BANK PROMOTION MATERIALS BANKING GLOSSARY – PART:003(IIB)

CREDIT SCORE:

Credit score is a three-digit number used by lenders to evaluate an individual’s creditworthiness. A good credit score means that a person can avail of credit at an interest rate lower than that offered to others. The score is based on a set of criteria that includes, among other  things, past loan history, number and amount of loans taken, number and amount of loans defaulted, filing for bankruptcy, credit card payment delays and balance outstanding in various loans.

NDS-OM:

The Negotiated Dealing System Order Matching (NDS-OM) is an electronic order matching system introduced by the RBI in February, 2002 with the objective of developing the Government securities market. RBI hopes that the NDS-OM will help usher in an automated electronic reporting and settlement process, facilitate electronic auctions and provide a platform for trading in Government securities on a negotiated basis as well as through a quote-driven mechanism. The NDS-OM is used voluntarily and co-exists with telephone based trading.

BANKASSURANCE:

In simple terms, bankassurance refers to banks selling insurance products to its customers. Previously, customers would approach banks for banking related services viz., opening accounts, taking a loan, etc, and would approach an insurance company to purchase insurance products. But now, a customer can buy insurance products in the bank that he/she is banking with. The synergy between banking and insurance arises out of two reasons – one, banks have a huge customer database that insurance companies can utilize to sell insurance products without needing to go through the hassle of compiling the same. Secondly, for banks, it is a source of fee-based income which helps them augment their income which is currently under tremendous pressure due to pressure on interest margins.

DIVIDEND YIELD:

Dividend yield refers to the dividend paid on a share and is expressed as a percentage of its market price. So, if a company pays 60 paise per share in respect of a financial year and its share price on the stock exchange is Rs. 25 per share then, the dividend yield would be 2.4%

MONEY LAUNDERING:

A process by which criminals try to hide or disguise the true origin and ownership of the proceeds of their criminal activities, thereby avoiding prosecution by the law. Money laundering is the conversion of profits of illegal activities into financial assets that appear to have legitimate origins. The financial system often serves as a conduit for converting the “black” money to “white”.  This is often done by setting up bogus offices to serve as “fronts” for the criminal activities, mixing the income earned from the illegitimate activities and so-called legitimate activities to show that the income so generated is legitimate. Such income is then placed in the banking system and used to fund criminal activities.

SHORT SELLING:

It refers to selling assets that one does not own, such as shares, in the hope of buying it more cheaply in the future, to make a neat profit. Short selling is made possible by borrowing the assets from another party and selling it to a third party. It is a popular trading strategy used by stock brokers in the stock markets around the world to book profits. The strategy is also used in other markets such as bond markets.

EARNINGS:

Earnings indicate the proportion of a company’s profits which belong to the shareholders and therefore a key figure in many share valuation yardsticks. They are expressed on a per share basis and are calculated by dividing a company’s weighted average number of shares outstanding for an accounting period into its profits after deductions for taxation, profits belonging to outside shareholders (minorities), extraordinary items and dividends to preference shareholders.

NRE RUPEE ACCOUNT:

Non Resident External  (NRE) rupee account is a type of deposit that can be opened by a non resident Indian (NRI) in any bank in India funded only with foreign currency, or transfers from a repatriable account (account from which money can be sent abroad freely). It is a fully repatriable account and funds in appropriate currency can be accessed anywhere with an ATM card. This account can be held jointly with another NRI only.

SOLVENCY MARGIN:

Solvency margin means the excess of assets an insurance company is required to maintain over its liabilities. Like capital adequacy ratio in banks, solvency margin is part of the prudential norms. To satisfy the solvency margins, insurers have to build up reserves as their business grows. For e.g. if a company collects Rs. 20 as premium and provides an insurance cover for Rs. 100, the risk element is Rs. 80. The margin is an indicator of having  buffer to ensure that the obligations under the insurance contracts can be met at any time.

FUTURES CONTRACT

Futures contract or simply futures, refers to a contract to trade any asset (equities, commodities etc) on a future date. While futures and forward contracts are both a contract to trade on a future date, there are a few differences between the two, which are as follows:

1)    Futures are always traded on an exchange, whereas forwards always trade over the counter.

2)    Futures are highly stantardised, whereas each forward is unique.

