Banking Related PDF

Banking Related Contents
What is Banking? Classification of Banking Systems Central Bank Commercial Banks Services Offered by Banks Depository Institutions Non-Depository Institutions Types of Deposit Accounts Demand Deposit Accounts Savings Account Current Account Money Market Account Term Deposit Accounts Wholesale Banking Fund Based Income Services Lines of Credit Term Loans Syndicated Loans Revolving Loans Trade Finance Factoring Forfaiting Leasing Letter of Credit
Bank Guarantee Overdraft Lockbox Processing Lock-box service Credit Appraisal Five Cs of Credit 7 Cs of Credit Analysis Types of Repayment Options Know Your Customer (KYC) Type of Cards 3 Cs of Internet Banking Bancassurance Commercial Paper (CP) Certificate of Deposit (CD) Micro Finance Different Bank Terms Bank Rate Repo Rate Bank Rate vs Repo Rate Reverse Repo Rate Cash Reserve Requirement (CRR) Statutory Liquidity Ratio (SLR) Banking Risks Credit Risk Market Risk
Operational Risk Solvency Risk Compliance/Regulatory Risk Liquidity Risk Legal Risk Reputational Risk Risk Management Risk Avoidance Strategy Risk Mitigation Strategy Risk Transfer Strategy Risk Management through Compliance Basel Norms Basel I Basel II Basel III Anti-Money Laundering Know Your Customer Sarbanes Oxley Act Investment Banking and its Functions Investment Banking Units Investment Banking Trading steps Non-Performing Assets (NPA) Problems caused by NPA and how to prevent that How to Resolve NPA Problem NPA Indian Perspective
Money Market Money Market Instruments and Features Risks involved in Money Market Instruments Banking System in India Co-operative Banks in India Banking System in USA Mortgage Banking Mortgage Loan Process Different types of Mortgage Products Mortgage Backed Securities Asset Backed Securities Securitization Risks associated in Mortgage Loans and MBS
Banking Terms/Glossary Banking Terms A Banking Terms D Banking Terms G Banking Terms J & K Banking Terms N Banking Terms Q Banking Terms T Banking Terms W Banking Terms B Banking Terms E Banking Terms H Banking Terms L Banking Terms O Banking Terms R Banking Terms U Banking Terms X, Y &Z Banking Terms C Banking Terms F Banking Terms I Banking Terms M Banking Terms P Banking Terms S Banking Terms V
What is Banking?
Posted on May 3, 2012 by admin in Banking.
Banking is defined as the method of accepting deposits in the form of Cash from some entities with surplus money (lenders and depositors) and lending these funds to the needy entities with need of cash or money (borrowers). Banking is one of the most important services in financial sector which builds the base of a country. The main functions of banking sector are outlined below

It provides liquidity for economic growth of a country It acts as the main pillar of the whole financial system It offers safety for the depositors who want to deposit their savings in the Bank It offers liquidity for the borrowers both on short and long term basis based on their need If provides credit or loan to dealers, households, small as well as large business houses It helps to manage all the financial transactions between different parties It provides the Government the flexibility to reach to the masses across the country
Efficiency of a bank depends on its ability to satisfy its investors and customers by offering better interest rate and services compared to its peers. Their main source of profit is the interest spread between the interest earned from lending and expensed from borrowing of money.
Classification of Banking Systems

Banking System has changed significantly in last couple of decades to meet different requirements of the customers and different regulatory requirements imposed by the Government of different countries. It has been essential to regulate the banking system with different new regulatory reforms in order to reduce risk and make banks non-vulnerable to any financial crisis. Basel norms were implemented to protect the banking system as well as the consumer base of a country. Financial crisis in 2008 has shown the requirement of stringent laws to stop banks from taking high risks in order to generate high profits. Lots of big banks were declared bankrupt during that time due to their huge exposure in high risky subprime market and Government had to rush to bail them out to protect common peoples money. To regulate the banking system, Central banks were formed by the government of different countries which overlook the domestic banking system and regulate all the banks. Based on this the banks can be classified into two main parts. They are

Central Bank Commercial Banks
Central banks mainly take care of the regulation part and act as a bank to the Government while commercial banks act as bank to the common people and businesses.
Central Bank
Central Bank is set up by the Government of each country to regulate the overall banking system and establish the supervisory framework for the banks operating in that country. It also acts as bank for government and controls the liquidity or money supply in the economy. The first central bank, the Sveriges Riksbank (Central Bank of Sweden), was established in Sweden in 1664 while the second central bank established in 1694 was the Bank of England (BoE). The main characteristics and functions of a central bank are outlined below

It acts as a bank for government and facilitates the sale and purchase of government bonds based on the requirement of the government It controls the overall money supply in the economy by using all the available monetary policy tools like SLR, Reserve Requirement, Repo rate etc. It regulates all the banks operating in a country. Also set the norms and guidelines for the foreign banks operating in a country It finalizes all the banking related rules, norms and code of conducts etc. and notifies the same to the banks. It also tracks banking processes for all the banks and takes actions for any violation. It does not interact with the common people directly but it always interacts with different banks in timely manner. It provides a common trading and transactions window for all the banks It devises norms for External borrowing of the domestic companies. It stores the forex reserves and gold for the Government and supports the importers with the foreign currency during crisis time. It uses its forex reserves to intervene the fluctuations of currency exchange rates whenever required Also regulates all the NBFCs (Non-Banking Financial Corporations) and Co-operative banking institutions of a country.
The central bank is often referred to as the Bankers Bank for its functions and characteristics mentioned above.
Commercial Banks
Commercial banks are the banks which provide different banking services to the common people and businesses across the country. They reach to every common people and work as a banker to each individual person and business. Commercials banks are located in different places of a country to reach to the mass and operate under one organization or banking name. It provides the following functions to the customers:

Accepts savings deposits from different customers Provides loans to individuals and businesses
Enables uniform structure of interest rates through competition and regulated banking system Facilitates banking in the rural areas by reaching there They offer all the banking related services to the customers
Commercial banks work as a back bone for the economy as they reach to each and every corner of a country.
Services Offered by Banks

The services offered by commercial banks can be broadly classified into 4 parts. They are

Payment Services Financial Intermediary Financial services Ancillary Services
Payment Service: The Payment Service is the backbone of the entire money flow in an economy. Previously the payment system was supported by Cheques, Demand drafts etc which have now been replaced with direct online money transfer with the evolution of technology. Financial Intermediary: This is one of the oldest functions of the Bank which specifies accepting deposits from customers and then lending these funds to borrowers. This is the main core business of the Banking system and will continue as long as the banking system exists. Financial Services: Financial services include new services which were launched by different financial institution with time. These services include investment banking, foreign exchange business, line of credit services, wealth management and broking services. These services generate income for the commercial bank in the form of commissions etc. which is also termed as Non-Fund income for banks. Ancillary Services: Other services that the Banks offer to the common men along with the necessary banking services. These ancillary services form a very minuscule of the services offered by the banks. Typical ancillary services include safe deposit lockers for gold, cheque pick up facility, door step banking etc. Traditional services offered by different banks

Offering savings deposits Currency exchange transactions Providing business or personal loans Providing car and home loans to retail customers Safe keeping of valuables Supporting government activities with credit by purchasing government bonds
Offering trust services, other properly and financial management related services for a fee
New services offered by banks

Financial Advisory Services Credit, debit cards and Gift cards Cash management Equipment leasing Venture capital loans and Private Equity funds Insurance services Retirement plans Equity trading and investment services Mutual funds and annuities Investment banking services Wealth management
Banks are nowadays offering different new services to attract more customers and grow their business. The other services offered by the Banks are increasing very fast and now accounts for a large portion of their income.
Depository Institutions
Depository Institutions are those financial institutions which directly accept deposits from depositors and lend to the borrowers. These institutions play the most important role in the development of the financial markets and in channelizing the savings to the borrowers in the economy. Depository institutions mainly include:

