Similarly, a receipt of cash on encashment of term deposits would fall within the scope of a taxable banking transaction if it satisfies the following conditions:

                (a)           The cash is received on encashment of a term deposit or deposits.

                (b)           The term deposit or deposits are in any scheduled bank.

                (c)            The amount of cash received in a single day exceeds Rs. 25,000 in the case of a deposit or deposits in the name of an individual or a HUF or Rs. 1,00,000 in case of any other person

                No BCCT shall be payable if amount of term deposit or deposits is credited to any account with the bank

                BCCT is charged at the rate of 0.1 percent of every taxable banking transaction

14. Service tax (chapter v of finance act, 1994)

Chapter V of the Finance Act, 1994, introduced Service Tax in India in 1994.  The Central Board of Excise & Customs (CBEC), Department of Revenue, Ministry of Finance, deals with the task of formulation of policy concerning levy and collection of Service Tax. Service tax rate was increased to 12% by Finance Act 2006. Some of the services related to banking covered in the service tax net are credit card services, merchant baking services, financial leasing services, security and foreign exchange services, advisory services, financial service, ATM operation, maintenance or management related services 

15. Income tax act, 1961

The income of a Bank is chargeable to income tax under section 28, Profits and Gains of Business and Profession. Apart from normal deductions under section Chapter IV D. Certain Specific Sections deal with the income chargeable to tax of a banking company. Section 43D provides that interest income of bad and doubtful debts, i.e. NPAs shall be chargeable to tax in the year in which they are credited to the profit and loss account or the year in which they are received. Hence the banks are allowed to follow a Hybrid System of Accounting, which is banned in case of other assessees by virtue of section 145 of the Income tax act. The provision made on NPAs is also allowed as a deduction as against the normal rule under section 36(1)(viia) to the extent of 7.5% of Income (computed before any deduction under this clause and Chapter VI-A) under the act or 5% (10% in case of rural branch) of the NPAs as per books of account of the bank on the last day of previous year.

16. Securities transaction tax (chapter vii of finance (no 2) act, 2004)

This is applicable from 1st October 2004 .The STT is applicable at different rates on the value of the “taxable securities transaction,” which means a transaction of purchase and sale of securities entered into in a recognised stock exchange in India and is payable by the buyer and the seller of the securities.

The value of taxable securities transaction,

(i)            in the case of taxable securities transactions relating to “ option in securities”, shall be the aggregate of the strike price and the option premium of such “options in securities”;

(ii)          in the case of taxable securities transaction relating to “futures”, shall be the price at which such “futures” is traded; and

(iii)         in the case of any other taxable securities transaction, shall be the price at which such securities are purchased.

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Introduction to the Accounting System in Banks

An accounting system can be defined as the series of tasks in an entity by which transactions are processed as a means of maintaining financial records. Such a system recognizes, calculates, classifies, posts, analyses, summarizes and reports transactions

The auditor of a bank needs to obtain a thorough understanding of the accounting system of the bank to assess the relevance and reliability of the accounting records and other source data underlying the financial statements. He should gain an understanding of the books of account and other related records maintained by the auditee. He should also understand the flow of various kinds of transactions. The auditor can gain such understanding through enquiries of appropriate personnel, by making reference to documents such as accounting manual, procedures manual and flow charts, and by observing the actual conduct of operations.

It may be stated here that even in a fully computerised branch, some work is presently carried out manually, e.g., preparation of vouchers, preparation of letters of credit and guarantees, preparation of some returns and statements, etc. In partly computerised branches, generally the back-office work (i.e. the internal processing of transactions of the branch) is carried out on computers whereas the customers’ transactions (i.e. the front-office work) are processed manually. Many of the banks in the private sector have networked all or most of their branches in the country; this has given them the capability of handling most of the transactions of their customers at any of the branches.