3)    The price of which the contract is finally settled is different – futures are settled at the settlement price fixed on the last trading date of the contract (i.e. at the end) whereas forwards are settled at the forward price agreed on the trade date (i.e. at the beginning)

4)    The credit risk of futures is much lower than that of forwards as the profit or loss on a futures position is exchanged in cash every day. After this, the credit exposure is again zero. However, the profit or loss on a forward contract is only realized at the time of settlement, so the credit exposure can keep on increasing.

MONEY CHANGERS:

Money Changers are persons/entities who are authorized to deal in India (to a limited extent) in foreign currencies or securities. Money Changer licenses are usually granted to those businesses which are engaged in the activities of travel agents, hotels, antique shops, jewellery shops, etc, that cater to the needs of foreign tourists or visitors and thereby help in earning foreign exchange for the country. Money Changers are permitted to deal in foreign currencies in the following manner:

1. Buying foreign exchange in the form of notes, coins and travellers’ cheques
2. Selling foreign exchange in the form of notes and coins

Money Changers usually fall in two categories:

1)    Full Fledged Money Changers (FFMC) who are authorized to undertake both buying and selling activities in foreign exchange with the public and

2)    Restricted Money Changers (RMCs) who are authorized only to purchase foreign exchange, subject to the condition that all collections are surrendered to an Authorised Dealer (usually a bank) or to a FFMC. Currently, the RBI has stopped issue/renewal of RMC licences, except in certain specific cases

REAL TIME GROSS SETTLEMENT – RTGS:

RTGS is a large value funds transfer system whereby financial intermediaries can settle interbank transfers for their own account as well as for their customers. The system effects final settlement of interbank funds transfers on a continuous, transaction-by-transaction basis throughout the processing day. RTGS eliminates the settlement risk in the case of interbank and high value transactions. The words “Real Time” suggest that the process is continuous and ongoing (unlike in the earlier days when clearance used to be only at the end of the day); the word “Gross” suggests that the entire amount is cleared (rather than the “net” amount as was the case previously) and finally, the word “Settlement” indicates settlement of dues. The RTGS  system went “live” on March, 26, 2004 through SBI, HDFC Bank, Standard Chartered Bank and Saraswat Coperative Bank. The advantages of RTGS for banks are mitigation of risks, especially in the case of high value transactions and faster transfer of funds across banks. It is also supposed to be costs of actually presenting the cheques for clearing. For customers, it means lesser waiting time to get their funds in the case of remittances.

FCNR –B

The Foreign Currency Non Resident or FCNR (B) account is meant for Non-Resident Indians (NRIs) who wish to hold the deposit in a foreign currency of their choice. The current options are the US dollar, Canadian Dollar, Pound Sterling, Australian Dollar, Deutshe Mark, Yen and Euro. The exchange rate risk is borne by the bank in which the deposit is held. Thus, the depositor need not worry about a depreciating rupee. The tenure of the deposit can be for a maximum period of 5 years. The maximum interest rate offered on FCNR (B) deposits is the LIBOR/SWAP rate of relevant maturity and currency as prevailing on the last working day of the week previous to the one in which the deposit has been accepted. The interest rate on the deposit is also freely repatriable. The FCNR deposit can be opened jointly with residents also. Loans against these deposits are available in India. The account can be opened by transferring funds from abroad or from existing NRE/FCNR (B) accounts

GLOBAL DEPOSITORY RECEIPTS:

Global Depository Receipts (GDRs) means any instrument in the form of Depository receipt or certificate (by whatever name it is called) created by the Overseas Depository Bank outside India and issued to non-resident investors against the issue of ordinary shares or Foreign Currency Convertible Bonds (FCCBs) of issuing company

E – PURSE:

Electronic purse or e-purse is a scheme whereby, any individual who wishes to be a member of the scheme can register himself/herself by going to the website and filling up a simple form which contains only his/her personal details. The registered person will thereafter own an account with the service provider. Such accounts are funded by transferring the money from bank accounts or credit card accounts. The money is credited into electronic purse account of the accountholder and the actual money is credited into the current account of the service provider with the clearing and settlement bank. The electronic purse accountholder can use the funds in his/her account either to transfer the funds to another electronic purse account or transfer to any other account anywhere (which is done through RTGS/DD) or transact on line purchases

CARBON CREDIT TRADING:

An emission unit or a carbon credit is equivalent to one tonne of carbon dioxide (or its equivalent in other greenhouse gases) that would otherwise have been emitted into the atmosphere. So, if a country reduces emission by one tonne of carbon dioxide it can earn one Carbon Credit  and it can trade this in the international market. Carbon credit trading is permitted under the Kyoto Protocol signed by 144 countries. Simply put, it is the buying and selling of emissions credits among the countries. It gives producers/companies the right to pollute up to a certain limit. Carbon Credit trading helps companies meet internationaly accepted emission control norms by purchasing these credits from companies who have surplus credits or have projects that generate carbon credits. Banks often help their clients (companies) buy carbon credits, locate buyers and sell them to a final buyer.

RIGHTS ISSUE:

An issue is a means by which a company raises new capital in the market. A rights issue is one such means which is generally used for raising equity capital but can be used to raise convertible capital as well. The principle on which a rights issue operates is that the existing shareholders in the company be given the right to maintain their "proportionate" share in the company's profits and assets and it also means that they should be allowed to maintain their proportionate voting power and that  is why they are given the first right to the new capital. Usually, shares in a rights issue are offered to the existing shareholders at a discount, as compared to the prevailing market price.

REINSURANCE:

To put it very lightly, reinsuring is insuring the insurer. Reinsurance is a means, by which an insurance company insures itself against the risk of losses. There are reinsurance companies which specialises in this. They usually underwrite (partly or wholly) the risks assumed by an insurance company. The main objective of reinsurance for the company going for reinsurance is to expand its risk taking capacity beyond what its size would normally allow. It also helps an insurance company in absorbing larger losses and reducing the amount needed to provide cover for the same.

MAGNETIC INK CHARACTER RECOGNITION(MICR):

The term MICR occurs with reference to a cheque. It refers to the digits printed in magnetic ink at the bottom of the cheque (in its front face) to facilitate automated processing. These numbers usually contain information about the bank on whom the cheque is drawn on, the account at that bank, the amount of the cheque and other information. On insertion of the instrument in the machine, the printed information is read by the machine. The advantage of the MICR system is that it minimises chances of error; enables easy clearing of cheques and boosts the transfer of funds thus facilitating operations. The position and content of the MICR line are governed by industry standards in the country.

MORTGAGE:

Mortgage is the legal agreement in which one party (usually referred to as the mortgagee) agrees to make a loan in return for which the borrower (mortgagor) agrees to pledge specific assets as security against the loan. Mortgages are commonly used in housing loan agreements where the borrower of a housing loan pledges his/her asset (the house) with the bank or NBFC that is lending money for purchasing such a house

KNOW YOUR CUSTOMER (KYC)

Know Your Customer (KYC) norms evolved out of the efforts of the international community in fighting the menace of money laundering (ML). The first mention of KYC procedures was made in the statement adopted by Basel Committee Reports of 1997 and 1998. It mentioned the KYC procedures and encouraged the banks' management and exhorted their central banks to draw guidelines for complete identification of customers and to map their transactions. Basically KYC procedures were evolved to prevent banks from being used intentionally or unintentionally by criminal elements for their money laundering activities

SPOT TRADING:

Trading in an asset (stocks, commodities, currencies) which is done immediately, i.e. where the delivery of the asset happens immediately is known as Spot Trading. The spot price is the price of an asset for immediate delivery. The word "immediate" means as soon as the delivery mechanism used between the buyer and the seller allows. The word spot is used to distinguish between the price of goods meant for immediate delivery and those that are meant to be delivered in the future.

NET WORTH

Net Worth of a firm or a company is its financial value to the shareholders. Net worth is usually reflected in a company's balance sheet. It is the difference between the assets of the company and all claims (liabilities) on the business other than those of ordinary shareholders. Net worth is also often referred to as net assets  or net block value.

SELF HELP GROUPS: SHGS:

A Self-Help Group (SHG) is a small voluntary association of poor people, preferably from the same socio-economic background, who do not have access to formal finance. They come together and form an association for the purpose of solving their common problems (usually relating to livelihood) through self help and mutual help. The SHG promotes small savings among its members. The savings are kept with a bank. This common fund is in the name of the SHG. The fund is used to average borrowings from banks for use by members. Usually, the number of members in one SHG should not exceed twenty.

