Banking Terms

 

 

 

GLOSSARY OF BANKING TERMS

 

 

Accrued Interest

Interest earned but not yet received.

Acquisition

Purchase of controlling interest in a firm, generally through tender offer

 

for the target shares.

Actuary

Insurance company official, responsible for estimating future claims and

 

disbursement and for calculating necessary fund and premium levels.

ADS

Authorized Dealers

Advising Bank

A Bank usually located in the country of residence of an Exporter, used

 

by an Importer’s bank to authenticate a Letter of Credit before it is passed on to the Exporter.

AEZs

Agricultural Export Zones

Affidavit

A written statement, sworn to be true by the person signing it, before

 

someone authorized by court of law.

Agent Bank

A participating bank in a syndicated loan that handles all the operations

 

and deals with the borrower on behalf of the members of the syndicate.

AIDB

All India Development Bank

AIFI

All India Financial Institution

ALCO

Asset-Liability Management Committee

ALM

Asset/ liability management involves a set of techniques to create value

 

and manage risks in a bank.

AMC

Asset Management Committee

American                      Depository

 

Receipt (ADR)

A certificate registered in the holder’s name or as a bearer security giving

 

title  to  a  specified  number  of  shares  in  a  non-US-based  company deposited in a bank outside the USA. These certificates are traded on US stock exchanges.

American option

An option that can be exercised on or any time before the date of expiry.

Amortization

Process of full payment of debt in installments of principal and earned

 

interest over a definite time.

Amount at risk

Balance of the sum payable not covered by reserves, potentially falling on

 

the net worth (net assets) of the company.


 

 

 

Annuity

Fixed amount of cash to be received every year for a specified period of

 

time.

APEDA

Agricultural   and    Processed   Food    Products    Exports                       Development

 

Authority.

Arbitrage

Simultaneous  purchase  and  sale  of  identical  or  equivalent  financial

 

instruments or commodity futures so as to benefit from difference in their price relationship.

ARF

Automatic Refinance Facility

ASB

Accounting Standards Board

Asset/Liability Risk:

A risk  that  current  obligations/  liabilities  cannot  be  met  with  current

 

assets. A fundamental risk in all organizations, which should manage the risk and maintain liquidity or become insolvent.

Assets

Things that one owns which have value in financial terms.

Assignment

Receipt of an exercise notice by an option writer (seller) that obligates

 

him to sell (in the case of a call) or purchase (in the case of a put) the underlying security at the specified strike price.

Audit Risk

The risk of giving an incorrect audit opinion.

Automated                          Banking

 

Machines (ABMs)

Terminals that allow bank customers to perform many everyday banking

 

tasks, e.g., deposits, withdrawals, bill payments and transfers between accounts.

Automated                              Teller

 

Machines (ATMs)

A computerized machine used for banking transactions, e.g. depositing or

 

withdrawing money, making balance/ transaction inquiries and transfers; operated   through  magnetic  plastic  cards  with  the  held  of  personal identification numbers (PINs).

Available Balance

The portion of a customer’s account balance having no restrictions from

 

the bank and available for immediate withdrawals.

Average life

Weighted average of the maturities of various loans or bonds after taking

 

into account agreed amortization’s.

Back-end value

Amount paid to the remaining shareholders in the second stage of a two-

 

tier or partial tender offer.


 

 

 

Balance of Payment

Statement  showing  the  country’s  trade  and  financial  transactions  (all

 

economic transactions), in terms of net outstanding receivable or payable from other countries, with the rest of the world for a period of time.

Balance Sheet

Statement of assets and liabilities of a company at any particular time.

 

The assets on a balance sheet will always equal the liabilities plus the owner’s equity.

Balloon Payment

A large payment that may be charged at the end of a loan or lease.

Bank Credit

Includes  Term  Loans,  Cash  Credit,  Overdrafts,  Bills  purchased  &

 

discounted, Bank Guarantees, Letters of Guarantee, Letters of credit.

Bank Debits

The sum of the value of all cheques and other instruments charged against

 

the deposited funds of a bank’s customer.

Bank Rate

Interest rate paid by major banks if they borrow from RBI, the Central

 

Bank of the country.  The Bank Rate influences the rates of interest major banks/ financial institutions charge and pay their customers.

Bank Statement

A periodic  record  of  a  customer’s  account  that  is  issued  at  regular

 

intervals, showing all transactions recorded for the period in question.

Banker’s Acceptance

Negotiable time drafts, or bills of exchange, that have been accepted by a

 

bank which, by accepting, assumes the obligation to pay the holder of the draft the  face  value of the instrument on the specified maturity date. Bankers’  Acceptances  are  generally  used  to  finance  export,  import, shipment, or storage of goods.

