Banking Terminology

ACCRUAL BASIS

Accounting system in which revenues and expenses are recognized in the period in which they arise, regardless of when the cash for the revenue or the expenditure actually occurs. Accrual accounting is the only basis of accounting approved under generally accepted accounting principles, and is used by public companies and most privately owned companies.

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ACCRUED INTEREST Interest earned, though not credited or otherwise paid. Interest earned by a deposit account may be added to the account balance or paid by check. Bonds pay interest every six months, but interest is earned (accrued) every month. An investor buying a bond midway between interest payment dates must pay the seller any interest accrued from the last payment date up to, but not including, the settlement date.

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A bank's indebtedness to other banks
BILLS PAYABLE Obligations of a firm

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BRIDGE LOAN

Short-term loan to cover a home buyer's financing costs when selling one house and purchasing another. The loan provides funds to buy a new house before proceeds are available from sale of the old house.

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Bridge Loan: In corporate finance, interim financing covering the time lag between redemption of a bond or commercial paper issue, and replacement by a new one. Bridge loans, commonly replacing short-term debt with longer term financing, are an integral part of corporate restructuring, mergers, and leveraged buy-outs. Banks and insurance companies supply funds to pay off old debts before proceeds are raised from new debt or issuance of stock. Also known as gap financing or swing loan.

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CASH BASIS

Cash basis accounting system in which

revenues are recognized when cash is received and expenses when they actually are paid.

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CLEARINGHOUSE

Association of banks organized to exchange checks A clearinghouse maintains a daily log of transactions it accepts on behalf of members. At the close of business the clearinghouse arranges the settlement of obligations and transfer of funds from members who owe money due. In its capacity as a central facility, the clearinghouse acts as buyer to all sellers and seller to all buyers.

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COLLATERAL
Asset pledged as security to ensure payment or performance of an
obligation. In bank lending, it is generally something of value owned by the borrower. If the borrower defaults, the asset pledged may be taken and sold by the lender to fulfill completion of the original contract. Collaterals are broadly classified into movable and immovable.

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COLLECTION

Presentment of checks, drafts, and other

negotiable instruments to the point of origin, and receiving payment from the paying bank.

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CONTINGENT LIABILITY

Financial obligation of a bank that is

dependent on future events or actions of another party. It includes bank guarantees, letters of credit, financial derivative instruments like options, futures,swaps and forward contracts. These are reported as off-balance sheet liabilities in a bank's report.

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FORECLOSURE

Legal proceeding initiated by a creditor to take possession of collateral securing a defaulted loan. Some countries allow lenders to reclaim property by simply declaring the borrower has defaulted, a process known as strict foreclosure. Most countries require lenders to file a foreclosure suit and obtain a judgment before seizing and auctioning off a borrower's property. Proceeds from a foreclosure sale are applied first to pay off the mortgage debt and foreclosure expenses, with the remainder, if any, going to the borrower.

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Pledge

Transfer or assignment of assets to secure payment of an obligation. If the borrower turns over the property (collateral) to the lender, who holds it in safekeeping, the action is referred to as a pledge If the borrower offers stocks, bonds, or other securities as collateral, the lender generally takes possession or is assigned ownership of the collateral until the loan is paid. Hypothecation On the other hand, if the borrower retains possession, but gives the lender the right to sell the property in event of default, it is a true hypothecation.

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INSOLVENCY

Inability to pay debts as they mature, or as obligations become due and payable. A person may still have an excess of assets over liabilities, but be insolvent if unable to convert assets into cash to meet financial obligations. A financial institution, such as a bank, generally is considered to be insolvent if its ratio of capital to assets is at, or close to, zero, or if its capital assets, including common stock, are of such poor quality that its continued existence is uncertain.

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LEAD BANK

Bank arranging a loan syndication, in which

several banks buy participations. The lead bank collects a management fee for assembling the syndicate and arranging the financing terms.

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MARGIN CALL

Call demanded by a lender to a borrower for additional funds or collateral to offset position losses in a margin account. If a bank loan has been secured by securities, the lender may make margin call if the value of the securities goes down below the specified benchmark. When the margin call is made,the customer is asked to post more cash or eligible securities.

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OFF-BALANCE SHEET ITEMS

Obligations that are contingent liabilities of a

bank, and thus do not appear on its balance sheet.

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REPURCHASE AGREEMENT

Contract to sell and subsequently repurchase securities at a specified date and price. Central Banks engage in repurchase agreements when it buys government securities from dealers, who agree to repurchase them by a specified date and at a specified price. Buying Treasury securities through repos adds reserves to the banking system

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RESCHEDULING

Process of negotiating new loans to replace

existing obligations, either by lengthening maturities, deferring of loan principal payments, or reducing interest rates, where the alternative is DEFAULT by the borrower and seizure of collateral by the lender.

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TRUST RECEIPT (TR Loan)

Written agreement used extensively in letter of credit financing, often extended to importer of goods. The buyer promises to hold the property received in the name of the bank arranging the financing, although the bank retains title to the goods. Trust receipts allow an importer to take possession of the goods for resale before paying the issuing bank.

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WRITE OFF

Accounting

process whereby a loan determined to be a worthless asset is removed from the books as an earning asset and charged to the LOAN LOSS RESERVES account. Process of removing a BAD DEBT or uncollectible loan from the balance sheet.

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Write back In case of default by the borrower of the loan, banks will have to make provisions of loan loss. However, in the case of subsequent recovery of such loans and advances, then the banks will reverse such loan loss provisions. This is known as write back in the banking terminology. Because, the initial fund for loan loss provisions will go from the bank profit, the subsequent such write back also naturally will go into the profit of

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Non Banking Assets (NBA) In the process of doing business, banks provide various loans and advances. In order to secure such loans, banks normally will take collaterals. In case of default by borrowers to pay the loan, banks will try to recoup their loans by auctioning such collaterals. However such auctions sometimes may not be successful due to either no bidding or inappropriate bid price being offered.

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In that case banks normally will transfer such collaterals into their own name. Banks can own such collaterals in two different ways: as normal assets or as non banking assets. If banks decide to retain it as normal assets, they will not be required to dispose it, however, they will have to make provisions of depreciation from their profit. In case banks decide to keep the collateral as non banking assets, no such depreciations will be required, but the banks will have to dispose such non banking assets within 5 years.