Banking 103 : Terms Related to Payments
Beneficiary : A beneficiary is the person or entity designated to receive funds or proceeds from a financial transaction, such as a transfer or payment. :
In the Unified Payments Interface (UPI), each combination of an account number and IFSC code is allocated a Virtual Payment Address (VPA), which is essentially a UPI ID.
USSD (Unstructured Supplementary Service Data)
Banking services can be used even if the phone does not have internet service, or if it is a feature phone. This service is called USSD.
To use this, just dial *99#
Digital Rupee ₹
Its functionality is similar to that of UPI. Furthermore, this will be covered in another article.
ASBA (Application supported by Blocked Accounts)
This is used while booking an Online IPO.
When you book an IPO, your money doesn’t leave your account. Instead, it’s kept safe in your account, just waiting for the big day of the IPO.
Now, here’s the interesting part! If you manage to get the IPO shares, then your reserved money will be used to buy them. If you don’t get those special shares or decide not to buy them, that money jumps right back into your account, ready for your next saving adventure or anything else you want to do with it.
E-Mandate (aka Standing Instructions)
Banks have a way to set up certain automatic payments for things like SIPs/OTTs or other regular payments. It’s like telling the bank in advance to make these payments for you, but at a specific time or date that you decide.
So, let’s say you want to pay for your gym membership automatically every month. You can tell your bank to do that for you. They’ll follow your instructions and make those payments exactly when you’ve asked them to, without you having to remind them every time.
Cheques and Demand Drafts (DD)
Two offline payment methods are through cheques and demand drafts (DDs). The recipient of these instruments is known as the payee, while the issuer is referred to as the drawer.
- If the cheque does not specify a PAYEE, the individual who presents the cheque at the bank can collect the cheque amount. Such a person is referred to as the BEARER (the term “bearer” is indicated on cheques).
However, in the case of a Demand Draft (DD), the DD will only be paid to the person whose name is mentioned on the DD.
- Underneath every cheque, there are three numbers mentioned.
- Cheque Number
- MICR Number
- SAN (Unique Short Account Number)
Cheque Number: The initial 6 digits (000001 in the Image)
MICR: Following the Check Number are 9 Digits (342240002 in the Image)
First 3 digits of MICR represent the CITY Code (342 in the Image)
The subsequent 3 Digits denote the BANK Code (240 in the Image)
The final 3 Digits indicate the BRANCH Code (002 in the Image)
SAN (Unique Short Account Number): Employed in the Image-based Cheque Clearing Process. It consists of a 6-digit number on cheques (076045 in the picture).
- To enhance the security of cheques, the RBI has introduced a new rule called the ‘Positive Pay System’ (PPS)
If someone is making a payment of over ₹50,000, it is mandatory to mention it in the Positive Pay System (PPS), or else that specific cheque will not be cleared.
- If a cheque is marked by crossing it out and writing “CANCELLED” on it, it is referred to as a “CANCELLED CHEQUE.
Primarily, it’s used for Bank Account Verification.
- If you give someone a cheque, but there isn’t enough balance in your account, causing the cheque to be dishonoured when presented at another bank, this situation is known as a “CHEQUE BOUNCE” (also referred to as a bounced cheque).
It’s a criminal offence in India.
(Section 138 of the Negotiable Instrument Act, 1881. Punishable with a fine which can extend to twice the amount of the cheque or imprisonment for a term not more than 2 (two) years, or both)
CARDS
Generally 3 types of cards are seen :
- Debit Card
- Credit Card
- Forex Card
Some form of Cards Network manages these cards.
There are 3 primary cards in India.
- Visa
- Mastercard
- Rupay (India’s very own)
Apart from these, there are also American Express (AmEX) and Diners Club International cards to some extent here.
CVV (Card Verification Value)
The 3-digit number, typically located on the back of the card, is a security code known as the CVV (Card Verification Value) or CVC (Card Verification Code). It serves as an additional security measure for online and card-not-present transactions. Sharing this code with anyone is not recommended as it helps verify that the person making a purchase physically possesses the card.
- Banking institutions often generate a significant portion of their income through Loans, which involves lending money to borrowers and charging interest on the amount borrowed
In loan documents, you’ll typically find a range of financial terms and conditions pertaining to the borrowing arrangement. These terms might include details about interest rates, repayment schedules, collateral (if any), penalties for late payments, loan duration, and other pertinent financial clauses. A more in-depth discussion on this subject will be provided in a separate article.
Common Banking Terms that come generally in Financial News
BASIS POINT (BPS) : The meaning of 1 basis point is 1/100th of 1%. In other words, a basis point (BP) represents 0.01%. For instance, when discussing financial percentages, if something changes by 100 basis points, it means a 1% change. This term is commonly used in finance and economics to denote small changes in interest rates, yields, or other financial percentages.
If it’s mentioned that the interest increased by 15 basis points, and if the interest rate was initially 7%, then the new interest rate has become 7.15%. Here, “15 basis points” means that there has been a small change of 0.15% in the interest rate, increasing it from 7% to 7.15%
Basis Points:
1 -> 0.01%
10 -> 0.1%
50 -> 0.5%
100 -> 1%
1,000 -> 10%
10,000 -> 100%
Basis points are a way of expressing small percentages. For instance, 1 basis point is equal to 0.01%, while 100 basis points represent a 1% change. So, as the numbers progress (10, 50, 100, etc.), they signify incremental percentage changes. For example, 1,000 basis points signify a 10% change, and 10,000 basis points represent a 100% change or doubling of the original value.
Repo Rate : Its the interest rate at which the RBI lends money to banks.
This interest rate is a critical financial parameter set by the Reserve Bank of India (RBI). When banks require liquidity or need funds to maintain their reserves, they borrow from the RBI. Loans are provided to banks at this interest rate. This rate is known as the “Repo Rate.” Changes in the Repo Rate are based on economic conditions, inflation, and monetary policy, which are influenced by the country’s economic situation. Banks then use this rate as a reference when lending to their customers, determining the interest rates for their loan products
Repo rate increase -> banks’ expenses increase i.e. loans will become expensive.
When the Reserve Bank of India (RBI) raises the repo rate, it leads to an increase in the cost of borrowing for banks. The repo rate is the interest rate at which the RBI lends money to commercial banks. When this rate goes up, banks end up paying higher interest on the funds borrowed from the RBI. Consequently, to maintain their profit margins, banks often increase the interest rates on loans they offer to customers. This results in loans becoming more expensive for individuals and businesses, affecting borrowing costs across the economy.
RBI Ombudsman : “If a bank is troubling an individual or engaging in something illegal, the person needs to go to the RBI Ombudsman to file a complaint.”
If an individual faces issues or encounters any unlawful activities from a bank, they have the option to approach the RBI Ombudsman to lodge a complaint. The RBI Ombudsman is an authority appointed by the Reserve Bank of India (RBI) to address grievances and resolve disputes between customers and banks or financial institutions. This mechanism ensures that consumers have a platform to raise their concerns against any unfair practices or misconduct by banks and seek appropriate resolution or redressal.
RBI Ombudsman : Watchdog/Guardian
It’s an online portal of RBI (cms.rbi.org.in)
Earlier articles in this series were :
Banking 101 : Accounts, KYC, Balances & More
Banking 102 : Terms Related to Deposits
That’s all for today, folks.
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Until Then, Cheers & Sayonara