Bankruptcy

A condition in which a firm (or individual) is unable to meet its (his)

 

obligations and,  hence,  its  (his)  assets  are  surrendered  to  a  court  for administration.

Basis Point

One-hundredth of one percentage point (i.e. 0.01%), normally used for

 

indicating spreads or cost of finance.

Bid/Bond Guarantee

A guarantee issued by a bank on behalf of a seller to a buyer to support

 

the sellers’ bid or tender for a contract.  If the sellers’ bid is accepted, the buyer can claim compensation under the guarantee.

BIFR

Board for Industrial and Financial Reconstruction.


 

 

 

Bill Discounting

Receiving payment on a bill of exchange prior to the bill’s maturity by

 

surrendering the bill for the face value less applicable interest for the time remaining up to maturity.

Bill of Exchange

An order written by the seller of goods instructing the purchaser to pay

 

the seller (or bearer of the bill) a specified amount on a specified future date.

Bill of Lading

A document which represents ownership of goods in transit.

Blue Chips

Shares in leading quoted companies that can be easily bought and sold

 

without influencing their price (liquidity) and are regarded as low-risk investments.

Bond

A negotiable instrument evidencing debt, under which the issuer promises

 

to pay the holder its face value plus interest as agreed.

Book Value

The cost price of an asset less accumulated depreciation.

Bought financing

Short-term financing arranged by a bank for offering continuing source of

 

funds pending receipt of loan/bond issue proceeds.

BR Act

Banking Regulation Act.

Brand name capital

A  firm’s  reputation;  the  result  of  non-salvageable  investment  which

 

provides customers  with  an  implicit  guarantee  of  product  quality  for which they are willing to pay a premium.

Break-even point

Refers to the price at which a transaction produces neither a gain nor a

 

loss.

Bridge Loan

Temporary finance provided to a project until long-term arrangements are

 

made.

BSE

Bombay Stock Exchange

Bull

One who expects prices to rise.

Bull Market

A market in which prices keep rising.

Bullet redemption

Repayment of a debt in one lump sum at the end of the maturity period.

 

A common practice in Euro markets in respect of bond issues.

Bundling

Provision of  more  than  one  product  or  service  to  a  customer  at  an

 

inclusive price e.g. ‘free’ life insurance with a loan.


 

 

 

Bust-up takeover

An acquisition followed by divestment of some or all of the operating

 

units of the acquired firm which are presumably worth more in pieces than as a going concern.

Buy-back

A public company, which buys its own shares, by tender offer, in open

 

market, or in a negotiated buy-back from a large block holder.

CIF

Cost, Insurance and Freight

Call Date

Date on which a bond may be redeemed before maturity at an option of

 

the issuer.

Call Money

Loaned funds that are repayable upon the request of either party.

Call Option

An option that gives its holder the right to buy an asset at a fixed price

 

during a certain period

Call Provision

A feature of a bond that entitles the  issuer to retire the bond before

 

maturity

Cap

A ceiling on the interest rate on a floating-rate note.

Capital

Funds invested in a firm by the owners for use in conducting the business.

Capital Adequacy Ratio

 

(CAR)

A ratio of total capital divided by risk-weighted assets and risk-weighted

 

off-balance sheet items.  A bank is expected to meet a minimum capital ratio specifically prescribed by the Regulator.

Capital budget

The list of planned capital expenditures prepared usually annually

Capital Gain and Loss

The difference between the price that is originally paid for a security and

 

cash proceeds at the time of maturity (face value of bond) or at the time of sale (selling price of a bond or stock).  When the difference is positive, it is a gain, but when it is negative, it is a loss.

Capital investments

Money used to purchase permanent fixed assets for a business, such as

 

machinery,   land   or   buildings   as   opposed   to   day-to-day   operating expenses.

Capital Market

Market in which financial instruments are bought and sold.

Capital Structure

The composition of a firm’s long-term financing consisting of equity,

 

preference shares, and long-term debt.

Cash cows

Business segments, having a high market share in low growth product


 

 

 

 

markets, which generate more cash flow than needed for reinvestment.

Cash Credit (CC)

An arrangement whereby the bank gives a short-term loan against the

 

self-liquidating security.

Cash Discount

A discount given to buyers for cash rather than credit purchase.

Cash flow forecast

An estimate of when and how much money will be received and paid out

 

of a business.  It usually records cash flow on a month-by-month basis.

Certificate   of                      Deposit

 

(CD)

A negotiable instrument issued by a bank evidencing time deposit

Cheque

A written order on a bank instrument for payment of a certain amount of

 

money.

CIBIL

Credit Information Bureau of India Ltd.

