Frequently Asked Banking Interview Questions Part – 3
What Is Debt-to-income Ratio?
The debt-to-income ratio is calculated by dividing a loan applicant’s total debt payment by his gross income.
What Is Adjustment Credit?
Adjustment credit is a short-term loan made by the Federal Reserve Bank (U.S) to the commercial bank to maintain reserve requirements and support short term lending, when they are short of cash.
What Do You Mean By ‘foreign Draft’?
Foreign draft is an alternative to foreign currency; it is generally used to send money to a foreign country. It can be purchased from the commercial banks, and they will charge according to their banks rules and norms. People opt for ‘foreign draft’ for sending money as this method of sending money is cheaper and safer. It also enables receiver to access the funds quicker than a cheque or cash transfer.
What Is ‘loan Grading’?
The classification of loan based on various risks and parameters like repayment risk, borrower’s credit history etc. is known as ‘loan grading’. This system places loan on one to six categories, based on the stability and risk associated with the loan.
What Is ‘credit-netting’?
A system to reduce the number of credit checks on financial transaction is known as credit-netting. Such agreement occurs normally between large banks and other financial institutions. It places all the future and current transaction into one agreement, removing the need for credit cheques on each transaction.
What Is ‘credit Check’?
A credit check or a credit report is done by the bank on a basis of an individual’s financial credit. It is done in order to make sure that an individual is capable enough of meeting the financial obligation for its business or any other monetary transaction. The credit check is done keeping few aspects in concern like your liabilities, assets, income etc.
What Is Inter-bank Deposit?
Any deposit that is held by one bank for another bank is known as inter-bank deposit. The bank for which the deposit is being held is referred as the correspondent bank.
What Is Iloc (irrevocable Letter Of Credit)?
It is a letter of credit or a contractual agreement between financial institute (Bank) and the party to which the letter is handed. The ILOC letter cannot be cancelled under any circumstance and, guarantees the payment to the party. It requires the bank to pay against the drafts meeting all the terms of ILOC.
It is valid upto the stated period of time. For example, if a small business wanted to contract with an overseas supplier for a specified item they would come to an agreement on the terms of the sale like quality standards and pricing, and ask their respective banks to open a letter of credit for the transaction.
The buyer’s bank would forward the letter of credit to the seller’s bank, where the payment terms would be finalized and the shipment would be made.
What Is The Difference Between Bank Guarantee And Letter Of Credit?
There is not much difference between bank guarantee and letter of credit as they both take the liability of payment. A bank guarantee contains more risk for a bank than a letter of credit as it is protecting both parties the purchaser and seller.
What Is Cashier’s Cheque?
A cashier cheque issued by the bank on behalf of the customer and takes the guarantee for the payment. The payment is done from the bank’s own funds and signed by the cashier. The cashier cheque is issued when rapid settlement is necessary.
What Do You Mean By Co-maker?
A person who signs a note to guarantee the payment of the loan on behalf of the main loan applicant’s is known as co-maker or co-signer.
What Is Home Equity Loan?
Home equity loan, also known as the second mortgage, enables you to borrow money against the value of equity in your home. For example, if the value of the home is $1, 50,000 and you have paid $50,000. The balance owed on your mortgage is $1, 00,000. The amount $50,000 is an equity, which is the difference of the actual value of the home and what you owe to the bank.
Based on equity the lender will give you a loan. Usually, the applicant will get 85% of the loan on its equity, considering your income and credit score. In this case, you will get 85% of $50,000, which is $42,500.
What Is Line Of Credit?
Line of credit is an agreement or arrangement between the bank and a borrower, to provide a certain amount of loans on borrower’s demand. The borrower can withdraw the amount at any moment of time and pay the interest only on the amount withdrawn.
For example:
if you have $5000 line of credit, you can withdraw the full amount or any amount less than $5000 (say $2000) and only pay the interest for the amount withdrawn (in this case $2000).
How Bank Earns Profit?
The bank earns profit in various ways:
a) Banking value chain
b) Accepting deposit
c) Providing funds to borrowers on interest
d) Interest spread
e) Additional charges on services like checking account maintenance, online bill payment, ATM transaction.
What Are Payroll Cards?
Payroll cards are types of smart cards issued by banks to facilitate salary payments between employer and employees. Through payroll card, employer can load salary payments onto an employee’s smart card, and employee can withdraw the salary even though he/she doesn’t have an account in the bank.
What Is The Card Based Payments?
There are two types of card payments:
a) Credit Card
b) Debit Card
What Ach Stands For?
ACH stands for Automated Clearing House, which is an electronic transfer of funds between banks or financial institutions.
What Is ‘availability Float’?
Availability Float is a time difference between deposits made, and the funds are actually available in the account. It is time to process a physical cheque into your account.
