Glossary of Terms used in Banking

  1. Overdraft account:


Overdraft is a type of a loan account in which bank gives a monetary limit up to which business can issue cheques/make payment even if they do not have funds (credit balance) in their account. This is similar to the credit card facility or credit line.

In overdraft, a wider range of collaterals can be used to secure the credit. There are even clean overdraft accounts, in which no specific collateral is offered; instead, clean overdrafts are granted against the worth of the individual. Overdraft facility is given against the security of fixed assets (if securitised).

Hence, an overdraft is a revolving or a floating loan account, here interest is charged on daily debit balance. Overdraft limit is approved only for a fixed period (usually 1 year) after which it is must be renewed. Generally, there is no restriction to the end use of funds.

  1. Cash credit account:

This is similar to bank overdraft. However, cash credits are more generally offered for businesses than individuals. This facility is provided on pledge or hypothecation of stock i.e. raw materials, work in progress, finished goods, etc. or on the guarantee of book debts (debtors) or other collateral security. The purpose of taking cash credit is to fulfill the working capital requirement of the business.

The credit limit extended on the cash credit account is normally a percentage of the value of the security offered. The cash credit account is like a current account with cheque book facility.

  1. NRE Account:

NRE or Non-Resident External Account is a type of a savings account maintained in INR which is used to invest income earned by an NRI outside India / to park foreign income earned outside India. An NRE account can be opened only by any person who is residing outside India. Interest is tax-free in this account because in this account only income which is earned outside India is allowed to be credited.

There is no restriction on withdrawal of funds i.e.100% amount can be withdrawn through cheque books/ATMs and money is fully repatriable.

  1. NRO account:

An NRO (Non-Resident Ordinary) is like a savings account where NRI can maintain and manage incomes earned in India such as rent, dividends, pension etc. Income earned in India by NRI is taxable in India, hence interest is taxable in this account. Transfer of funds is allowed between NRO accounts but the NRO account has restricted repatriability i.e permitted remittance allowed from NRO is up to USD 1 million net of applicable taxes in a financial year after giving undertaking along with a certificate from a chartered accountant.

An NRE account can be jointly held with another NRI but not with resident Indian. On the other hand, NRO account can be held with NRI as well as resident Indian ( a close relative) as defined under Section 6 of the Companies Act 1956.

  1. Auto sweep FD:

An auto Sweep is a facility given by banks which interlinks saving bank account with a Fixed Deposit account. In Auto Sweep account amount above a pre-determined limit is automatically transferred to fixed deposit and hence it earns a higher rate of interest. Similarly, In case someone withdraws more than what is available in the savings account; the balance will be taken from the FD automatically.

For example, if you have an account at HDFC Bank and your balance goes below Rs.35, 000 in auto sweep savings account, the bank will tap into your FD to give you the sum that you require for withdrawal.

  1. Transaction date and value date:

Transaction date is the date of the transaction while value date is the date on which value /significance is given to that transaction. This is particularly useful in banking where interest is usually calculated from the value date.

Example If one deposits a cheque of Rs. 10,000 in the bank on 07.06.2012 this is the Transaction date on which one has deposited cheque but the bank will pass the cheque on 09.06.2012 and transfer Rs. 10,00 in the beneficiary’s account, this is the 9.06.2012 is value date when a bank can give value to our transaction.

Transaction date is the date on which the amount has been debited or credited to your account. Another example an amount of Rs 20, 00,000 is credited on 6th July by way of RTGS at 3:45 pm, which is just before the closing hours for the bank, in that case, the transaction date will be 6th July, but the value date will be 7th July.

  1. AMB:

AMB or the Average Monthly Balance in a bank is the average of the closing balance of an account for each day in a given month.

For example daily closing balance for 5 days is day 1: 12,567, day2: 3,847, day3: 9,876, day4: 6,253 and day 5: 8,374, than average balance for 5 days is 32,212.

AMB has significance as many banks require customers to maintain the minimum average monthly balance of say Rs.5, 000. The requirement is not to maintain Rs 5,000 balance every single day, but on an average.

  1. ABQ:

Average Quarterly balance is an average of closing balance of each day divided by the number of days in a quarter. In the below example Rs.5,000 was the balance from 1st July 2016 to 20th July 2016 i.e. 19 days hence 5000X19=95000 is taken and then divided by the total number of days in a quarter.

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