CLB

Company Law Board

Clean-up merger

Also called Take-out merger.  The consolidation of the acquired firm into

 

the acquiring firm after the acquirer has obtained control.

CMS

Cash Management Services.

Collateral

Property (real,  personal  or  otherwise)  pledged  as  security  for  a  loan.

 

Also, any supplementary promise of payment, such as a guarantee.

Collusion

A secret  agreement  between  two  or  more  persons  to  defraud  another

 

person of his or her right in order to achieve an unlawful objective.

Commercial                             Credit

 

Risk

The  risk  of  loss  from  providing  credit  to  corporate  counter-parties.

 

Extension of credit can take the form of direct loans and contingencies/

 

guarantees.

Commercial Paper (CP)

Issue  of  short-term  notes,  without  any  underwriting,  representing  a

 

promise to repay the amount at a specified future date.

Commitment fee

A fee charged by a bank in respect of an unused balance of a line of credit

 

or sanction of loan designed to offset the bank’s cost of keeping the funds available.

Compound Interest

Interest payable (receivable) on interest.

Conglomerate

A combination of unrelated firms; any combination  that is not vertical or

 

horizontal


 

 

 

Consumer  Price  Index

 

(CPI)

An index that measure movements in the average price of products and

 

services.

Convertible Bond

A bond that is convertible into common stock.

Convertible Security

Bond or preferred stock which is convertible into equity shares generally

 

at the option of the holder

Corporate Banking

Banking services for large firms.

Corporate Governance

A system by which organizations are directed and controlled.  Board of

 

directors are responsible for the governance of their organizations.

Corporate Tax

A tax on the profits of firms, as distinct from taxation of the incomes of

 

their owners.

Coupon Rate

The stated interest rate on a bond.

Covenant

A definite provision in a loan contract.

CRAR

Capital to Risk-Weighted Assets Ratio.

CRAs

Credit Rating Agencies.

Credit Crunch

Refers to a situation where supply of credit falls even though there is

 

sufficient demand for it.

Credit History

A record of how a person or company has borrowed and repaid debts.

Credit Risk

The risk of loss from failure of the counterparty to perform as agreed

 

(contracted).

Credit Scoring System

A statistical system used to determine whether or not to grant credit by

 

assigning   numerical   scores    to   various   characteristics                   relating       to creditworthiness.

Creditworthiness

A creditor’s measure of a consumer’s or company’s past and future ability

 

and willingness to repay debts.

CRISIL

Credit Rating and Investment Services of India Limited

Cross default

Two loan agreements connected by a clause that allows one lender to

 

recall the loan if the borrower defaults with another, and vice versa.

Cumulative Dividends

A feature of preferred stock that requires all past dividends on preferred

 

stock to be paid before any equity dividends are paid.

Currency basket

Arrangements whereby two or more currencies are clubbed together with


 

 

 

 

defined weights, and whose exchange rate/ interest rate is determined by

 

computing weighted average market rates.

Currency Market Risk

The risk of loss from having positions in any of the currency markets.

 

The risk can be from outright positions.  It can also reside in the balance sheet or in the income flows of a company.

Current assets

Short-term assets, constantly changing in value, such as stocks, debtors

 

and bank balances.

Current liabilities

Short-term liabilities, due to be paid in less than one year, such as bank

 

overdrafts, money owed to suppliers and employees.

Current Yield

The yield on a security resulting from dividing the interest payment or

 

dividend on it by its current market price.

D/A (documents against

 

acceptance)

Refer to shipping documents presented to a bank on a collection basis to

 

be passed to the buyer when he or she accepts a bill of exchange.  The bank holds the bill of exchange until it ends (maturity) when they ask the buyer to pay the seller.

D/P (documents against

 

payment)

Refer to shipping documents presented to a bank on a collection basis to

 

be passed to the buyer (drawee) when payment is made.

DCF

Discounted Cash Flow.

Debenture

An  instrument  for  raising  long-term  debt.   Debentures  in  India  are

 

typically secured by tangible assets.

Debt/equity ratio

A comparative ratio of debt and equity used to measure the gearing/

 

health of a business.

Default

Generally, failure to satisfy an obligation when due, or the occurrence of

 

one of the defined events of default agreed to by the parties under a contract.

Default Risk

The risk  that  a  borrower  may  not  repay  principal  and/or  interest  as

 

originally agreed.

Default Risk Premium

The component of a required interest rate that is based on the lenders’

 

perceived risk of default.

Depreciation

An annual deduction of a part of the cost of an asset.  In general, it means


 

 

 

 

a decline in market value.

DFI

Development Financial Institution.

Direct Financing

Provision of funds for investment to the ultimate user of funds.