Commercial Banks Savings and Loan Associations Credit Unions
Commercial Banks: These are the depository institutions which are in the business of taking deposits from different entities and retail customers and providing loan to different borrowers (persons as well as businesses). They also provide a range of products and services for individuals as well as businesses to attract more customers. Retail banks are perfect example for the same. Savings and Loan Associations: These institutions provide savings account facilities to the customers and also provide different lending services like mortgage lending. Many of them provide a range of services similar to a commercial bank to attract more customers. Housing finance company is a perfect example of the same. Credit Unions: These are not-for-profit financial cooperatives that offer personal loans and other consumer banking services mainly to the needy and poor persons. Different cooperatives and credit unions are established by the Government to provide credit at much cheaper rate to the farmers.
Commercial banks, savings and loan associations and credit unions together hold a large share of the money stock of a country in the form of various types of deposits. They also lend these funds directly to individuals and businesses for different purposes and also lend them indirectly through investment in financial instruments.
Non-Depository Institutions
These institutions perform a variety of functions other than direct banking with the customers. All together they support the financial system of a country. The following are the common types of non-depository institutions:

Mutual Funds Security Firms Investment banking, Equity Broking Pension Funds Insurance Companies
Mutual Funds: Mutual Funds are the professionally managed funds by fund management companies which collectively invest money taken from many big and small investors in bonds, shares, money market instruments, commodities etc. to generate higher return from the same. It also offers different portfolios with different risk-return objectives based on investors choice and helps investors to achieve portfolio diversification without worrying much about market index movement. Security Firms: Investment banking, Equity Broking: These financial institutions help the investors to perform different capital market and debt related financial transactions. Broking services enable trading in equity market and exchange of shares among different entities. Investment banking services help different companies to raise money from the market through IPO, Debt offering etc. and to complete different merger and acquisition related transactions. Pension Funds: Pension funds mainly handle the pension deposit of all the people living in a country. They take money from people and invest the money in almost risk free instruments like government bonds etc. The main aim is to save their money and provide them interest rate by investing the money in appropriate investment instruments. The rules and guidelines are very strict for the Pension funds as retirement savings of all the common men are deposited in the funds. Insurance Companies: Insurance companies provide the necessary insurance services to the common people and different business entities. There are different rules and guidelines for the Insurance companies which are different from the rules and guidelines being followed by the Banks. The main aim is to spread risk among large number of people so that potential loss to an insured can be minimized.
Types of Deposit Accounts

Banks take deposits from the customers and this is the major source of its cash or funding. A Deposit account is an account which enables the money to be kept in the bank on behalf of the customer or account holder. Every account holder has an account which he uses to store his money with the bank. Deposit account can be of mainly 2 types are they are

Demand Deposit Accounts Term Deposit Accounts
Click on the account type links to get further description about these accounts.
Demand Deposit Accounts

Demand Deposit accounts are whose deposit accounts which enables the account holder to withdraw money anytime based on the demand. As per the definition, demand deposit accounts provide more flexibility to the account holders in terms of withdrawing money whenever they want. Different types of deposit accounts are as follows: Savings Account: This is the most popular demand deposit account which enables the account holders to save their surplus money and earn nominal interest rate on the same. Nowadays lots of extra services are being offered along with a savings account in order to attract more customers. Negotiable Order of Withdrawal (NOW) Account: This is mainly available in USA which pays interest, on which Cheques may be written. These accounts are structured to comply with Regulation Q which prohibits interest payment on checking accounts. Money Market Account: This is a special type of deposit account which has a relatively high interest rate but requires a higher minimum balance to be kept in the account to earn that higher interest rate. Failing to keep the higher minimum balance attracts monthly fees from the account holders. This is almost same as savings accounts but used to attract customers with high net worth. Current Account: This is a deposit account where there are no restrictions on the number of times money can be withdrawn and also the bank does not pay any interest on the balance maintained in this account. This is also known as transaction account in US as it facilitates higher number of transactions for the respective account holders.
Savings Account
Savings account is the most popular type of demand deposit used by the customers to keep their savings with the banks. Banks pay a nominal interest rate on this account which can be regulated or deregulated by the Central bank. The savings account can be with a cheque facility or without a cheque facility and should have some minimum balance to be maintained in the account to make it operational.
Currently ATM, online banking, online fund transfer, bill payment etc. services are provided free of cost for these accounts to attract more customers.
Current Account
This is almost similar to the savings accounts except that there is no restriction on the number of withdrawals from this account and also the bank does not pay any interest on the balance maintained in this account. This account is also knows as transaction account as it facilitates different types of transactions with much ease. Other services like ATM, online banking, online fund transfer, bill payment etc. services are provided free of cost for these accounts to attract more customers.
Money Market Account

A money market account (MMA) is a deposit account offered by a bank and almost similar to savings account. It has a relatively high rate of interest and typically requires a higher minimum balance to earn interest rate. The banks can also deduct penalties if the account holder fails to maintain the minimum balance required. These accounts are mainly offered to high net worth individuals along with other wealth management services.
Term Deposit Accounts

Term deposit accounts are the specific deposit accounts for which account holders can withdraw money only after a specified period of time. These accounts are also known as fixed deposit due to fixed tenure involved in the same and money cannot be withdrawn for a fixed period of time before the maturity date under normal circumstances. The interests earned on these accounts are relatively higher than the normal savings deposit accounts as money is blocked with the banks for higher duration. Different types of term deposit accounts are specified below Fixed Deposits: Fixed deposits enables account holders to save their surplus money for a fixed tenure which offers them higher rate of interest. The interest rate and maturity date are fixed earlier and the interest rate is considerably higher than the saving account interest rate. In some countries, fixed deposits are encouraged to increase savings by offering tax benefits by the Governments. Certificate of Deposits (CD): Certificate of deposit is a special type of term deposits which enables the CD bearer to earn interest on the amount specified in the Certificate of Deposit. A CD has a maturity date, a pre-fixed interest rate and can be of any value which is issued by commercial bank and insured by the FDIC (Federal Deposit Insurance Corporation) in US.
Retirement accounts: Retirement account is another type of term deposit accounts offered by the banks which enables the customers to save money to use them after their retirement. It also offers tax benefit to encourage people to save for their future. These accounts are mostly used by the employers to deposit pension money for their employees.
Wholesale Banking
Wholesale banking refers to the transactions between banks and large high net worth customers like corporates and government to facilitate their financial transactions. This is also known as Business-to-Business banking because of its application in businesses. The main services offered as a part of Wholesale banking are

Project/Corporate Finance Real Estate Finance Leasing Bills of Exchange Bank Guarantees Trade Finance Export Finance Forex transactions
It also supports cross border transactions by offering different types of services to the export and import companies as well as government. The services can also be classified into further divisions based on the fund inflow to the bank. These classifications are

Fund based income Non-Fund based income Fee based income
All the services are explained in subsequent posts.
Fund Based Income Services

