Popularly Used Financial Terms & it’s Meaning
Unless you’re one of those wizards for whom financial terms easily roll off their tongues, most people roll their eyes and quickly get back to looking at the latest irrelevance on social media. If social media is your source of knowledge, you’d be doing yourself a disservice by not keeping yourself abreast of such terms, as they can affect your financial life, one way or the other.
Familiarise yourself with these financial acronyms and terms, for it could add to your fortunes.
- Know Your Customer (KYC)
The RBI has made Know Your Customer (KYC) norms obligatory on banks and other financial institutions to identify and verify the identity of their customers as a way of preventing them from dealing in money laundering or other illegal financial activities. Banking and other financial entities are required to periodically update each customer’s KYC details.
- Annual Percentage Rate (APR)
APR or Annual Percentage Rate of interest on a loan, credit card, or mortgage represents the real cost of credit, as it includes all additional fees and payments made by you beyond the interest rate. If you receive a 0% APR offer from your credit card company on purchases, it essentially means you won’t have to pay interest for a specific time. Any amount outstanding after that period will be charged APR at the prevailing rate.
- Indian Financial System Code (IFSC)
The Indian Financial System Code (IFSC) is an 11-character code in alphanumeric format to uniquely identify all bank branches within the NEFT, RTGS, and the Immediate Payment Service (IMPS) network within India. This code is printed on every cheque leaf in your personal or company chequebook. To transfer funds to an account electronically, the receiver must share his IFSC code as it identifies the receiver bank and branch.
- Magnetic Ink Character Recognition (MICR)
Magnetic Ink Character Recognition (MICR) is a technology used to verify the legitimacy or originality of paper documents, especially cheques. A special ink sensitive to magnetic fields is used in the printing of certain characters. Every bank branch has a unique MICR code, which helps the RBI speed up the cheque clearing process, with MICR readers.
- Electronic Clearing Service (ECS)
Electronic Clearing Service (ECS) is another method of transferring funds from one bank account to another. It is most often used to pay regular bills (telephone, mobile, credit card, electricity, etc, to make EMI payments (Personal, Car, Home Loan), and SIP investments. This is done by invoking the auto debit facility. ECS is also used by entities for payment of salaries, pensions, distribution of dividend interest etc.
- Immediate Payment Service (IMPS)
Since NEFT may not be available for use on weekends and bank holidays, you could try using IMPS or Immediate Payment Service. The service is available 24X7. The minimum transfer value is Rs 1 and the maximum value is Rs 2 lakh. But to use this service, you will need to register via your bank and provide the mobile number and MMID of the beneficiary as IMPS transfer can also be done through mobile phones. Mobile Money Identifier (MMID) is a seven-digit unique number issued by the bank.
- National Electronic Funds Transfer (NEFT)
The National Electronic Funds Transfer (NEFT) system allows individuals, companies, and other entities to transfer funds electronically from one bank to another within India. Normally, funds from the remitting bank will be sent to the RBI within three hours of the transaction. However, the time taken to credit the beneficiary bank’s branch account depends on how long it takes the bank to process the transaction. It should be noted that NEFT operates only during business hours on weekdays. NEFT transactions cannot be done on Sundays, bank holidays, and second and fourth Saturdays of the month. The minimum transfer value is Rs 1 and there is no upper limit.
- Real Time Gross Settlement (RTGS)
Another method for transferring money electronically within the Indian banking system is Real Time Gross Settlement (RTGS) scheme, where the minimum amount for each transaction is Rs 2 lakh and the upper limit is Rs 10 lakh. The beneficiary account receives the money immediately.
It should be noted that NEFT, RTGS and IMPS impose transaction fees in slab rates. Consult your bank for these details.
- Society for Worldwide Interbank Financial Telecommunication (SWIFT)
SWIFT is an acronym for Society for Worldwide Interbank Financial Telecommunication. It is an internationally recognised identification code for banks worldwide, and is usually used for international wire transfers. Only those banks that are SWIFT-enabled can take part in this system. In EU nations SWIFT is also known as BIC or Bank Identification Code. When dealing with international transfers also be aware of IBAN or International Bank Account Number. IBAN is appears in bank statements and the bank’s online systems. IBAN and BIC contain your bank account number and sort code written in an internationally recognised format. All these numbers can make your wire transfers happen quickly and securely.
- Credit rating
Credit rating involves the evaluation of the risk of an individual, business, company, or government being able to meet their financial ability to pay debt – and an implicit forecast of the likelihood of a default. Credit ratings are provided by agencies to verify the financial strength of the issuer for investors. There are six credit rating agencies registered with SEBI in India: CRISIL, ICRA, CARE, Fitch India, Brickwork Ratings, and SMERA. The RBI has licensed four credit rating bureaus, including CIBIL, Equifax, High Mark, and Experian.
This is the property or other assets of the borrower. It is demanded by a lender as a sort of guarantee for the repayment of the loan. If the borrower defaults on making the promised loan payments, the lender can seize the collateral to recoup losses.
- Net Asset Value (NAV)
Net Asset Value (NAV) is the value per unit of a mutual fund or an exchange-traded fund (ETF), on a specific date or time. NAV is used to calculate the net worth of your investment. Mutual fund NAVs are calculated every day, based on the closing market prices of the securities in the fund’s portfolio. ETFs and closed-end funds trade like stocks, hence they trade at market value; that is either a premium or discount to the NAV. NAV for ETFs is also calculated at the close of the market, but these can also be calculated multiple times per minute in real-time, in case of intraday trading.
- Banking Ombudsman
The Banking Ombudsman is a quasi-judicial authority, created by the government to deal with customer complaints of services provided by banks and financial institutions in India. The Ombudsman has the authority to look into complaints in all areas regulated by the RBI. This scheme covers all scheduled banks, regional rural banks, and cooperative banks.
This is just a small selection of the many terms that make up the banking and financial industry. A quick online search for other definitions will stand you in good stead when talking to your peers, your bank, or other finance companies. After all, forewarned is forearmed!
* The information provided in this article is generic in nature and for informational purposes only. It is not a substitute for specific advice in your own circumstances.