Direct taxes

Taxes which affect the consumer directly, such as income tax, corporate

 

tax, capital gains tax etc.

Discount

The amount by which a bond or preferred stock sells below its par or face

 

value.  In foreign exchange market, it is the amount by which forward price  is  less  than  the  spot  price.           In  general,  it  means  an  extent  of reduction in the price / value of the asset/  product which is given when it is sold.

Dividends

Company earnings that may be paid out to shareholders according to the

 

number of shares or stocks they hold.  Dividends can be earned on stocks as also units of mutual funds.

Documentary Credit

Written undertaking by a bank on behalf of an importer authorizing an

 

exporter to  draw  drafts  on  the  bank  up  to  a  specified  amount  under specific  terms and conditions.       They are used to facilitate international trade.  Also called Letter of Credit (LC).

DRT

Debt Recovery Tribunal.

Due diligence

While finalizing documentation, the lead manager and the legal counsel

 

conduct a thorough review of the borrowing entity with reference to the financials,  legality, and all such matters relevant in a public offering of securities.

Earning Yield

The ratio of earning per share to market price of the share.

ECBs

External Commercial Borrowings.

ECGC

Export Credit Guarantee Corporation.

Effective rate of interest

The percentage rate of return on an annual basis, reflecting the effect of

 

intra-year compounding.

Entrepreneur

A person who conceives, starts and manages a business.

EOUs

Export-Oriented Units.

Equitable mortgage

A type of mortgage under which one still owns the property which is


 

 

 

 

security for the mortgage.  The owner can occupy or live in the property.

Equity

The value of a business after all debts and other claims are settled.  Also,

 

the amount of cash a business owner invests in a business and/ or the difference between the price for which a property could be sold and the total debts registered against it.

Escrow Account

An account for which a bank acts as an uninterested third party (custodian

 

/ depository) to ensure compliance with the terms of the deal between two parties only upon the fulfillment of some stated conditions.  The account becomes operative on the occurrence of the stated event.  Banks hold such accounts in which funds accumulate to pay taxes, insurance on mortgage property, etc.

Exchange Rate

The rate at which one currency may be exchanged for another.

Exchange Rate Risk

The  risk   that   changes   in   currency   exchange   rates   may   have   an

 

unfavourable impact on costs or revenues of economic units.

Excise duties

Duties levied on items manufactured within the country and paid by the

 

manufacturer.

Exports

Products and services sold to other countries.

Face Value

The stated principal amount of a financial instrument.

Factoring

Sale of receivables to a financial institution usually on a ‘non-recourse’

 

basis.

Fixed assets

Assets such as land, buildings, machinery or property used in operating a

 

business that will not be consumed or converted into cash during the current accounting period.

Fixed Rate

A predetermined rate of interest applied to the principal of a loan or credit

 

agreement.

Foreign Exchange

Various instruments  used  to  settle  payments  for  transactions  between

 

individuals  or   organizations   using   different   currencies   (e.g.   notes, cheques, etc.)

Foreign Exchange Rate

The value of a nation’s currency in terms of another nation’s currency.

Foreign Trade

The exchange of goods between two nations.


 

 

 

Forfaiting

A form of export finance in which the forfaiter accepts, at a discount from

 

the exporter,  a  bill  of  exchange  or  promissory  note  (note)  from  the exporter’s  customer; the forfaiter in due course collects payment of the debt.          Such  notes  are  normally  guaranteed  by  the  customer’s  bank. Maturities are normally up to three years.

Forward Contract

A contract in which one party agrees to buy, and the other to sell, a

 

specified product at a specified price on a specified date in the future.

Forward Cover

Forward purchase or sale of foreign currency to offset an anticipated

 

future cash flow.

FRNs

Floating Rate Notes.

Funded debt

Generally, a short-term debt that has been converted into long-term debt

 

funding.

Futures

Contracts to  buy  something  in  the  future  at  a  price  agreed  upon  in

 

advance. First developed in the agriculture commodity markets but often involve foreign exchange, and Government bonds.

Going-concern value

The value of the firm as a whole over and above the sum of the values of

 

each of its parts; the value of an organization’s learning and reputation.

Goodwill

The excess of the purchase price paid for a firm over the book value

 

received. Recorded on the acquirers’ balance sheet.

Gross               Domestic

 

Product (GDP)

The total of market value of the finished goods and services produced in a

 

country in  a  given  year.    Comprising  three  sectors  viz.  Agriculture, Industry & Services.

Gross National Product

 

(GNP)

The total market value of finished goods and services produced in the

 

country in  a  given  year,  plus  the  income  of  domestic  residents  from investments made abroad, minus the income earned by foreigners abroad from the domestic market.