For example:
you have $20,000 already in your account and a cheque of another $10,000 dollar is deposited in your account but your account will show balance of $20,000 instead of $30,000 till your $10,000 dollar cheque is cleared this processing time is known as availability float.
What Do You Mean By Term ‘loan Maturity’ And ‘yield’?
The date on which the principal amount of a loan becomes due and payable is known as ‘Loan Maturity’. Yield is commonly referred as the dividend, interest or return the investor receives from a security like stock or bond, interest on fix deposit etc. For example, any investment for $10,000 at interest rate of 4.25%, will give you a yield of $425.
What Is Cost Of Funds Index (cofi)?
COFI is an index that is used to determine interest rates or changes in the interest rates for certain types of Loans.
What Is Convertibility Clause?
For certain loan, there is a provision for the borrower to change the interest rate from fixed to variable and vice versa is referred as Convertibility Clause.
What Is Charge-off?
Charge off is a declaration by a lender to a borrower for non-payment of the remaining amount, when borrower badly falls into debt. The unpaid amount is settled as a bad debt.
What ‘libor’ Stands For?
‘LIBOR’ stands for London Inter-Bank Offered Rate. As the name suggest, it is an average interest rate offered for U.S dollar or Euro dollar deposited between groups of London banks.
It is an international interest rate that follows world economic condition and used as a base rate by banks to set interest rate. LIBOR comes in 8 maturities from overnight to 12 months and in 5 different currencies. Once in a day LIBOR announces its interest rate.
What Do You Mean By Term ‘usury’?
When a loan is charged with high interest rate illegally then it is referred as ‘Usury’. Usury rates are generally set by State Law.
What Is Payday Loan?
A pay-day loan is generally, a small amount and a short-term loan available at high interest rate. A borrower normally writes post-dated cheques to the lender in respect to the amount they wish to borrow.
What Do You Mean By ‘cheque Endorsing’?
‘Endorsing cheque’ ensures that the cheque get deposited into your account only. It minimizes the risk of theft. Normally, in endorsing cheque, the cashier will ask you to sign at the back of the cheque. The signature should match the payee. The image over here shows the endorsed cheque.
What Are The Different Types Of Loans Offered By Banks?
The different types of loans offered by banks are:
a) Unsecured Personal Loan
b) Secured Personal Loan
c) Auto Loans
d) Mortgage Loans
e) Small business Loans
What Are The Different Types Of ‘fixed Deposits’?
There are two different types of ‘Fixed Deposits’:
Special Term Deposits:
In this type of ‘Fixed Deposits’, the earned interest on the deposit is added to the principal amount and compounded quarterly. This amount is accumulated and repaid with the principal amount on maturity of the deposit.
Ordinary Term Deposits:
In this type of ‘Fixed Deposits’, the earned credit is credited to the investor’s account, once in a quarter. In some cases, interest may be credited on a monthly basis.
The earned interest on fixed deposits is non-taxable. You can also take a loan against your fixed deposit.
What Are The Different Types Of Loans Offered By Commercial Banks?
Start-Up Loans:
This type of Loan is offered to borrower to start their business and can be used to build a storefront, to acquire inventory or pay franchise fees to get a business rolling.
Line of Credit:
Lines of credit are another type of business loan provided by commercial banks. It is more like a security for your business; the bank allows the customer to withdraw the amount from readily available funds in an adverse time. Customer or Company can pay back over time and withdraw money again without going into the loan process.
Small Business Administration Loans:
It is a Federal Agency (U.S) that gives funding to small businesses and entrepreneurs. SBA (Small Business Administration) loans are made through banks, credit unions and other lenders who partners with SBA.
What Is ‘bill Discount’?
‘Bill Discount’ is a settlement of the bill, where your electricity bill or gas bill is sold to a bank for early payment at less than the face value and the bank will recover the full amount of the bill from you before bill due date. For example, electricity bill for XYZ is $1000; the electricity bill company will sell the bill to the bank for 10% to 20% discount to the face value.
Here, the bank will buy the electricity bill for $900 whose face value is $1000, now the bank will recover, full amount of bill from the customer i.e $1000. If the customer fails to pay the bill, the bank will put interest on the outstanding bill and ask the customer for the payment.
What Is ‘bill Purchase’?
In ‘Bill Purchase’ the loan will be created for the full value of the draft and the interest will be recovered when the actual payment comes. For example, a ‘Sight draft’ is presented for which the loan is created for 100% of the draft value. The money is received after 7 days, and then the interest will be recovered for 7 days along with the principal amount.
What Is ‘cheque Discount’?
Cheque discounting service is offered only by few banks. For instance, if you have a cheque of $3000 outstation and the cheque will take 7 seven days for clearance, then bank will offer you a service for early payment.
The bank can make an early payment, but they will pay only for certain percentage of the actual amount, here they will pay you $2000 but they will charge interest on it and the remaining $1000 will be paid, once the outstation cheques get clear.