Banks, like most other large-sized institutions, follow the mercantile system of accounting. Thus, the system of recording, classifying and summarizing the transactions in a bank is in substance no different from that followed in other entities having similar volume of operations. However, in the case of banks, the need for the ledger accounts, especially those of customers, being accurate and up-to-date is much stronger than in most other types of enterprises. A bank cannot afford to ignore its ledgers particularly those containing the accounts of its customers and has to enter into the ledgers every transaction as soon as it takes place.  In the case of banks, relatively lesser emphasis is placed on books of prime entry such as journals.  This is unlike most other types of enterprises where books of prime entry are generally kept up-to-date while ledgers, including the general ledger and subsidiary ledgers for debtors, creditors, etc., are written up afterwards

Banks follow the accounting procedure of ‘voucher posting’ under which the vouchers are straightaway posted to the individual accounts in the subsidiary ledgers. At the end of each day, the debit and credit vouchers relating to a particular type of transactions (e.g. savings bank accounts, current accounts, demand loans, cash credit accounts, etc.) are entered on separate voucher summary sheets and the total thereof is posted to the respective control account in the General Ledger. The general ledger trial balance is prepared every day.

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Form and Content of Financial Statements

Sub-sections (1) and (2) of section 29 of the Banking Regulation Act, 1949, deal with form and content of financial statements of a banking company and their signing. These sub-sections are also applicable to nationalised banks, State Bank of India, subsidiaries of State Bank of India, and regional rural banks.

Sub-section (1) of section 29 requires every banking company to prepare a balance sheet and a profit and loss account in the forms set out in the Third Schedule to the Act or as near thereto as the circumstances admit. These financial statements have to be prepared as on the last working day of each financial year (i.e., 31st March) in respect of all business transacted during the year. Form A of the Third Schedule to the Banking Regulation Act, 1949, contains the form of balance sheet and Form B contains the form of profit and loss account

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Disclosures in Balance Sheet (As Mandated by RBI)

The Reserve Bank of India has from time to time, issued circulars to banks on

Disclosure in the ‘Notes on Account’ to their Balance Sheets

The Master circular: DBOD.BP.BC No.16/ 21.04.018/ 2006-07 dated July 1, 2006 incorporates all operative instructions issued by RBI up to 30 June 2006.

Accordingly in addition to the 16 detailed schedules to the balance sheets, banks are required to furnish the following information in the “Notes on Accounts”:


Sl. No

List of Disclosure Items


Capital Adequacy Ratio


Capital Adequacy Ratio - Tier I capital


Capital Adequacy Ratio - Tier II capital


Percentage of Shareholding of the Government of India in the nationalised banks.


Amount of Subordinated debt raised as Tier-II capital


Gross value of investments, etc


Provisions made towards depreciation in the value of Investments


Movement of provisions held towards depreciation on investments


Repo Transactions


Non-SLR Investment Portfolio


Forward Rate Agreement/ Interest Rate Swap


Exchange Traded Interest Rate Derivatives


Disclosures on risk exposure in derivatives


Percentage of Net NPAs to Net advances


Movements in NPAs


Amount of provisions made towards NPAs


Movement of provisions held towards NPAs


Details of Loan assets subjected to Restructuring


Restructuring under CDR


Details financial assets sold to an SC/RC for Asset Reconstruction


Provision on Standard Asset


Interest Income as a percentage to Working Funds


Non-interest Income as a percentage to Working Fund


Operating Profit as a percentage to Working Fund


Return on Assets


Business (deposits plus advances) per employee


Profit per employee


Maturity pattern of Loans and Advances


Maturity pattern of Investment Securities


Maturity Pattern of Deposits


Maturity Pattern of Borrowings


Foreign Currency Assets and Liabilities


Exposure to Real Estate Sector


Exposure to Capital Market - Investment in Equity Shares, etc


Bank Financing for Margin Trading




Exposure to Country Risk


Details of Single Borrower/Group Borrower Limit exceeded by the bank


Provisions made towards Income Tax during the year


Disclosure of Penalties imposed by RBI


Consolidated Financial Statements – AS 21


Segment Reporting – AS 17


Related Party Disclosure – AS 18


Other disclosures as required under the relevant Accounting Standards


Disclosure of ‘Provisions and Contingencies’


Disclosure on Floating Provision

The full extract of the RBI circular has been given as an Annexure.


Company Secretary

Thanks  for sharing

Loosening Myself

Thanx for such a nice info.


thanks for tha info..



Thanks ayush for the info.



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