Pariksha SaathiLesson 10 of 10 · Banking and Financial Awareness
Banking Terms, Bank Codes (IFSC, MICR, SWIFT) and International Financial Institutions
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Terms about banks' money
Many questions only test whether you know a term. NDTL (net demand and time liabilities) is the base on which CRR and SLR are worked out. CASA means current and savings deposits. CRAR is the capital to risk-weighted assets ratio. Net interest margin (NIM) is the gap between interest earned and interest paid, as a share of earning assets, while the spread is the gap between lending and deposit rates. Bancassurance means a bank selling the policies of an insurance company. An account with no customer-initiated transaction for two years is treated as inoperative, and deposits unclaimed for ten years are moved to the RBI's Depositor Education and Awareness Fund (DEAF, 2014), from which the depositor can still claim them.
Terms about loans and security
Hypothecation is a charge on movable assets, such as a vehicle or stock, that stay with the borrower. A pledge means the goods, such as gold ornaments, are handed over to the lender. A mortgage is a charge on immovable property such as a house or land. A lien is the bank's right to keep a customer's property until dues are paid. A letter of credit is a bank's promise to pay a seller on behalf of a buyer when set documents are produced, and is widely used in trade. A bank guarantee is a promise to pay if the customer fails to perform. Factoring is selling receivables to a factor for immediate cash; forfaiting is the same idea for medium-term export receivables. A haircut is the margin cut from the value of collateral, or the loss creditors accept in a settlement.
Codes used in banking
The IFSC (Indian Financial System Code) is an 11-character code that identifies a bank branch for NEFT, RTGS and IMPS: the first four letters show the bank, the fifth character is 0, kept for future use, and the last six characters identify the branch. The MICR (Magnetic Ink Character Recognition) code is a 9-digit number printed in magnetic ink at the bottom of a cheque so that machines can read it: the first three digits stand for the city, the next three for the bank and the last three for the branch. The SWIFT code, also called the BIC (Bank Identifier Code), has 8 or 11 characters, four for the bank, two for the country, two for the location and an optional three for the branch, and is used for international transfers. SWIFT (Society for Worldwide Interbank Financial Telecommunication), founded in 1973 with its headquarters in Belgium, carries payment messages between banks; it does not itself move money. PAN (Permanent Account Number) is a 10-character code issued by the Income Tax Department.
Bretton Woods institutions
In July 1944 the United Nations Monetary and Financial Conference at Bretton Woods, New Hampshire (USA), created the International Monetary Fund (IMF) and the International Bank for Reconstruction and Development (IBRD). Both have their headquarters in Washington, D.C., and India is a founding member of both. The IMF came into being in December 1945 and began operations on 1 March 1947. It watches exchange rates and balances of payments, lends to countries facing balance-of-payments problems and gives technical advice. Each member has a quota that decides its contribution, its access to loans and its votes. In 1969 the IMF created the Special Drawing Right (SDR), an international reserve asset valued on a basket of major currencies.
World Bank Group
The World Bank Group has five institutions: the IBRD (1944), which lends to middle-income countries; the International Development Association (IDA, 1960), which gives soft loans and grants to the poorest countries; the International Finance Corporation (IFC, 1956), which invests in private businesses; the Multilateral Investment Guarantee Agency (MIGA, 1988), which insures foreign investors against political risk; and the International Centre for Settlement of Investment Disputes (ICSID, 1966). The IBRD and IDA together are called the World Bank. India is a member of all except ICSID.
Other international bodies
The Bank for International Settlements (BIS), founded on 17 May 1930 and based in Basel, Switzerland, is the bank of central banks; it hosts the Basel Committee on Banking Supervision, and the RBI is a member. The Asian Development Bank (1966) is based in Manila, Philippines. The Asian Infrastructure Investment Bank (AIIB), proposed by China, began operations in January 2016 with headquarters in Beijing, and India is a founding member. The New Development Bank (NDB) was agreed by Brazil, Russia, India, China and South Africa at the BRICS summit in Fortaleza, Brazil, in July 2014, and began work in 2015 with headquarters in Shanghai; its founders hold equal shares, and its first president was K.V. Kamath of India. The Financial Action Task Force (FATF), set up in 1989 by the G7 in Paris, sets global standards against money laundering and terror financing.
Key facts
- IFSC: 11 characters; first 4 letters for the bank, the 5th character 0, last 6 characters for the branch.
- MICR: 9 digits printed in magnetic ink on cheques; 3 for the city, 3 for the bank and 3 for the branch.
- SWIFT (1973, headquarters in Belgium) is a messaging network; a SWIFT or BIC code has 8 or 11 characters.
- Hypothecation: movable asset stays with the borrower; pledge: goods handed to the lender; mortgage: charge on immovable property.
- Deposits unclaimed for 10 years go to the RBI's Depositor Education and Awareness Fund (2014); the depositor can still claim them.
- Bretton Woods Conference, July 1944: created the IMF and IBRD, both headquartered in Washington, D.C.; the IMF created the SDR in 1969.
- World Bank Group: IBRD, IDA (1960), IFC (1956), MIGA (1988) and ICSID (1966); India is not a member of ICSID.
- BIS: 17 May 1930, Basel, Switzerland, the bank of central banks; AIIB: operations from January 2016, headquarters Beijing.
- New Development Bank: BRICS, Fortaleza summit July 2014, headquarters Shanghai, equal shares for founders; first president K.V. Kamath.
- Asian Development Bank: 1966, Manila; FATF: 1989, Paris, sets standards against money laundering.
Quick revision
NDTL, CASA, CRAR, NIM, bancassurance; inoperative after two years, unclaimed 10 years to DEAF (2014); hypothecation vs pledge vs mortgage vs lien; LC, bank guarantee, factoring, forfaiting; IFSC 11 characters (5th is 0), MICR 9 digits (city-bank-branch), SWIFT/BIC 8 or 11, SWIFT 1973 Belgium, PAN 10; Bretton Woods July 1944: IMF (operations 1 March 1947, SDR 1969) and IBRD, Washington; IDA 1960, IFC 1956, MIGA 1988, ICSID 1966; BIS 1930 Basel; ADB 1966 Manila; AIIB 2016 Beijing; NDB 2014 Shanghai; FATF 1989.