Gross Profit margin

The difference between the sales a business generates and the costs it pays

 

out for goods.

Guaranty

The undertaking of responsibility by one party for another party’s debt or

 

obligation to perform some specific act or duty.   Although the original


 

 

 

 

debtor is responsible for the debt, the guarantor becomes liable in the

 

event of a default.

Haircut

The difference between the market value of a security and its value when

 

used as collateral.   The haircut is intended to protect a collateral taker from losses due to declines in collateral values.

Hedge

One investment purchased against another investment in order to counter

 

any loss made by either.

Holding company

A company which controls another company, usually by owing more than

 

half of its shares.

ICD

Inter-Corporate Deposit.

Imports

Goods and services that a country buys from other countries.

Indemnity

If someone promises to compensate someone else for loss or damage, it is

 

called an indemnity.

Indirect financing

The process by which deficit spending units obtain funds from financial

 

intermediaries who, in turn, them from ultimate surplus spending units.

Indirect taxes

Taxes, which  are  charged  on  goods  produced,  imported  or  exported:

 

Excise and Customs duties.

Industry life cycle

A conceptual model of the different stages of an industry’s development.

 

1.  Development stage: New product, high investment needs, losses;

 

2.  Growth    stage:    Consumer    acceptance,    expanding                sales,     high profitability, ease of entry;

3.  Maturity stage: Sales growth slows, excess capacity, prices and profits decline – key period for merger strategy;

4.  Decline  stage:  Substitute  products  emerge,  sales  growth  declines, pressure for mergers to survive.

Inflation

A percentage rate of change in the price level.

Inflation Premium

A premium for anticipated inflation that investors require in addition to

 

the pure rate of interest.

Initial  Public  Offering

 

(IPO)

The first offering to the public of common stock, e.g. of a former privately

 

held firm, or a portion of the common stock of a hitherto wholly-owned


 

 

 

 

subsidiary.

Insolvent

The condition when one is unable to pay one’s debt obligations when due.

Insufficient Funds

When an account balance is inadequate to cover a cheque that has been

 

written and presented for payment.

Insurance

A contract whereby one party agrees to pay a sum to another party for a

 

fee (premium) in the event that the latter suffers a particular loss.   The person or firm that undertakes the risk is the insurer.  The party desiring to be protected from loss is the insured party.

Intangible assets

Assets that cannot be touched.  Examples are goodwill and patent rights.

Internal Rate of Return

 

(IRR)

The rate of discount at which the net present value of an investment is

 

zero.

Lease

A contractual arrangement whereby one party (the lessor) grants the other

 

party (the lessee) the right to use an asset in return for periodic rental payments.

Lessee

One who takes property on lease.

Lessor

A person,  Corporation,  or  other  legal entity that leases property to a

 

lessee.

Letter of Credit (LC)

A formal document issued by a bank on behalf of a customer, stating the

 

conditions under which the bank will honour the commitments of the customer.

Lien

A lender’s claim on assets offered as security for a loan.

Line of Credit

A pre-approved credit facility (usually for one year) enabling a bank

 

customer to borrow up to the specified maximum amount at any time during the relevant period of time.

Liquidation

Divestment of all the assets of a firm so that the firm ceases to exist.

Liquidity

The extent to which or the ease with which an asset may quickly be

 

converted into cash with the least administrative and other costs.

Loan Document

A business  contract  by  which  a  borrower  and  lender  enter  into  an

 

agreement.    Loans  are  classified  according  to  the  lender  or  borrower involved,  whether  or  not  collateral  is  required,  the  time  of  maturity,


 

 

 

 

conditions of repayment, and other variables.

Loan Risk

This is the risk of loss from loaning money and having the borrower fail

 

to repay, either due to genuine reasons or willfully.

Long-term Liabilities

Money that  one  owes  over  a  period  longer  than  12  months,  such  as

 

mortgages, bank loans and other obligations.

Margin

A part of the value of security, which is not given as a loan by the bank or

 

financial institution.

Market Capitalization

The total value, at market prices, of the securities at issue for a company

 

or a stock market or sector of the stock market.  Calculated by multiplying the number of shares issued by the market price per shares.

NBFC

Non-Banking Finance Companies.

NCD

Non-Convertible Debenture.

Net Present Value

Capital budgeting criterion, which compares the present value of cash

 

inflows of a project discounted at the risk-adjusted cost of capital to the present value of investment outlays discounted at the risk-adjusted cost of capital.

Net Worth

Book value of a company’s common stock, surplus, and retained earnings.

Non Performing Assets

 

(NPA)

When due payments in credit facilities remain overdue above a specified

 

period, then such credit facilities are classified as NPA.