Banks have to generate income from different lending services in order to provide interest to the depositors and make profit. Banks earn most of their income from interests on different types of lending services which are also referred to as Fund based income services due to involvement of funds here. Banks lend money to the borrowers for short, medium or long term either against some security or without any security and the borrower promised to repay the amount in future along with the interest amount measured based on pre-decided interest rate. The lending to the borrower is also referred to as Loan which is nothing but a contractual agreement between the borrower and the bank which contains all the terms and conditions like loan amount, tenure, rate of interest, repayment schedule etc.
The fund based lending can be done through Lines of Credit, Terms loans, Trade Finance, Export Import Finance, Revolving loans, club loans, Leasing etc.
Lines of Credit
Line of credit is a special type of fund based lending services offered to the corporates by the banks to meet short term business or working capital requirements. First, the bank approve a loan limit for a corporate or company based on its credit rating and business and the company (borrower) can take any number of loans within that limit to meets it short term business requirement without applying each time. If the combined loan amount crosses the loan limit set by the bank, then the corporate needs to apply for fresh approval and bank has to complete the full loan approval cycle to approve the same. The bank charges interest rate on such loans to earn profit for itself. Sometimes a flat fee is used for fixed amount and fixed duration short term credits. Lines of credit can be secured or unsecured depending on the credit rating of the company and the loan amount. For secured, companies need to offer collateral security like land, fixed assets, receivables etc. to cover up the borrowing while for unsecured, no collateral security is offered. If the company fails to repay the loan, bank may take charge of the collaterals and sell them to recover the money. Advantages

Companies can take multiple number of loans without applying each time Saves lots of time for the borrower Helps companies to meet urgent working capital requirements Borrower needs to pay interest only on the current outstanding amount taken as loan. Reduces documentation and loan approval process overhead for bank
Companies use this facility to meet their urgent working capital requirement as it allows the company to pay interest only on the loan amount taken from the bank. The line of credit amount is renewed after certain duration based on the credit condition of the borrower.
Term Loans
Term loans normally refer to the loan provided for financing of long term assets like Home, Car, House repairmen work etc. This does not allow the borrower to re-borrow any amount after repaying some part or full part of the loan. The term loan is the mostly widely used loan by the retail customers and banks earn high interest income on the same. The interest rate can be either fixed or floating depending on the loan agreement between the bank and the borrower. For fixed interest rate on term loans, the interest rate is fixed for a certain period of time, after which the interest rate is re-visited. For floating interest rate term loans, the interest rate is linked to a benchmark interest rate like LIBOR or banks prime lending rate (PLR) and is updated based on the bench mark interest rates. Banks update their
benchmark interest rate PLR, depending on the benchmark interest rates (Repo and Reserve Repo) set by the Central Bank. The term loans can also be divided into 2 parts based on the tenure of the loan. These 2 types are

Short Term Loan Long Term Loan
Short term loans are provided for shorter time duration to meet the short term liquidity requirement of the borrower. Also sometimes, borrowers prefer to take short term loans in order to reduce the total interest payment on the loan. Personal loans, 2 wheeler loans for shorter duration etc. are example of short term loans. Long term loans are provided for longer duration like 5-20 years to meet the long term requirement of the borrower like buying a flat, car other fixed assets etc. The repayment schedule depends on the agreement between the borrower and banks but all the money is repaid at the end of the tenure. The interest rate can be floating or fixed.
Syndicated Loans
As the name refers, Syndicated loan happens when multiple banks form a group to collectively satisfy a high funding requirement of a borrower. This grouping happens when the funding requirement of the borrower is very high and much higher than the credit limit of a single bank. All the banks lend only the amount to the same borrower they are entitled to. The main banker of the syndicate manages all the legal terms and credit details and takes help from other member banks to meet the credit requirement. In case of default, banks can take legal action either independently or jointly. Syndicated loans mostly happen in corporate sector where multiple banks come under one lead bank to satisfy huge credit requirement of the borrower.
Revolving Loans
A Revolving Credit is firm commitment by the bank to lend up to a certain amount .Revolving credit is similar to the line of credit except for the fact that the duration of the line of credit is longer ,generally up to five years. The duration of a commitment to lend against a revolving loan is therefore longer than a Line of Credit. This commitment is subject to a loan agreement containing mutually agreeable terms and conditions. Revolving credits are to be paid in full at maturity, and the revolving credit line can be re-used again for a fresh borrowing, if required. A fee generally is charged for a Revolving Credit commitment. This is a monthly charge from 0.25% to 0.50% per annum on the average daily-unused portion of the committed amount.
Revolving loans refer to the loans where the borrower can withdraw the money within his credit limit, repay some or all part of the outstanding amount and can borrow again over the tenure of the loan. Banks normally charge normal interest rate on the borrowed amount and a very nominal interest rate to the range of 0.5% to 1% (much lower than the interest rate on borrowed money) on the money unused. The money unused is calculated by subtracting money withdrawn from total credit limit. Advantages

Offers high flexibility to the borrowers Lower interest payment and cost savings Can be used to meet short term working capital requirement Usually provided for short term
Business houses, industries, retailers and different companies use this type of loan to meet their urgent cash requirement without any hassles.
Trade Finance
Trade Finance refers to all the lending activities by a bank to facilitate trading between two countries. This is completely different from personal and corporate banking and having separate products to help different import and export entities to continue with their trading. With globalization, it has become very necessary for banks to spread their business across the globe and open up branches in different continents. The main purpose is to facilitate different trading customers in their inter-country trading activities and earn heavy fees from the services offered to them. Services offered by banks in trade finance category

Assisting clients in importing accessories and raw materials from other countries Extending credits against receivables of exporting company Provides loan facilities to customers to import assets from other countries Offers all the forex services to cater their foreign currency requirements Risk management services to mitigate credit risk against the default of the buyer Other risk management like country risk, currency risk etc. Helps clients to raise loans in foreign currency at attractive interest rates Offer credit protection to the exporting company until the shipment receives to the desired location
Moreover banks help their clients to reduce cost of funding by availing trade finance activities at cheaper rate and also by reducing their risk exposure in international trading. Services offered related to Import

Necessary document preparation and collection Issue Letter of credits Bankers Acceptance facility
Standby Credits Guarantees for the exporters
Services offered related to Export

Necessary document check and verification Confirm and validate the Letter of credits Handling transferable credits and receivables from importers Extending credit facilities to the overseas buyer Extending credit to overseas financial institutions for the purpose of on lending to their clients Providing credit protection to the exporters if the importer fails to pay the exporter.
Banks charge high fee for trade finance related services, thats why it has become very popular for the banks now.
Factoring
Factoring is a financial transaction where a company sells its account receivables to a third party or a bank at a discount for some immediate money to finance its urgent cash requirements. Normally every company has a credit policy which provides the byers some credit period to pay back all the pending dues; these are called account receivables and termed as asset for the company. Account receivables are non-cash assets but it helps the companies to withdraw cash from the bank by selling these account receivables and the withdraw amount can vary between 70 80% of the total account receivables value. The main characteristics of factoring are

Usually a third party or a bank buys the account receivables; named as a factor The company sells some of its account receivables at a discount; normally 70-80% of its total value Three parties are involved in the transaction Bank or the factor, company that sells account receivables and the debtor There is some risk associated with the debtors ability to pay the receivables within the time frame.
Difference with Bank loan The main differences between bank loan and factoring are

For Factoring, the emphasis is given on the value of account receivables while more emphasis is given on the credit rating of the company for loans This is a purchase of financial assets which is different from loan Factoring involves three parties as specified earlier while loan involves two parties
How does Factoring works
The following diagram shows how Factoring works among the customer, Supplier and the Factor
Factoring Process Flow