REVERSE MORTGAGE:

Reverse Mortgage (also referred to as reverse annuity mortgage )is a credit instrument which is of use to existing owners of houses. Under reverse mortgage, the owner takes out a mortgage such that the lender pays the owner a fixed sum on a monthly basis for a stated period of time. The house, which is mortgage-free, is used as collateral by the lender (usually a bank). At the end of the term (say 20 years), the borrower needs to repay the lender, to avoid having to sell the property. A reverse mortgage works best for people in the older age groups as they would want the equity in their home and at the same time would not like to sell the property.

OPERATING PROFIT:

Earning from a firms normal business operations is the operating profit of the firm. It is the residual income of a bank after expenses have been deducted from its earning. In terms of definition the operating profit for a bank is defined as total earnings less total expenses, excluding provisions and contingencies

UNDERCAPITALISED:

Any firm or business whose capital structure (debts plus equity) is insufficient for effective business operations is said to be under capitalised. These are often seen as likely candidates for consolidation or merger with a bigger bank.

MICRO FINANCE INSTITUTIONS (MFIS)

Institutions which provide microfinance (small amounts of money) to the poor without any collateral are called as microfinance institutions. Such institutions restrict themselves to only providing microfinance (micro credit, micro insurance etc) to the poor. Though commercial banks are allowed to provide microfinance and indeed they do, they are not classified as microfinance institutions. Currently, there is no regulatory authority for the MFIs in India though a bill is in the offing which would make NABARD the sole regulatory authority for MFIs in India. The Grameen Bank of Bangladesh is the most notable microfinance institution  in the world.

OPEN INTEREST:

Within a Futures market, the open interest is the number of outstanding contracts. For every contract, there is a buyer and a seller. Therefore, the open interest changes only when new "long" and "short" traders come into the market, rather than when existing traders are simply covering their positions. Thus, open interest can be an indicator of sentiment; for e.g. simultaneous increase in both, the spot price of the asset and the number of open positions in it would imply a strong underlying demand

CORPORATE DEBT RESTRUCTURING:

Corporate Debt Restructuring (CDR) is a non-statutory voluntary mechanism applicable only to standard and substandard assets of banks and financial institutions with high priority given to potentially viable cases. Thus, the main concern of CDR is revival of units with potential. As in the U.K.,  Korea and Thailand, India too  has developed a CDR mechanism which ensures timely and transparent restructuring of corporate debts of viable entities affected by internal and external factors. Proposals under CDR entails mainly the following:

Extending the repayment period of loans

Converting the un-serviced portion of interest into term loans

Reducing the rate of interest on outstanding loans

STEP DOWN SUBSIDIARIES:

Step-down subsidiaries are ventures promoted by the holding company of a corporate group. Several companies float Special Purpose Vehicle (SPVs) that are subsidiaries of the acquiring firm.The step-down subsidiary acts as an arm of the holding company, which can be used for future acquisitions by the corporate group. In India till now the step-down subsidiary resorted to funding largely from overseas firms since Indian lenders do not finance acquisitions in a big way. By allowing the step-down subsidiary to raise funds on the strength of the Indian Corporates balance-sheet, more Indian money is available for buyouts.

SPREAD BETTING:

It is an off balance sheet financing as it is neither a debt nor an equity. Factoring is when a business (the client) sells its "accounts receivable" to a factoring agent (several banks are into factoring) at a discount. Under this sort of financing, the factor undertakes to buy the accounts receivables of a business at a discount with or without recourse to the client. It means instant cash for the client and is a source of income for the bank, as it buys the receivables at a discount and when it actually receives the due amount, the difference translates as income for the bank. Further, it is also a source of fee income for the bank as a finance charge and service and handling charges are collected from the client.

HELD TO MATURITY (HTM) AND AVAILABLE FOR SALE(AFS)

Accounting standards require a company (or a bank) to classify its debt and equity assets into three categories viz., Held to Maturity (HTM), Trading and Available for Sale (AFS). Debt securities which the company (or bank) has the intent and ability to hold to maturity are classified as HTM securities. The impact of temporary fluctuations in the prices of the securities is not reflected in the financials of the company. Equities do not have a maturity date and hence cannot be classified under HTM. Securities that are bought and sold principally for trading in the near future are classified as Tradings under HTM or Tradings that  are categorised under AFS are reported at fair value.