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Commonly used terminologies in Banking

ICICIdirect 8 Mins 20 Oct 2023

There are various types of Banks: PSU Banks, Private Banks, Co-operative/Regional Banks, Small Finance Banks and Foreign Banks.

When you deposit money in a bank, let's say the bank gives you an interest rate of 4%. But when the bank lends out this money, they lend it out at say, 12%.

The difference of 8% in the above scenario is effectively the profit of the bank!

The loans that do not pay interest for 90 days are known as Non-performing Assets. Banks have to provide for such bad loans.

Structure of a Bank

Asset for a Bank: The asset portion of a bank's capital includes cash, government securities, and interest-earning loans (e.g., mortgages, letters of credit, and inter-bank loans).

Liabilities for a Bank: The bank's main liabilities are its capital (including cash reserves and, often, subordinated debt) and deposits. The latter may be from domestic or foreign sources (corporations and firms, private individuals, other banks, and even governments).

Banks are required to maintain Liquidity with the Reserve Bank of India:

SLR (Statutory Liquidity Ratio): It is the money a bank needs to preserve in the form of cash, gold or government Bonds before providing credit customers. This limitation is added by RBI on banks to make funds available to customers on-demand at your earliest convenience.

Banks are required to maintain SLR at 18%.

CRR (Cash Reserve Ratio): Banks are required to hold a certain proportion of their deposits in the form of cash. Banks don’t hold these as cash with themselves, but deposit such amounts with RBI / currency chests.

CRR rate is at 4.5% currently.

Repo Rate: The rate at which the RBI lends short-term money to the banks. The RBI through its Monetary Policy committee changes the repo rate to balance growth and Inflation.

Reverse Repo rate: The rate at which banks park their short-term excess liquidity with the RBI.

Now let us understand various terminologies for Banks

Net Interest Income (NII): This is the spread the bank makes on its lending. It is calculated as Interest Income – Interest Expended

Net Interest Margin (NIM): This is the spread the bank makes on its lending. It is the earning which is left after deducting the cost paid to depositors from its yields on Loans. This is denoted in % terms. The formula is Yield on Loans – Cost of funds

Capital Adequacy Ratio (CAR): The capital adequacy ratio (CAR) is a measure of a bank's available capital expressed as a percentage of a bank's risk-weighted credit exposures. Essentially, it is the Capital that is available to lend.

Tier I Capital – In simple words this capital is freely available with the bank to lend out.

Tier II Capital- This is the capital tied up somewhere and is less freely available to lend. In case of an adverse event, the bank can use this capital to lend.

Under Basel III norms, a bank’s tier 1+tier 2 capital must be a minimum of 8% of its risk-weighted holdings. The minimum capital adequacy ratio, also including the capital conservation buffer, is 10.5%.

Current Account Saving Account (CASA)- There is no interest paid on the Current Account and a small interest rate is paid on a savings account.

The combination of both is called CASA which shows the liabilities of the bank on which it pays relatively less interest.

Deposits: Bank deposits are a savings product that customers can use to hold an amount of money at a bank for a specified length of time. In return, the financial institution will pay the customer the relevant amount of interest, based on how much they choose to deposit and for how long.

Now let us come to NPA.

Gross NPA (GNPA): It is the total loans on which no payment has been paid for 90 days or more. GNPA % is usually shown in each Bank’s quarterly results. The percentage is basically the GNPA amount as a % of the total advances.

Slippages: Slippages denote the fresh amount of loans that have turned bad in a year. The slippage ratio of a bank is calculated as Fresh accretion of NPAs during the year /Total standard assets at the beginning of the year multiplied by 100.

Provisioning Coverage Ratio (PCR): This is the ratio of provisioning to GNPA and indicates the extent of funds a bank has kept aside to cover loan losses. For Instance, a company has GNPAs of Rs 100 and they have set aside 50 Rs, then the PCR is 50%.

Net NPA (NNPA): The total figure left after deducting provisions made for bad loans from GNPA.

(GNPA – Provisions+upgrades/writeoffs = NNPA) 

Special Mention Account (SMA)

SMA-0 is a category in which stress with respect to the principal and interest has remained overdue for a period of 0 to 30 days.

SMA-1 is a category in which stress with respect to the principal and interest has remained overdue for a period of 30-60 days.

SMA-2 is a category in which stress with respect to the principal and interest has remained overdue for a period of 60-90 days.

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