1. Supplier makes a credit to their customers. 2. Supplier sells its customer a/c to the factor and notifies the customer. 3. Factor makes advance payment to the supplier after deducting the margin and discount charges. 4. Factor maintains customers account and follows up for payment. 5. Customer remits the amount due to the factor. 6. Factor makes final payment to the supplier i.e. margin amount.
Benefit of Factoring
It manages trade debts of the client by maintaining sales ledger, collecting payment and other administration services. The supplier is saved of the administrative cost of book keeping, stationery, postage and management time. It takes care of the risk aspect of the debt from the supplier when the arrangement is without recourse to the supplier. It provides advance to the client before maturity date. This improves the liquidity of the supplier.
Use of Factoring in India Development of factoring started in the year 1990, when SBI and some nationalized banks started factoring subsidiaries. These factors provide pre-payment upto 80% of the invoice value and deal only in inland bills. Factoring services are not extended to financial and investment companies.
Forfaiting
Posted on June 28, 2012 by admin in Banking.
Factoring essentially involves purchase of inland receivables. In international trade transactions, forfeiting is much a more common form of financing export-related receivables.
Forfaiting is purchasing of export bills where payment is expected to be received over a longer period in installments (deferred payment exports). It is done without recourse to the exporter if the bills are accepted by the importers bank also known as Avalling Bank. An Aval is an endorsement on the importers promissory note by the importer bank, guaranteeing the payment. How does Forfaiting work? The below diagram shows the basic function of the Forfaiting Process.
Forfaiting Process Flow Exporter sells the goods to importer on deferred payment basis. Importer issues series of promissory notes undertaking to pay the exporter in installments with interest. Importer approaches its banker (Avalling bank) (1) for adding the bank guarantee on the promissory note that that payment will be made on each maturity date. The promissory notes are now avalised (2). Avalled notes are sent to the exporter (3). Avalled notes are sold at a discount to a forfeiter, usually exporters bank (4) and exporter obtains finance (5). Forfaiter may hold till maturity date and obtain payment from the importer/avalling bank, or sell it in the secondary market or sell it, to a group of investors (securitization). Benefits of Forfaiting

Forfeiter provides 100% finance unlikely to the Factoring process. Risk is covered based on the importers country and the rating of the Avalling bank.
Leasing
Leasing is a financial process which enables companies to obtain some fixed asset for some specific duration on rent without buying the asset completely. A company may need one asset for short duration like 1-2 years and dont have money to buy the asset for this short duration. In that case, they prefer taking it on lease for 1- years and giving it back after the use of the asset. The lessee is the receiver of the asset and lessor provides the asset on leasing. The lease period can be of very short duration for operating lease or can be same as the life of the asset for financial lease. Banks and different financial institutions buy different assets and provide
them as financial lease to different companies from which they earn the rent and interest over the entire period of the asset. Financial lease is very popular in Aviation industry where operating lease is very popular in manufacturing industry. Advantages of Leasing

Leasing requires lower funds than purchasing the same asset Leasing is more flexible than buying the asset for short term use Helps for rapid expansion in business without investing much in fixed assets like lands and buildings. Financial lease provides tax benefits as lease payments are considered as expenses
Disadvantages

Lessee has to bear the maintenance cost of the asset Difficult to terminate a lease contract before the end of the lease period specified in the initial contract May result in higher rental at the time of renewal of the lease contract and sometimes it may not be successful.
Letter of Credit
Letter of Credit or Documentary Credit is used for Import finance which the importing entities use to reduce risk on their import from unknown exporters of other countries. In cross-country trade, importers pay the money to the exporter only after receiving the goods and services from other countries. They use letter of credit mechanism for the settlement of payment between themselves. A letter of credit is a document which a financial institution or bank issues to the exporter of the goods in foreign country which provides the guarantee that the issuer will pay him the money for goods once the exporter deliver the same to another importer. The issuer of letter of credit takes the payment from the importer and pays to the exporter once the shipment is completed. The steps involved in letter of credit mechanism are

Before the shipment the importer request a bank to take payment obligation on his behalf in favor of an overseas exporter After checking the credit status of the importer, the issuing bank then prepares a letter of credit in favor of the overseas exporter payable at any bank in the exporters home country. The issuing bank can have its own branch in the exporters country or can have agreement with some other bank to receive its letter of credit. The receiving bank takes the letter of credit from the issuing bank and promises to pay the exporter once the shipment is delivered. If the credit status of the issuing bank is not acceptable to the exporter then he can request importer for a letter of credit which should be through a bank in the exporters country. In that case, the issuing bank requests some other bank in the exporters country to take undertake the full payment obligation on their behalf for the shipment.
If a bank from exporters country takes the full obligation of the payment to the exporter, it gives the maximum confidence and assurance to the exporter. After the shipment, the exporter presents the documents to the confirming bank which the banks scrutinize further. If the documents are proper, then the bank makes the payment to the exporter and notifies the issuing bank. Issuing bank checks all the documents and reimburses the confirming bank The issuing bank then sends collection of payment document to the importer or directly debit the payment from his account Thus the payment is completely made from the importers to the exporters for cross-border training.
Due to high increase in cross border trading and high fees involved in the letter of credit process banks are now trying to provide different letter of credit services to satisfy different customers. Banks are also extending their network to other countries to reduce dependency on other banks while taking this service. Types of Letter of Credits There are various types of letters of credit available depending on contract terms associated with the same. These are

Revocable Irrevocable Revolving Confirmed Standby Back-to-back Deferred Payment
Revocable: A revocable Letter of Credit can be cancelled or revoked at any time by the importer without the consent of the exporter. This option is not used as it possesses significant risk to the exporter. By default all the Letter of Credits are irrevocable. Irrevocable: An irrevocable Letter of Credit can be revoked only after the consent of all the related parties involved in the process. By default, all the letter of credits is irrevocable. Revolving Credit: Revolving letter of credit is used for repeated import of same type of goods by the same importer over a period of time. In revolving credit, the amount is reinstated and made available to the exporter on periodic basis to enable him export the same goods multiple times to the same importer. It is very useful for importers who want to import the same material from a cross-border exporter at regular intervals for a specified period of time. Confirmed: A confirmed letter of Credit contains an additional confirmation from some other bank in addition to the issuing bank. The confirming bank takes on an obligation to pay even if the issuing bank defaults and fails oblige the payment obligation. Standby Credit: Standby credit is a default instrument which protects the exporter from the default of importer or failure of any obligation of the applicant. Here the beneficiary is
eligible for payment when the applicant fails to perform the obligation specified in the terms and conditions. Back-to-Back: The original letter of credit is used as security by the exporter to open another credit in favor of another exporter of its own group. Here the issuing bank may be different, but the original letter of credit is used as security for the later one. Deferred Payment Credits: In this type of letter of credit option, the payment is deferred for future until the imported material is used properly by the importer. Here payment is made in different installments based on the contracts terms and conditions. Suppose one importer is importing some equipment to build a nuclear reactor from an overseas supplier. The deferred payment schedule can be 20% advance payment, 50% after receiving the equipment and rest 30% after successful completion of the project. Risks associated with Letter of Credit Due to its cross border transactions and involvement of not well-known parties leads to multiple risks associated with Letter of Credit process. The main risks are