Non-Recourse

 

Discounting

Purchase from the seller of accepted term Bills of Exchange at a discount

 

to allow for funding of the advance from the discount date until the maturity date  of the bills.          When the discount is provided on a non- recourse basis the financing bank has no recourse to the seller in the event of non-payment by the buyer or the buyers’ bank.

NSE

National Stock exchange of India Limited.

Obligation

The responsibility to perform some act or pay a sum of money when due.

OD

Overdraft

Off-Balance Sheet

Includes all banking transactions that do not appear on the balance sheet

 

of a bank as an asset or as a debt.  Includes all commitments for which a cash flow  arises conditional on a specific event.                                                                                      For instance, a loan


 

 

 

 

guarantee will create an obligation only if there is a default.  Derivatives

 

are a form of off-balance sheet transactions.

On-Line

A computer system where input data are processed as received and output

 

data are transmitted as soon as they become available to the point where they are required.

Open-End Credit

Commonly referred to as a Line of Credit. May be used repeatedly up to a

 

certain limit; also called a Charge Account or Revolving Credit.

Open-End Lease

Often, referred to as a finance lease. A lease that may involve a balloon

 

payment based on the value of the property when it is returned.

Operating Cycle

The length of time taken by a firm to produce its final product, sell it to

 

customers, and collect proceeds of the sale in cash.

Operating Lease

Short-term, cancelable lease.

Operating synergy

Combining  two  or  more  entities  results  in  gains  in  revenues  or  cost

 

reductions because of complementarities or economies of scale or scope.

Operational Risk

Includes all risks not included in market risks and credit risks, such as

 

losses arising from fraud, failure in computer systems and data entry errors.

Opportunity Cost

The rate of return that can be earned on the best alternative investment.  In

 

general, the gain or return on the next best investment opportunity or the next best use of resources, which is forgone by putting the resources to a given use.

Option

A formal contract which grants the holder of the option the right to buy or

 

sell a certain quantity of an underlying interest or asset at a stipulated price within a specific period of time.

Option Contract

A contract that gives the buyer the right, but not the obligation, to buy or

 

sell an underlying asset by (or on) a specific date for a specific price.  For this right the purchaser pays a premium.

Overdraft System

The system in which the borrower is allowed to overdraw on his current

 

account with the banker upto a certain specified limit during a given period.


 

 

 

Par Value

The value of a security when it is issued.  For bonds and preferred stock,

 

par value is equivalent to face value.

Partial Shipment

A load sent in more than one consignment.   In a Letter of Credit, the

 

buyer can say whether this is allowed or not allowed.

Partnerships

Shared ownership among two or more individuals, some of whom may,

 

but do not necessarily, have limited liability with respect to obligations of the group. There is a written agreement among partners detailing the terms              and             conditions             of    participation   in    a    business            ownership arrangement.

Pass                  Through

 

Certificates

Debt instruments backed by a portfolio of assets.

Payback period

Length of time required for an asset to generate cash flows just enough to

 

cover the initial outlay.

Plain                    Vanilla

 

Transactions

The  most  common  and  generally  the  simplest  types  of  derivatives

 

transaction.  Transactions that have unusual or less common features are often called exotic or structured.

Pledge

If someone pledges goods, they let a second person take possession of the

 

goods, but the person pledging the goods still owns them.  It is often done as security  for money owed or to make sure that something is done as promised.

Power of Attorney

A power of attorney is a document, which gives power to the person

 

appointed by it to act for the person who signed the document.

Prepayment

Payment of the principal amount of a loan ahead of the scheduled date.

Present Value

The discounted value of a payment or stream of payments to be received

 

in future, taking into consideration a specific interest or discount rate. Present Value represents a series of future cash flows expressed in today’s value.

Prime     Lending               Rate

 

(PLR)

The rate of interest charged on loans by banks to their most creditworthy

 

customers.

Principal

Amount of debt that must be repaid. Also means a person who deals in


 

 

 

 

securities on his own account and not as a broker.

Product Differentiation

Development of a variety of product configurations to appeal to a variety

 

of consumer tastes.

Product Life Cycle

A conceptual model of the stages through which products or lines of

 

businesses pass.   Includes development, growth, maturity, and decline. Each stage presents its own threats and opportunities.

Product Mix

The composite of products offered for sale by an organization.

Productivity

The amount of physical output for each unit of productive unit.

Promissory Note

A signed undertaking from one party containing a promise to pay a stated

 

sum to a specified person or a company at a specified future date.

PSB

Public Sector Bank

PSE

Public Sector Enterprise

PSU

Public Sector Undertaking

Purchasing            Power

 

Parity

The concept that homogeneous goods cannot have more than one price

 

measured in any one currency.   If the price increases domestically, the domestic currency will depreciate so that the price denominated in foreign currency remains the same.

