20 Common Banking Terms You Should Know

Banking Terms: Do you find banking terms confusing? You’re not alone. The banking sector in India uses many terminologies that can be hard to grasp, even for professionals. However, understanding basic banking terms is important since banking is a vital part of both personal and business finances.

From common terms like ATM and types of bank accounts to lesser-known banking terminologies, these concepts are widely used across all banks. Knowing important banking terms is also beneficial for aspirants preparing for banking exams and interviews.

This guide simplifies terms related to banking, making them easier to understand. Explore these 20 banking-related terms to improve your financial knowledge.

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Understanding Banking Terms

Banking terms are commonly used words and phrases that explain financial transactions and services. These banking terminologies are essential for handling money and are used by all banks in India. Knowing basic banking terms helps in making informed financial decisions.

For example, understanding “interest rates” can help compare loan offers, while knowing “minimum balance” rules prevent unnecessary charges. Awareness of important banking terms also makes reading bank statements easier.

Familiarity with terms related to banking is useful for comparing savings, loans, and credit options. Learning these banking-related terms ensures better money management and financial awareness.

Top 20 Basic Banking Terms

Banking comes with many terms that might seem confusing at first. Knowing these basic banking terms helps in managing money better, whether you’re opening an account, applying for a loan, or making transactions. Here’s a simple explanation of important banking terms to help you understand how banks operate:

1. Bank Account Types and Their Functions:

Banks offer different types of accounts, each serving a specific purpose.

Savings Account: A deposit account where you can keep your money safe while earning interest. Suitable for individuals who want to save money while having easy access to funds.
Current Account: Mainly used by businesses and individuals with frequent transactions. It does not offer interest but allows unlimited withdrawals and deposits.
Fixed Deposit (FD): A savings option where money is locked in for a fixed period, earning higher interest than a regular savings account.

2. Bank Deposits and Withdrawals:

Deposits and withdrawals are fundamental banking-related terms that define how money moves in and out of an account.

Deposit: Adding money to your bank account, either in cash, through cheques, or online transfers.
Withdrawal: Taking money out of your account via ATMs, cheques, or online banking.

3. Interest and Its Types:

Interest is the extra amount banks pay on deposits or charge on loans.

Simple Interest: Interest is calculated only on the initial amount deposited or borrowed.
Compound Interest: Interest earned or charged on both the initial amount and the accumulated interest over time.

Example: If you deposit ₹10,000 at 5% annual compound interest, the interest adds to the principal, increasing earnings each year.

4. Loans and Credit Facilities:

Borrowing money from a bank comes with conditions and repayment rules.

Loan: A sum borrowed for personal, home, or business use, which must be repaid with interest.
Credit Card: A card that allows you to spend up to a certain limit, with repayment due later, usually with interest if not paid on time.
Overdraft: A facility where banks let account holders withdraw more money than they have, up to a set limit.

5. Banking Transactions and Payment Methods:

Understanding transaction-related banking terminologies helps in smooth financial dealings.

NEFT (National Electronic Funds Transfer): A payment system for transferring money between banks in batches.
RTGS (Real-Time Gross Settlement): A system where large payments are settled instantly and individually.
IMPS (Immediate Payment Service): A quick, 24/7 money transfer service between banks.
UPI (Unified Payments Interface): A mobile-based system allowing instant payments between accounts using a phone number or UPI ID.

6. Banking Security and Regulations:

Banks follow strict security measures to protect customer funds and transactions.

KYC (Know Your Customer): A verification process where banks collect identity and address proof before opening an account.
IFSC Code (Indian Financial System Code): A unique code used for online money transfers to identify a specific bank branch.
MICR Code (Magnetic Ink Character Recognition Code): A code printed on cheques to facilitate processing.

Also Read: Common Types of Online Banking Fraud

7. Cheques and Their Uses:

A cheque is a written document instructing the bank to pay a certain amount to a person or business.

Bearer Cheque: This can be encashed by anyone holding it.
Crossed Cheque: This can only be deposited into a bank account, not cashed directly.
Post-Dated Cheque: A cheque dated for a future day, ensuring payment at a later time.

8. Banking Charges and Fees:

Banks charge fees for various services, which customers should be aware of.

Minimum Balance Fee: Charged when an account holder does not maintain the required balance.
Transaction Charges: Fees applied on certain transactions, such as ATM withdrawals beyond a set limit.
Processing Fees: Charged on loans and credit card applications for administrative costs.

9. Digital Banking and Online Services:

With digital banking, managing finances has become easier.

Net Banking: Access your bank account through a website for transactions, bill payments, and balance checks.
Mobile Banking: Using a mobile app to perform banking tasks like transferring money and checking statements.
E-Wallets: Apps like Paytm, Google Pay, and PhonePe that allow cashless transactions.

Also Read: AI in Banking–Role, Benefits, Challenges, and Future Outlook

10. Banking Instruments and Their Uses:

Banks provide various instruments to help customers manage money and payments.

Demand Draft (DD): A prepaid bank order for a fixed amount, used for secure payments.
Promissory Note: A written promise by one party to pay a specific amount to another at a future date.
Letter of Credit (LC): A document issued by a bank guaranteeing that a seller will receive payment from a buyer, commonly used in international trade.