Fraud risk as the importer can present false documents for shipment and credit as the Banks depend on only documents to verify the transaction Government policy and financial sanctions imposed by other countries can make the letter of credit risky for exporters Non-Delivery or damage of goods due to accidents and hazards The quality of the goods delivered may not inferior to what was promised earlier Unfavorable movement of forex rate can affect the profitability of the exporter Shipment delay can cause significant loss to the importer Risk of defaulting of the issuing bank or the importer Significant legal risks involved due to different legal requirements in different countries
Due to these risks banks charge very high fee to support letter of credit transactions. Also banks need to have very good risk management mechanism to mitigate these risks arising out of cross border transactions.
Bank Guarantee
Bank guarantee is provided by a bank to a business or an individual which specifies that the bank will pay the pre-specified outstanding amount if the business or individual defaults on the same. These are mainly used as collateral by businesses or individuals to gain trust and win different contracts in domestic as well as foreign country. Sometimes the other party involved in the business and contract asks for bank guarantee to secure its investment and mitigate default risk. It helps to win contracts in foreign countries where the foreign entity or the main party can only trust a bank guarantee. Types of Guarantees Different types of bank guarantees are issued by a bank. The main types are specified below.
Tender Guarantee: This bank guarantee provides protection against the additional costs involved in tender if the winning party fails to take up the contract. This is usually very nominal amount and sufficient enough to fund awarding the same contract to another party or ask for new tender. Performance Guarantee: Here the bank pays the guarantee amount, specified in the contract, if the contractor fails to satisfy the performance criteria. The beneficiary may use the amount to improve the performance by awarding a new contract to another vendor. The performance guarantee amount covers the performance improvement charges which usually 10-15% of the total contract amount. Advance Payment Guarantee: Here the bank provides guarantee to refund the advance amount that the beneficiary has already paid to the contractor but the contractor failed to take up the project and defaults on the advance payment refund. This protects the beneficiaries from losing the advance amount already paid to the contractor. Maintenance Guarantee: Here the bank provides the guarantee to ensure proper maintenance after completion of the project. If the contractor fails to provide the necessary maintenance, the bank pays the maintenance charges to the beneficiary so that he can assign the maintenance task to some other contractor. Customs Guarantee: This is used to provide guarantee to the customs department so that the necessary customs duty can be recovered from the bank if the importer failed to oblige any customs duty exemption rule while importing any equipment from overseas. Banks earn fee either as a percentage of guaranteed amount or some flat amount. This is a widely used whole sale product by the banks and mostly used by businesses, contractors etc.
Overdraft
Posted on September 10, 2012 by admin in Banking.
Overdraft is a facility offered to retail clients with credit card features such as billing date, minimum payment, and pay by date, penal interest and late fee for late payment. It is same as a short term loan which should be repaid with the interest. Sometimes, customers have to submit collaterals with the banks in order to secure overdraft loans. Key terms for Overdraft Interest: The normal interest is applied to the Overdraft accounts as well. It depends on the bank. It varies to each and every bank. The penal interest will applied in case the customer fails to pay the interest on time. The interest can be paid in monthly basis, quarterly, halfyearly, yearly basis. Sanction Limit: The sanction limit is amount given to the customer as a loan which he cannot exceed. This limit is calculated according to the collateral value submitted by the customer to the bank. Drawing power: The amount which the customer can withdraw from the sanction limit set by the bank.
Example: Suppose a customer approaches the bank for a loan and lodges his house as the collateral to obtain the same. Bank determine the sanction limit as 5,00,000 after evaluation the collateral but the set the drawing power as 90%. He can withdraw only 4,50,000 using overdraft facility even though his sanction limit is 5,00,000. Types of Overdraft Revolving OD: The money which is given to you by the bank as loan can be utilized any number of times. Example: if your drawing power is USD 100,000, you have withdrawn amount USD 50,000 out of it. Now the available balance in your account is USD 50,000. Later you repay your entire loan of USD 50,000 which now makes the available balance as USD 100,000. You can utilize the full amount USD 100,000. Non Revolving OD: This is opposite to the revolving OD. Once the money is utilized from the limit, even though you repay it into the account, you cannot utilize the money again. Example: if your drawing power is USD 100,000, you have withdrawn amount USD 50,000 out of it. Now the available balance in your account is USD 50,000. Later you repay the amount USD 50,000 which now makes the available balance as USD 100,000. But you can utilize only the remaining amount of USD 50,000. You cannot use the money you have deposited Temporary overdraft (TOD): A Temporary Overdraft (TOD) is an advance made by the bank to a customer to meet the customers immediate requirements. It is for a short period, generally not backed by a formal sanction. Sometimes, Temporary Overdraft is granted during cash withdrawal for esteemed customers when they dont have sufficient balance in their account. At that time, Temporary Overdraft is granted automatically by the banks up to a certain limit. Example: While cash withdrawal the customer passes the cheque on 1, 00,000 but there is unavailability of 10,000. At this time either the system will automatically grant 10,000 as Temporary Overdraft to the customer or the bank manager will grant the Temporary Overdraft. Collaterals for Overdraft There are different types of collaterals like houses, machineries, land, vehicle, mutual funds, deposits etc.

Collaterals are the security given to bank by the customer who gets loan or OD The Bank can take different collaterals to cover the advances given to customers The collaterals are taken by way of primary and secondary collateral. Collateral with higher valuation is termed as Primary collateral. Once the collaterals are defined as approved collateral, the user can link it either to an individual account as security. The single collateral can be linked to any number of account depending on the overall valuation of the collateral and the loan the customer has taken on his loan account. The unutilized amount can be used as collateral to take further loans.
The individual account can be linked to two or more collateral if valuation of one collateral is not enough to cover the entire loan amount.
Lockbox Processing
Lockbox, in general, is a service offered by banks to the companies where the company receives all the payments via mail and directs them to a special post office box. This special post office box is termed lockbox. The Bank obtains this box from the Postal Service department. The bank, in turn, picks up the payments and deposits them into the companys accounts. The company is also notified of the deposit. Lockbox are nothing but containers to collect the paper cheques. The collection, conversion, processing and clearing of the cheques to and from financial institutions is known as cheques processing. cheques processing and lockbox processing terms can be used interchangbly. Why Lockbox

Lockbox is an efficient cash management tool which provides cash management services to all the needy corporate customers. Lockbox is mainly used to enable funds to be readily available and to avoid tight cash flow. Lockbox is mainly used by businesses that receive cheque payments by paper in mail from consumers or business customers. Using Lockbox is an efficient way to minimize the fraudulent activities since payments are handled by the bank. In short, the bank collects the receivables and deposits them into the operating business accounts of its customer companies.
Types of Lockbox The prime objective to consider lockbox services is to increase the speed and efficiency in processing the payments received. Hence different types of lockbox services are introduced to support this objective. They are: Wholesale lockbox and Retail lockbox Wholesale Lockbox:
o o o o
Deals with large value payments Used to process small volume of payments. Used for business payment. Advantage: More money is available on a daily basis. Hence debt cost can be reduced.
Retail Lockbox:
o o o
Deals with small value payments and also higher processing volumes than wholesale lockbox. Used for making payments to the consumers. Advantage: Reduce costs while maintaining accuracy
Fee Structure

Some banks process the cheques at no cost for their bug customers. But there can be fees for higher volume of cheques. Some banks charge some maintenance fee to maintain the lockboxes. Retail accounts processing are always more expensive than wholesale accounts processing.
Lockbox Processing by the Bank

Lockbox is a cash flow technique in which all the payments of a Companys customer are delivered to a special post office box. Customers can be situated in any geographical location. Lockboxes will be situated in places nearest to the customers geographic location. Now the couriers of the bank, who have a key to the lockbox, remove the entire contents from it and deliver all the payments into the customers bank. Now the bank processes all such payments received and deposits it directly into the corresponding bank account.
Lockbox Processing by the Company
Once any cheque or payment is processed in the lockbox department, a notification is sent to the Company intimating the successful processing of the remittance document.
Advantages of Lockboxes

Efficient and faster access to funds and faster return-item processing. Improves cash flow and hence availability of funds for the corporates. No postal delay involved since there is a dedicated box to receive all your customers payments instead of you receiving it and processing the payments. Remittance information can be tracked all the time and customers will get updates regularly. Lower floating cost due to faster processing with less effort. It is widely used by corporate customers as their payments and statements are both processed by various financial institutions using this facility
Disadvantages of Lockboxes

Lockboxes need to be closely monitored to prevent theft or fraudulent activities. The courier persons should be trained efficiently on the banks security and Policies to ensure full security. It involves tremendous amount of paper movements between a bank provider and their customers which may lead to human error sometimes.
Lock-box service
Through lock-box services, banks provide payment collection boxes at different locations help its client receiving payment from different vendors. The boxes are operated by the banks and banks clear the lock boxes multiple times in a day to collect all the incoming cheques and
payments on behalf of its clients, mainly companies and businesses. After receiving the cheques, the banks deposit the amount in the respective customers accounts. Advantages of lock-box services