Pure         Conglomerate

 

Merger

A combination of firms in non-related business activities that is neither a

 

product-extension nor a geographic-extension merger.

Rating

Refers to the credit quality of a counterparty.  External ratings are given

 

by rating agencies (ranging from AAA very safe asset to C).                                                                                         Internal ratings are granted by the bank itself.

Ratio

Comparison of two figures used to evaluate business performances, such

 

as debt/equity ratio return on investment, etc.

Reconciliation

Checking all bank account papers to make sure that the bank’s records

 

and customer’s records are in sync.

Recourse

In the context of a sale of a loan by a bank to investors, they have the right

 

to call the guarantee from the bank should the borrower be unable to meet its obligations

Redemption

Redemption  means  paying  off  all  the  money  borrowed  under  an


 

 

 

 

agreement.

Resolution

A formal document expressing the intention of a board of directors of a

 

corporation.

Revolving     Letter                      of

 

Credit

A  Letter  of  Credit  in  which  the  value  of  the  Letter  of  Credit  is

 

automatically reinstated upon utilization.  A Letter of Credit may revolve by value, time or both.

Rights Issue

Issue of securities offered to existing shareholders/ bond holders on a pre-

 

emptive or priority basis.

Risk Assessment

A process used to identify and evaluate risks and their potential effect.

Sale

Transfer of  ownership  of  some  type  of  property  from  one  person  to

 

another, for some consideration.

Salvage

The attempt to get repayment of some portion of a loan obligation which

 

has already been written off the bank’s books.

Scale Economies

The reduction in per-unit costs achievable by spreading fixed costs over a

 

higher level of production.

SEBI

Securities and Exchange Board of India.

SEBs

State Electricity Boards.

Securitization

The process of transformation of a bank loan into tradable securities.  It

 

often involves the creation of a separate corporate entity, the Special Purpose  Vehicle  (SPV),  which  buys  the  loans  financing  itself  with securities that are sold to investors.

Selective Credit Control

 

(SCC)

Control of credit flow to borrowers dealing in some essential commodities

 

to discourage hoarding and black-marketing.

Senior Debt

Debt  which,   in   the   event   of   bankruptcy,   must   be   repaid   before

 

subordinated debt receives any payment.

Serial Bonds

Bonds that mature at specified intervals.

Series Bond

Bond which may be issued in several series under the same indenture.

Service Charge

A fee paid for using a service.

Service Provider

The organization which provides the outsourced service.

SEZ

Specific Economic Zone.


 

 

 

SFC

State Financial Corporation.

Short-term Loan

Loan to a business for less than one year, usually for operating needs.

SICA

Sick Industrial Companies (Special Provisions) Act.

Sinking Fund

A  fund  to  which  a  firm  makes  a  periodic  contribution  to  facilitate

 

retirement of debt.

Special Purpose Vehicle

A legal corporate entity created to buy loans from banks.  It finances itself

 

with securities issued to investors.

Stakeholder

Any individual or group who has an interest in a firm; in addition to

 

shareholders and bondholders, includes labour, consumers, suppliers, the local community, and so on.

Standby       Letter                     of

 

Credit

A guarantee issued by a bank, on behalf of a buyer that protects the seller

 

against non-payment for goods shipped to the buyer.  The buyer pays the seller  directly  for the goods and only if the buyer fails to pay does the seller claim under the Standby Letter of Credit.

Statement

All transactions in a bank account for a period of time.  Statements are

 

usually given once a month.

Statutory Audit

By law, certain companies need to have their accounts audited by suitably

 

qualified accountants.  This is called a statutory audit.

Stocks

Traded on a stock exchange, these are shares in a company.  Essentially,

 

one purchases shares in an exchange for owning a part of a company.

Swap

An agreement for an exchange of payments between two counterparties at

 

some point(s) in the future and according to a specified formula.

SWOT

Acronym  for   Strengths,   Weakness,   Opportunities   and   Threats;   an

 

approach  to  formulating  firm  strategy  via  assessment  of  a  firm’s capabilities in relation to the business environment.

Syndicate

Group of banks and financial institutions, which together contribute the

 

necessary financing for a transaction.

Syndicated Loans

Loans to a company backed by a group of banks in order to share the risk

 

in a  large  transaction  among  several  financial  institutions.                                                                                              There  is usually a lead bank and several participating banks.


 

 

 

Synergy

The “2 + 2 = 5” effect.   The output of a combination of two entities is

 

greater than the sum of their individual outputs.

