Question on Some Banking Terminology

Question on Some Banking Terminology, What is a Sub-prime crisis, What is KYC, What is SWIFT, What is NOSTRO and VOSTRO account, What is RuPay Card,What is a foreign exchange reserve,What is NPA, What is Money Laundering, What is Bancassurance,

Question on Some Banking Terminology

What is a Sub-prime crisis? (Question on Some Banking Terminology)

• Borrowers are classified into two categories Prime and Sub-prime
• Prime borrowers are those with a good credit score
• Sub-prime borrowers are those with a less credit score
• A credit score is calculated based on a number of factors like timely loan repayments (if previously taken), credit card limit.
• Lenders lend loans to sub-prime borrowers typically at higher interest rates since the probability of defaults is high in such a case.

What is KYC?

KYC means “Know Your Customer”. It is a process by which banks obtain information about the identity and address of the customers. This process helps to ensure that banks’ services are not misused. The KYC procedure is to be completed by the banks while opening accounts. Banks are also required to periodically update their customers’ KYC details.

The KYC guidelines of RBI mandate banks to collect proofs from their customers. They are-
1. Proof of identity
2. Proof of address

What is SWIFT?

• The Society for Worldwide Interbank Financial Telecommunication (SWIFT) provides a network that enables financial institutions worldwide to send and receive information about financial transactions in a secure, standardized, and reliable environment.
• SWIFT does not facilitate funds transfer, rather it sends payment orders, which must be settled by correspondent accounts that the institutions have with each other. Each financial institution, to exchange banking transactions, must have a banking relationship by either being a bank or affiliating itself with one (or more) so as to enjoy those particular business features. India was the 74th Nation to join SWIFT Network.
• A majority of FOREX-related messages are sent to correspondent banks abroad through SWIFT. SWIFT Code consists of 8 or 11 character when the code is 8 digit, It is referred to the primary office
  • First 4 – bank code
  • Than 2 – country code
  • Than 2 – location code
  • Last 3 – branch code (optional).

What is NOSTRO and VOSTRO account?

• A Nostro is our account of our money, held by the other bank whereas a Vostro is our account of other bank money, held by us.
• NOSTRO account is maintained by an Indian bank in foreign countries.
• VOSTRO account is maintained by a foreign bank in India with their corresponding bank.

What is RuPay Card?

• RuPay is the Indian domestic card payment network set up by the National Payments Corporation of India (NPCI) at the behest of banks in India. The RuPay project had been conceived by Indian Banks Association (IBA) and had the approval of the Reserve Bank of India (RBI).
• RuPay Logo National Payments Corporation of India (NPCI) has a plan to provide a full range of card payment services including the RuPay ATM, RuPay Micro ATM, Debit, Prepaid, and Credit Cards which will be accepted in India and abroad, across various channels like POS, Internet, IVR, and mobile, etc.
• The initial focus of NPCI would be to approach those banks who have not been issuing any payment card at all more specifically – Regional Rural Banks (RRBs) and urban co-operative banks.
• All Public Sector Undertakings (PSU) banks set to join the RuPay system by the end of the year 2012. RuPay-based debit cards can be used by consumers on the Internet from September 2012.
• The government of India had launched India’s first domestic payment card network, RuPay, to compete with Visa Inc and MasterCard Inc.

What is a foreign exchange reserve? (Question on Some Banking Terminology)

• Foreign exchange reserves (also called Forex reserves) are the foreign currencies held by a country’s central bank and its member banks. They are also referred to as foreign currency reserves or foreign reserves.
• The reserves are labeled as reserve assets under assets by functional category. In terms of financial assets classifications, the reserve assets can be classified as Gold bullion, Unallocated gold accounts, Special drawing rights, currency, Reserve position in the IMF, interbank position, other transferable deposits, other deposits, debt securities, loans, equity (listed and unlisted), investment fund shares and financial derivatives, such as forward contracts and options.

What is Bancassurance?

Bancassurance also sometimes known as the bank insurance model (BIM) or Allianz, is the partnership or relationship between a bank and an insurance company, or a single integrated organization arrangement that allows the insurance company can sell its products to the bank’s client base. This partnership arrangement can be profitable for both companies. Banks can earn additional revenue by selling the insurance products, while insurance companies are able to expand their customer bases without having to expand their sales forces or pay commissions to insurance agents or brokers.

What is Money Laundering?

Money laundering is the process of concealing the source of obtaining money. Money or funds obtained from serious crimes, such as drug trafficking or terrorist activity, originated from a legitimate source.

What is NPA?

• A nonperforming asset (NPA) refers to a classification for loans on the books of financial institutions that are in default or are in arrears on scheduled payments of principal or interest. Once the borrower has failed to make scheduled principal or interest payments for 90 days the loan is considered to be an NPA.
• Banks are required to classify NPAs further into Substandard, Doubtful, and Loss assets.
  1. Substandard assets: Assets which has remained NPA for a period less than or equal to 12 months.
  2. Doubtful assets: An asset would be classified as doubtful if it has remained in the substandard category for a period of 12 months.
  3. Loss assets: As per RBI, “Loss asset is considered uncollectible and of such little value that its continuance as a bankable asset is not warranted, although there may be some salvage or recovery value.”

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