It helps to simplify payment collection and processing of account receivables on behalf of different companies. It reduces overhead work for the company as the company persons do not need to collect the cheques and deposit the same in the bank. Only the drop box addresses are provided to the vendors which enable them to send their all cheques to the same address through post. Company maintains lock boxes in different locations across a country with the help of a bank to facilitate payment receipts from all of its customers and vendors. As the bank itself receives the cheques it reduces time significantly and makes the payment collection process faster.
Credit Appraisal
Banks use the credit appraisal services for themselves before providing loan to a borrower. The Credit Appraisal process is based on careful analysis of various facts and data provided by the borrower to the bank. After the proper credit appraisal process, banks takes a decision to either fund the project or reject the proposal. This in-depth study is called the pre-sanction credit appraisal which helps the approver to sanction the loan to the borrower. Credit appraisal takes care of

Borrowers ability to complete the project and its intention to re-pay the loan after commissioning of the project All the technical details related to the project like project requirement, end product, maintenance, project specifications, quality etc. All the financial details related to the project like Cash Inflow, Cash Outflow, NPV, Break Even period, growth opportunity etc. Financial appraisal to determine whether the company will be able to repay the loan from incremental cash flows or not. Market Appraisal to determine whether the project is viable or not and what are chances of being successful
Advantages

Reduces risk involved in the loans provided for a project Increase confidence among the corporate bankers and improved sales decision Reduces NPA (Non-Performing Assets) and possibility of financial loss Proper assessment is done with different options
Five Cs of Credit
The 5 Cs of Credit is also known as the 5 Cs of banking. It refers to main 5 points which the banks use to take approval decision of loans. The main points the banks analyze are

Cash Flow Collateral Capital Character and Conditions
Cash Flow refers to the cash flow that the business generates or the monthly income for an individual. The cash flow is checked to determine whether the business or the individual will be able to repay the loan from the cash flow from business or his monthly income. For companies, banks use different financial ratios like Debt Service Coverage Ratio and Interest Coverage Ratio to analyze the loan repaying capability of the company. For individual, it should be the monthly salary and the credit rating of the company they are employed in. Banks normally dont provide the loan in case of cash flow uncertainty. Collateral provides some security to the banks when they are giving high amount of loans to the borrowers. Banks use the collateral as the secondary source of repayment of the loan if the company or individual fails to repay the loan within the agreed time period. It provides some comfort to the banks as they will be able to recover either some parts or the entire amount of the loan in future by selling the collateral. Banks accept account receivables, Inventory, Land, Fixed assets, real estates as collaterals while providing loans. Capital refers to the current capital that the company or the individual is holding. For a company, it is same as the owners equity in the company and it should be sufficient enough for the loan to be approved. Enough capital will ensure that the company can continue with its business operations even if it fails to generate positive cash flow for some time. Also high owners capital in the company gives more confidence in the bank that the owners have very high interest in the current business and will stick to it during any crisis situation as well. Banks normally check debt-equity ratio to analyze the current status of owners capital and debt level in the company. Conditions refer to the current business scenarios and the overall credit environment. Banks normally hesitate to provide loans if the current business situation is not good and profitability of the companies is not up to the mark. Also if the overall credit environment is bad and NPA (Non-Performing Asset) is already high then banks normally dont provide loans easily. For companies, banks also analyze the sector they are operating in and the current condition of the entire sector. Banks check the below details while analyzing the condition of a company while providing loans.

Companys risk management processes Its historical financial performance and key financial parameters Competition in the industry in which the company operates
Diversification of the business Supply, patent related disputes and other possible risks Regulatory or legal issues involved if any
After checking all these parameters, banks provide loan to the company only if they find it suitable based on these conditions. Character of the company owners or the individual is one of the most important parameter, banks check while providing the loans to companies or individuals. Banks refer to the previous track records of the borrower and his willingness to repay the loan amount. Banks provide loans only to the borrowers with sound character whom can also be trusted to honor their commitment in repaying the loan amount. These are very important parameters that the banks use to take decision about the approval of the loans. The Individuals and companies should also try to improve these parameters before going for any fresh loan application.
7 Cs of Credit Analysis
Lenders or banks use 7 Cs to perform the credit analysis of the borrower of the loan. The main parameters based on the credit analysis is done are

Collateral Character Conditions Credit Capacity Currency Country
Collateral provides some security to the banks when they are giving high amount of loans to the borrowers. Banks use the collateral as the secondary source of repayment of the loan if the company fails to repay the loan. It provides some comfort to the banks as they will be able to recover either some parts or the entire amount of the loan in future by selling the collateral. Banks accept account receivables, Inventory, Land, Fixed assets, real estates as collaterals while providing loans. Conditions refer to the current business scenarios and the overall credit environment. Banks normally hesitate to provide loans if the current business situation is not good and profitability of the companies is not up to the mark. For companies, banks also analyze the sector they are operating in and the current condition of the entire sector. Banks check the below details while analyzing the condition of a company while providing loans.

Companys risk management processes Its historical financial performance and key financial parameters Competition in the industry in which the company operates Diversification of the business
Supply, patent related disputes and other possible risks Regulatory or legal issues involved if any
After checking all these parameters, banks provide the loan to the company only if they fund it suitable based on these conditions. Character of the company owners or the individual is one of the most important parameter, banks check while providing the loans to companies or individual. Banks refer the previous track records of the borrower and his willingness to repay the loan amount. Banks provide loans only to people with sound character whom can also be trusted to honor their commitment in repaying the loan amount. These are very important parameters that the banks use to take decision about the approval of the loans. The Individuals and companies should also try to improve these parameters before going for any fresh loan application. Credit refers to the credit score of the borrower which reflects their ability and willingness to repay the loan. Banks check the credit and repayment history to come up with the credit rating for borrowers which help the banks to take a decision about the loan. Capacity refers to the money generated by the company or business in order to repay the loan and interest on the same. For companies, banks use different financial ratios like Debt Service Coverage Ratio and Interest Coverage Ratio to analyze the loan repaying capability of the company. Banks normally dont provide the loan when there is some uncertainty in the cash flow. Currency parameter is used for cross border lending where the banks analyze the historical trend in currency movement while taking decision about a loan. Steep unfavorable movement (domestic currency depreciation) can make a cross border loan very much costlier and increase the probability for default. Banks need to check this parameter while providing cross border loan to foreign companies. Country is also an important parameter used by the banks in cross border lending. Here the countrys political system, legal system, laws and regulations are closely verified before providing loan to companies operating in the country. Political stability and proper legal system are very much important parameters to boost the confidence among the cross border lenders. Banks will not be willing to provide loans to the foreign companies if the government is politically unstable, legal system is not suitable and the government policies do not support industrial growth and foreign investment.
Types of Repayment Options

After taking the loans, the need to repay the entire loan amount along with the applicable interest. The repayment arrangement can be agreed between the bank and the borrower depending on the need and feasibility of the borrower. There are different types of loan repayment arrangements are used which are specified below.
Equal Periodic Installments
Stepped Up Installments Bullet Repayment Deferred Repayment
Equal Periodic Installments: This is the most widely used repayment option used by the borrowers to repay the loan amount along with interest. In this type of repayment arrangement, the borrower repays an equal amount at periodic intervals (monthly, quarterly or annually depending on the agreement) to the bank. This payment from the borrower includes the interest for the period and some part of the principal payment. With every payment the outstanding principal decreases. Stepped Up Installments: In this type of repayment arrangement; the installments payable on the loan are increased after certain intervals over the entire tenure of the loan. The installments start with a small amount and then start increasing with either constant amount or constant percentage. This type of repayment arrangement is preferred by borrowers who expect increase in their income after certain intervals (yearly salary increase for salaried professionals). Bullet Repayment: In this type of repayment arrangement, most of the repayment is made on the maturity of the loan. The interest can be paid during the tenure of the loan or at the time of maturity. Deferred Repayment: In this type of repayment arrangement, the repayment starts only after a given period of time after disbursement. Here the starting date is deferred by the repayment schedule can follow the equal period installment or the steeped up installment methods. This is mostly used for education loans or some project finance where the repayment starts only after completion of the education course or the project.
Know Your Customer (KYC)