11. NPA (Non-Performing Asset):

When a loan borrower fails to make payments for 90 days or more, the loan is classified as an NPA (Non-Performing Asset). Banks must take action to recover the amount, which may include legal steps or auctioning assets.

12. Capital Adequacy Ratio (CAR):

This ratio measures a bank’s ability to handle risks by comparing its available capital to its risk-weighted assets. A higher CAR indicates a stronger bank that can withstand financial difficulties.

13. Repo Rate and Reverse Repo Rate:

These rates are controlled by the Reserve Bank of India (RBI) to manage inflation and liquidity in the economy.

Repo Rate: The rate at which RBI lends money to banks. A higher rate means costlier loans for businesses and individuals.
Reverse Repo Rate: The rate at which banks deposit excess funds with RBI. When this rate increases, banks prefer saving money with RBI instead of lending.

14. CRR (Cash Reserve Ratio) and SLR (Statutory Liquidity Ratio):

Banks are required to keep a portion of their deposits as reserves.

CRR (Cash Reserve Ratio): The percentage of deposits that banks must keep with the RBI, ensuring liquidity in the banking system.
SLR (Statutory Liquidity Ratio): The percentage of deposits that banks must invest in safe assets like government securities.

15. Debt and Equity in Banking:

These are two main ways businesses raise money.

Debt: Borrowing money with an agreement to repay it with interest (e.g., loans, bonds).
Equity: Raising money by selling shares in a company. Shareholders become part-owners but don’t owe repayments like a loan.

Also Check: How to Get a Bank Job in India? A Complete Guide

16. EMI (Equated Monthly Installment):

EMI is the fixed monthly payment made towards a loan. It includes both principal and interest amounts, ensuring the loan is repaid over time.

Example: If you take a ₹5 lakh loan for 5 years at 8% interest, your EMI will be a set amount every month until repayment is complete.

17. Mortgage and Collateral:

Banks secure loans using assets as a guarantee.

Mortgage: A loan taken by pledging property, commonly for home loans.
Collateral: Any valuable asset (property, gold, fixed deposit) used as security for a loan. If the borrower fails to repay, the bank can seize the asset.

18. Cheque Bounce and Its Consequences:

A cheque bounces when the bank refuses to process it due to insufficient funds, mismatched signatures, or expired validity. A bounced cheque can lead to penalties, legal action, or a negative impact on the issuer’s credit score.

19. CIBIL Score and Credit Rating:

Your financial history affects loan approvals.

CIBIL Score: A credit score (ranging from 300 to 900) reflecting your loan repayment history. A higher score improves the chances of loan approval.
Credit Rating: A financial rating given to companies or governments based on their ability to repay borrowed money.

20. Nominee in Banking:

A nominee is a person chosen to receive money from a bank account, fixed deposit, or insurance policy in case the account holder passes away. Adding a nominee ensures hassle-free fund transfer to the rightful person.

Also Check: 10 Must-Know Finance Terms for Beginners

Knowing these terms related to banking makes financial transactions easier and helps in making informed decisions. Whether it’s loans, deposits, or digital banking, understanding these banking terminologies ensures better financial planning and security.

Therefore, to learn these terms, you can read financial articles, follow banking updates, or take online courses. Regularly using banking services and asking questions when in doubt also improves your understanding over time.

Learn Banking Terms and Build a Career in BFSI with PW Skills

The Post Graduate Certification in Banking, Financial Services & Insurance (BFSI) from PW Skills is a three-month program designed to help you understand essential banking terms and concepts. This course provides a solid foundation for those looking to enter the BFSI sector, covering banking operations, financial services, and insurance. It also includes soft skills training and interview preparation to support career growth.

What BFSI Course Offers:

Comprehensive Banking Knowledge – Learn banking-related terms and concepts that are essential for various roles in the industry.
Guidance from Industry Professionals – Gain insights from professionals with practical knowledge of banking operations.
Soft Skills Training – Improve communication and confidence for workplace interactions and interviews.
Hands-On Learning – Engage in real-world activities that help you apply important banking terms in practical scenarios.

Build your knowledge of banking terminologies and start your journey in the financial sector with the PW Skills BFSI Certification Online Course!

Banking Terms FAQs

What are banking terms?

Banking terms are words and phrases used in banking and finance to explain different processes, services, and transactions. Understanding these basic banking terms helps individuals manage accounts, apply for loans, and use banking services effectively.

Which are the most important banking terms to know?

Some important banking terms include interest rates, credit score, loan tenure, overdraft, net banking, and EMI. These banking-related terms help in making informed financial decisions when dealing with banks and financial institutions.

Why is it important to learn banking terms?

Knowing banking terminologies makes it easier to understand financial transactions, avoid hidden charges, and make better money decisions. Whether opening an account or applying for a loan, understanding terms related to banking ensures better financial awareness.

How can I learn about banking terms in detail?

You can learn banking terms through online courses, financial blogs, and practical banking experience. The PW Skills Post Graduate Certification in Banking, Financial Services & Insurance (BFSI) provides structured learning on banking-related terms along with hands-on practice and expert guidance.

Do banking terms apply to digital banking?

Yes, banking terminologies are relevant to digital banking as well. Terms like UPI, net banking, mobile banking, and two-factor authentication are essential for understanding and safely using online banking services.