Banking Terms in India – Know the Common Banking Terms

Knowing Banking Terms in India can make our life simpler and safer and while ignorance of these common banking terms in India can unnecessary hassles.

Read this instance to understand why. Ayesha received her bank statement yesterday and was furious; the bank had charged her close to Rs. 1000 for non maintenance of balance.

Her Reaction (angry and vociferous): “ How can you do this, I have been your customer for six years and have always maintained more than the required balance so what are you charging me for”

The Explanation (simple)

Ayesha rarely used this account she had put around 10000 in the account (the required Average Quarterly Balance) and had forgotten about it. A couple of months back while travelling out of the country she faced some problem with her credit card and used the money in this account.

The account balance dipped to zero; after she came back she deposited Rs. 10000 to maintain her balance before the quarter ends… missing the key word average. When the quarter ended her “account was maintained” as per her as the account had the required balance of 10000 in it!

This is a common misnomer

The balance needs to be maintained through the and not only at the end of the quater. We will see later how it is actually calculated. We have multiple banking transactions for our credit card, loans, savings account, deposits etc but sometimes we miss out on making an effort to understand the meaning of the terms.

Hence knowing some common banking terms in India can make our life simpler and safer and while ignorance of a few of them can cause us loss or unnecessary hassles. Here is a list of some banking terms in India.

1. Average Quarterly Balance

The above example demonstrates how the confusion about AQB can cause problems. So how do banks calculate the AQB? If there are 91 days in a quarter the day end balance of each day from 1 to 91 is totaled and then the sum is divided by 91; this figure is the average balance in your account for the quarter.

2. Auto Debit Mandate

Often when you apply for a credit card you rarely think of going through the entire form or terms and conditions; the company representative just marks the place where you have to sign and you happily oblige.

Sometimes this can result in the customer signing an auto mandate form without realizing it. This authorizes the credit card company to debit the dues from your linked account directly.

This can cause trouble in two ways

a) there can be a dual payment one manually done by you and one automatic which can disturb your calculations for the month

b) there can be a more troublesome outcome also especially if you have a dispute about your credit card bill and or do not intend to pay the entire amount immediately.

The funds will nevertheless get debited from your account with you being left in the lurch following up with the call center.

3. Charges on Insurance Policies

When you buy an insurance policy it is absolutely necessary to be sure about the various charges that you would be paying explicitly or implicitly and their timeline.

As per data collected by IRDA there were at least nine products in the market where 100% of the first premium goes towards charges (which your agent might conveniently forget to tell you when he shows you the illustration that gives the return on the policy). However these policies have lower charges in the successive years.

Various charges include Policy administration charges, Premium allocation charges, Fund management charges etc. These charges are especially high in ULIPs (Unit Linked Insurance Plans).

Example: Ved Buys a ULIP and pays a premium of Rs 50000 per year; after three years he wants to withdraw the money. He estimates that at an average of promised 12-14% returns his corpus would be at least above Rs 1, 80,000 (assuming returns of 12%). He is surprised when his corpus is close to Rs.1.37,000 (@12%) which is lower than his total investment also.

This is because in the first year the total charges were about 40% which meant that his actual investment was Rs. 30000 and in the subsequent two years the charges were 20% so his investment was Rs. 40000/year. The returns are on the actual investment and not the initial investment made.

So keep this in mind when buying a policy. Check what the policy charges are and how they are distributed; all projections are made with a long term horizon of at least 5 years in mind.

4. Inactive/Dormant Account

Often accounts that have no activity in them especially a withdrawal for a long stretch of time can be classified or marked as inactive/dormant depending on the bank policy or the time elapsed.

Usually the bank will send you information about this. Do not panic or do not ignore this. This is done for the customer’s safety as inactive accounts are a hotbed for people who want to misuse accounts for fraudulent activity. Going to the bank with an identity proof can solve the problem

Ignoring may result in you not being to withdraw money from your account from the ATM or your issued cheques being returned (usually banks avoid doing this).

5. Ombudsman

He can be your best friend in case you have a complaint that is not being addressed by a financial institution. Be it related to undue charges, non-processing of any application or a fraudulent activity you can file a complaint with the banking ombudsman or the insurance ombudsman as the case maybe.

An ombudsman is a senior official appointed by the concerned apex body to deal with complaints related to service issues and resolve them in a fast and inexpensive way. At present the banking ombudsman has offices at 15 locations in India and the insurance ombudsman has offices at 12 locations across the country.

In case of a problem don’t not get disheartened as there is a way to resolve it and a mechanism to get it sorted; often people just give up. For insurance ombudsman you can get the contact details here and for the banking ombudsman here

6. Real Time Gross Settlement

This doesn’t seem to be one of those common banking terms in India? Does it. This a fairly recent mechanism introduced by almost all banks know that allows you to transfer money from one bank account to a bank account in another account on a real time basis.

This is a faster way of transferring though the bank may charge a small amount for it, normal cheque clearing from A bank to B bank takes three working days.

Example: Ashish’s EMI is debited from his HDFC account but he realizes that he does not have sufficient funds in the account and the due date is tomorrow. So what must he do; go to SBI (where he has another account) withdraw money and then go to HDFC to deposit funds.

No there is a better and easier option: He goes to SBI fills out a form for RTGS and the money is transferred to his HDFC account the same day. Fast, easy and less time consuming.

7. Value Dating of FDs

Value date is the date from which your deposit starts earning interest. A lot of bank (like ICICI Bank) print on their Fixed Deposit Receipts that no value dating of FD is possible beyond thirty days.

So if your FD matures on 10/1/2013 and you go to the bank before 08/2/2013 to renew your FD then your deposit starts earning interest from the day it matured i.e. 10/1/2013. Beyond 08/2/2013 the FD will be renewed from the date you give the instructions. Not renewing your deposits within the stipulated period can result in loss of interest for you.

Conclusion – Banking Terms in India

Being an informed customer helps you in being able to make the best of your time and money. Usually the systems are in place we just miss out on using them to our advantage by being hasty or just a little lazy. Happy Banking to All! Hope this list of Banking Terms in India comes handy.