Know Your Customer (KYC) is set of customer due diligence related activities that the banks or financial institutions must perform to identify their customers and notifying them with all the relevant important information related to all the banking and financial products. KYC has been mandated by the respective central banks of all the countries to protect customers from any kind of fraudulent activities, Identity theft and money laundering activities. KYC Control typically includes these below details

Collection and analysis of basic identity information (CIP) Identification and verification of the customers Describe clients source of wealth and request for proper references Determination of customers risk from any kind of fraudulent activities Monitor customers transaction pattern and compare the same with the peer group Monitor account activity to determine those transactions that do not conform with the normal or expected transactions for that customer Customer Acceptance Policies
On-going monitoring of account with high risks and proper risk management
Know Your Customer (KYC) policies are most closely associated with the fight against money laundering and mostly used in Wealth Management deals with large value transactions where it is more critical. Indias Central bank and banking regulator, The Reserve Bank of India has introduced KYC guidelines for all banks in 2002. RBI directed that all banks ensure that they are fully compliant with the KYC provisions before December 31, 2005.
Type of Cards
Banks provide different types of cards to the customers and businesses depending on their need. There can be overlaps between these classifications based on the combinations of services offered by these cards. Credit Card This is one of the oldest types of cards issued since 1950s. through credit card, the card holder enjoys some credit limit and can use the card to pay bills and withdraw funds within the credit limit. Basic characteristics of credit cards

Offered to all customers even if they dont already have a savings or current account. Card holder is given some credit limit based on his credit ratings and monthly income He can use the credit card to pay different utility or merchant bills and withdraw money based on their need The total outstanding limit should stay below the credit limit for all the time. The outstanding amount should be paid within a credit cycle to avoid any interest rate on the same Interest rate is charged on the non-paid outstanding amount and the interest rate is much higher than other financial loans Card holder can repay all the outstanding amount in some cycles with the applicable interest rates Banks and financial institutions earn money from the commissions earned from the merchants or shops. Credit risk involved in credit cards as the customer may default to repay the remaining outstanding amount.
Different types of credit cards are available for the customers based on their credit rating, usage pattern, usability across different countries and other tie ups with different companies. Debit Cards Debit cards are offered to all the current account holders (both savings and current accounts) which enable them to spend up to the amount available in their bank account. Debit card has the following characteristics.
Only the existing account holders are offered with the debit cards
Customers can spend only up to the available amount in their account; the amount is instantly debited from their account. No credit risk involved in this type of card from the perspective of the issuer. Banks and financial institutions earn money from the commissions earned from the merchants or shops
ATM Cards ATM cards are offered to the existing account holders and they are used solely for the purpose of cash withdrawals only. Previously ATM card could be used only in the network of the card issuer itself, like ATM card issues by bank X can only be used in the network owned by Bank X in order to withdraw money. But currently one ATM card can be used in any ATM machine connected in any network in order to withdraw money, like ATM card issued by Bank X can be used to withdraw money in ATM network provided by any bank other than Bank X as well. Currently ATM facility is clubbed with credit and debit cards and the money withdrawal limit is decided from the type of card. For credit cards, the money withdrawal limit can be anything under the total credit limit and for debit cards; the money withdrawal limit should be restricted to the balance available in the main account. Travel Currency card Travel currency card is mainly used for overseas travel which reduces dependency on Foreign currency conversion. This card is preloaded with a specific amount and can be issued in multiple currencies. The main characteristics of this card are

This card is preloaded with some specific amount and can be issued in multiple currencies The foreign exchange rate is decided and locked at the time of purchase and it does not change during the period of spending. One currency card is operational in only one specific foreign currency which reduces benefits for multiple country travel at the same time. The unitized amount can be surrendered provided it is higher than the threshold level. Can be used as an ATM card as well to withdraw amount in foreign currency.
Travel cards become very popular nowadays for overseas travel to another country as it is very handy and comes with security pin number. Travelers dont need to carry cash while traveling, thus reducing risk of theft. Gift Cards Gift cards have come up to revolutionize the gifting idea through which someone can gift a card to someone else with some pre-loaded money into it. The other person can use the card in any merchant shop or to pay bills under the pre-loaded limit based on his choice. It provides more options to the card holder and he can buy anything he wants utilizing the preloaded amount. Gift cards can also be topped up with more money depending on the choice. Currently Gift cards are replaced with gift vouchers which are easy to procure and easy to use.
Loyalty Cards Loyalty cards are used by different business or companies in order to attract loyal customers. Loyalty points are earned based on the purchase amount on the cards and those points can be converted to money or other gift items. Also the loyalty points can earn the card holder higher discount while doing multiple transactions with the same card. Co-branded credit cards which are the combination of credit card as well as loyalty card have become very popular nowadays as they offer significant benefits to the loyal customers and help different brands to retain their customers through proper loyalty programs. Corporate Cards Corporate cards are issued to the employees of well-known business houses and MNCs which help them to pay their official expenses easily. Here the employees use the corporate card issued to them to pay all the official bills rather than using personal credit or debit card and the outstanding amounts are repaid directly by the company. Company also takes the responsibility of any late payment and pays the interest charges on the same. It reduces paper work involved in the whole process and helps employees to pay officials bills with much ease.
3 Cs of Internet Banking
Use of Internet and new technologies have enabled todays banking activities to be the most convenient, efficient, clean and the most secure way of doing business. Most of the banking facilities are now available online and can be used the account holders/user for any kind of transactions. Internet banking allows its customers to carry out their financial transactions in a timely, efficient, safe manner, anytime, at any location. With the tremendous growth in internet, internet banking has become the most necessary aspect and the survival formula in banking. All the banks have to necessarily implement the same in order to retain customer and be competitive. The 3 Cs of Internet Banking mainly refers to these below three points

Customer Delight Corporate Social responsibility Carbon Footprints Reduction
Now, Internet banking has brought Banks closer to us making banking services available round the clock as per our convenience. Internet banking increases customer delight by providing the best possible services which are very convenient and easy to use. With these benefits banks need not have many branches and provide 24*7 direct services to the customers which help to reduce overall carbon footprint. These Corporate Social Responsibilities of the banks help us to contribute to our society and Green initiatives.
Customer Delight
Since its inception in last 1980s, Internet banking has become an integral part of consumer banking. Internet banking allows the customers to conduct financial transactions on a secured website as per their convenience. Benefits offered by Internet Banking to its customers

Easy banking transactions from any place in the world. Only an internet connection is sufficient to do all the financial transactions using internet banking. Gives option to receive bills and make online payment, thus saving time, fuel, money and paper. All the fund transfer transactions can be easily done using internet banking facilities. Investment in mutual funds, PF, Pension funds and purchase of equity shares can be done using online Demat accounts associated with internet banking. Consumers can apply for loans, credit card, fixed deposits etc through internet banking which helps to reduce time and effort associate with the same Can check balance and transaction details at any point of time. Can use internet banking for any clarification and service request related to banking products and issues. Can carry out other transactions like change in address, change in contact number etc with much ease without visiting the branch.
Corporate Social Responsibility