Systematic Risk

The risk that the failure of one participant in a payment or settlement

 

system, or in financial markets generally, to meet its required obligations when  due  will  cause  other  participants  or  financial  institutions  to  be unable to meet their  obligations (including settlement obligations in a payment and settlement system) when due.

Take-out Merger

The second-step  transaction  which  merges  the  acquired  firm  into  the

 

acquirer and thus takes out the remaining target shares which were not purchased in the initial (partial) tender offer.

Tangible Assets

Physical assets such as plant, machinery, factories, and offices.

Tax Avoidance

Lawful agreement or re-arrangement of the affairs of an individual or

 

company intended to avoid liability to tax.

Tax Evasion

Fraudulent or illegal arrangements made with the intention of evading tax,

 

e.g. by failure to make full disclosure to the revenue authorities.

Tax Haven

An international banking and financial centre providing privacy and tax

 

benefits.

Tax Incentives

Tax benefits.   Most tax incentive measures fall into one or more of the

 

following categories: tax exemption (tax holiday); deduction from the taxable base; reduction in the rate of tax; tax deferment, etc.

Term Loan

A loan intended for medium-term or long-term financing to supply cash to

 

purchase fixed assets such as machinery, land or buildings or to renovate business premises.

Tier 1 Capital

Refers to core capital consisting of Capital, Statutory Reserves, Revenue

 

and other reserves, Capital Reserves (excluding Revaluation Reserves) and   unallocated   surplus/   profit   but   excluding   accumulated   losses, investments in subsidiaries and other intangible assets

Tier 2 Capital

Comprises Property Revaluation Reserves, Undisclosed Reserves, Hybrid

 

Capital,  Subordinated  Term  Debt  and  General  Provisions.                                                                                                  This  is

 

Supplementary Capital.


 

 

 

Title Deeds

Documents which prove who owns a property and under what terms.

Trade Creditors

Organisations, which are owed money for goods and services supplied.

Trade Debtors

Organisations, which owe money for goods and services supplied.

Trade Deficit

The amount by which merchandise imports exceed merchandise exports.

Transaction

Action in a bank account.    Could be a deposit, withdrawal, debit card

 

payment, service charge or interest payment.

Trust

An entity created for the purpose of protecting and conserving assets for

 

the benefit of a third party, the beneficiary- A contract affecting three parties, the settlor, the trustee and the beneficiary.

Trust Deed (Settlement

 

Deed,    Declaration              of Trust                  or Trust Instrument)

Document  that  lays  down  the  foundations  of  how  the  trustees  are  to

 

administer and manage the trust assets and how they are to distribute and dispose of trust assets during the lifetime of the trust.

Trustee

Trustees have a fiduciary duty to act in accordance with a trust deed and

 

for the benefit of the beneficiary (ies).

UCPDC

‘Uniform Customs and Practice for Documentary Credit’ developed by

 

the International  Chamber  of  Commerce  as  the  rules  that  govern  the operation of  Letter of Credit transactions worldwide.                                                                          ICC publication No.500 contains details of the rules currently in use.

Undervaluation

When a firm’s securities sell for less than their intrinsic, or potential, or

 

long-run value for one or more reasons.

Underwriting

The arrangement in which investment bankers undertake to ensure the full

 

success of the issue of securities.

Universal Bank

A bank or a financial institution that has the legal authority to offer all

 

financial  services  and  may,  thus,  be  engaged  in  securities  dealing, insurance,  underwriting, and the full range of more traditional banking services.

Value Creation

The difference between the value of an investment and the amount of

 

money invested by shareholders.

Variable Expenses

Costs of doing business that vary with the volume of business, such as


 

 

 

 

advertising costs, manufacturing costs and bad debts.

Variable Rate

A variable rate loan or credit agreement, calls for an interest rate that may

 

fluctuate over the life of the loan.  The rate is often tied to an index that reflects  changes in market rates of interest.  A fluctuation in the rate causes changes in either the payments or the length of the term.

VCF

Venture Capital Fund.

Venture Capital

Commonly refers to funds that are invested by a third party in a business

 

either as equity or as a form of secondary debt.

Vertical Merger

A combination of firms, which operate at different levels or stages of the

 

same  industry  manufacturer  mergers  with  a  type  company  (backward integration).

VRS

Voluntary Retirement Scheme

Winding up

Winding up of a company is done by paying the company’s creditors, and

 

then distributing monies left (if any) among the members.

Yield

(1)   A measure of the income generated by a bond.    The amount of

 

interest paid on a bond divided by the price.   (2)   The rate of discount which makes  the present value of the stream of future returns plus the terminal value of the asset equal to the current market price of the asset.

Zero Coupon Bond

A bond issued at a discount (i.e. below par value), earning no interest but

 

redeemable at its par value, thus providing a guaranteed capital gain.