An increasing number of financial institutions are contributing towards the society through Internet Banking as it is a very easy way to reach to its all customers. Recently, huge amount of money has been collected towards the people affected from natural calamities like earthquakes, floods and war hit regions. Some of the leading financial organizations have taken initiatives to showcase their Corporate Social Responsibility and have been actively involved in generating funds for the needy. Some of the examples are:
Following the floods that affected districts of Bihar, West Bengal and Orissa in 2008 in India, Indias largest private sector bank ICICI Banks online appeal mobilized Rs. 31.7 million from more than 55,000 Internet banking customers. Many US Financial Institutions like Bank of America and Citi Group raised funds for HAITI Earthquake Victims using Internet Banking as an effective tool for a noble cause. Some banks have started different Rural development schemes as a part of their corporate social Responsibility
Carbon Footprints Reduction

Use of internet banking ensures that the customer doesnt have to travel to the bank premises for conducting his day to day banking transactions which not only benefits the banks but also reduce the energy required to open and maintain large number of branches in different areas.
Significant use of Online Banking and Bill Pay, e-statements, ATMs and other paperless products has significantly reduced overall paper consumption. E-delivery reduces paper usage, cuts cost to the bank and provides customers more ways to protect their privacy. These measures help banks and consumer to reduce carbon footprint which is very important for our Green earth and sustainability.
Bancassurance
Posted on August 28, 2012 by admin in Banking.
Bancassurance is defined as the insurance distribution model where insurance products are sold through bank branch network. The presence of several banking groups as promoters of insurance companies is of great significance to this model. In simple words, this is the partnership between banks and insurance company whereby the later uses the banks channel in order to sell insurance products. However, in its broad sense, it can also mean a bank performing these actions with its own insurance subsidiary / allied company. The concept of Bancassurance originated in France. This is dominant model in many European countries. It gave outstanding results for European Banks as a new avenue for enhancing non-interest income streams. This is also referred as Bank Insurance model (BIM). Banks can leverage their network and high-tech electronic delivery channels to offer bancassurance products through

Branches ATM network Internet Banking Call Center Sales persons and Relationship Managers
Why banks go for this business model?

Distribution of insurance products helps bank to reduce dependency on interest based income i.e. Increase the fee-based earnings of banks. Bancassurance helps Insurers to understand and analyze spending habits, investment pattern and saving of customer through banks database, which helps them to manufacture customize insurance product. Banks have huge customer base which will help them to market the insurance products easily. Through bancassurance banks can meet or exceed their customers expectations by giving them value added services like insurance. To diversify the banks products and services portfolio
Types of Bancasssurance models followed by banks Only Distribution:
Here the banks take care of only distribution of insurance products to their retail and commercial banking customer. Except marketing of the Insurance products, no other insurance operations are performed by the banks. Insurance products are sourced from a third party insurance company and banks earn commission payment or profit share for the marketing. Here banks do not take any risk of selling insurance. Joint Venture: Here, banks form joint ventures with one or more insurance companies and float an Independent insurance company for doing bancassurance business. The percentage of ownership of joint venture varies from case to case. For Foreign insurance companies, the FDI limit in the insurance sector is applicable. The insurance products are sold by banks own branch network and internet banking services. Bank and insurer take their proportionate share of revenue and profit and loss. Banks are responsible for distribution of insurance products. Hence banks take sales regulatory risk and the insurance related risks as well depending on their share in the joint venture. ICICI bank and UK Insurance giant Prudential has formed a joint venture called ICICI Prudential in order to sell different insurance products. Fully owned insurance subsidiary: Here, Banks float fully owned insurance subsidiary. The insurance products developed by this insurance subsidiary are sold by the Bank. In some cases banks float subsidiary which is involved in reinsurance business. Here banks have to bear all the risks associated with insurance business. Bancassurance in India: In India the banking & insurance sectors are governed by RBI and IRDA respectively. So Bancassurance is also governed by both the entities. A bank in one state can market the insurance product of only one life insurance Company and one general insurance company in that state. If the insurance company does not have health insurance product, then bank is allowed to tie up with one general insurance company dealing in only health insurance products in that state. Some Examples are

LIC has tied up with multiple PSU banks in order to sell their insurance products. Birla Sun life Insurance has tied up with some banks to sell their products. New India Assurance has tied up with PSU bank Central Bank of India for the same purpose
Advantages to Banks
A One Shop service offering complete range of banking and insurance products and services resulting in higher customer retention levels which in turn Increase in customer loyalty. Enhancement in the utilization of manpower, branch network Increase in Return on asset (RoA) without increasing Asset- Improved income streams new avenues for generating fee income leads to increase in return on assets Improvement in profitability/productivity
Advantages to Insurance Companies

Access to the wide network of branches of banks hence lower cost of customer acquisition. Penetration into untapped segments like rural population. Volume and profit of Insurance Company will go up because it is easier for banks to sell insurance products. It is easier for Insurance company to analyze the customers spending habits, purchase capability, savings using banks customer database. Hence Insurance Company can customize the insurance product accordingly.
Advantages to customer

Customers can have access to all financial services under one roof. Customers have to pay less for the same insurance product as the distribution cost involved in it is reduced. Customized insurance products are available to customers. Customers frequently visit the bank for one or other reason and hence it will be easier for them to access claims.
Commercial Paper (CP)

Commercial Paper (CP) is a fairly new instrument which was originated in US. It helps private companies with good credit rating to raise money directly from the market and investors. They raise money by issuing commercial papers in tight money market conditions through sources other than banks. CP is a fairly popular instrument and exists in most of the developed economies. Large corporate and private companies find CPs cheaper, simpler and more flexible due to their better credit rating. By definition, CP is a promissory note issued by leading, reputed and highly rated corporates to raise money for short-term requirements. In India, the maximum period (tenor) is 1 year. Main characteristics of Commercial Paper are

Commercial paper is a short-term debt instrument (money market instrument) issued by both financial and non-financial companies. These debt instruments are unsecured in nature, that is, they do not require any charge to be created on the companys assets. If the company fails to pay back the investors the amount of commercial papers after their maturity, the investors can not sell a particular asset and recover their dues. Commercial papers are discount instruments, which mean they are issued at discount and redeemed at face value. It can have different maturity periods but it varies within 1 year. In India, the maturity period varies between 90 days to 365 days. In India, RBI regulates the Commercial paper instruments. Companies have to adhere to the norms set by the RBI in order to raise money using commercial papers.
Detail Process of Issuing Commercial paper in India
First meet the criteria set by the Reserve Bank of India, main regulator for commercial paper instruments in India Make the issue rated by a SEBI registered credit rating company Select the agents, dealers and merchant bankers for the same Issuing agent acts as a trustee cum agent to the issue by holding the notes in safe keeping, to deliver the notes to the CP dealer, receive the proceeds and pass them to the issuer. After that the merchant banker places the CP and then confirms the deal to the company. Commercial papers are tradable by endorsement in the secondary market and on maturity (maximum 1 year) it is presented for payment. Investors in CP could be individuals, corporates, banks, unincorporated bodies, NRIs, etc.
Indian Scenario: CPs in India came into existence in 1990. The idea was to enable highly rated corporate borrowers to diversify their resources of short-term borrowings and also to provide additional instruments to investors. With RBI considerably relaxing the norms for issues of CP, this market has picked up substantially and is reasonably vibrant. Corporates also require prior RBI permission for issue of CPs. The company has to advise RBI through the lead bank or principal bank, the details of the issue in the prescribed format. Benefits of Commercial papers:

Investors get higher yield compared to other short-term investments. These are more liquid in nature For the issuer, the rates are economical because they are in direct contact with the investors. Issuers can match the exact amount and maturity requirements of investors, and therefore gets favorable exposure to variety of investors.
Certificate of Deposit (CD)

A certificate of Deposit (CD) is a deposit defined by specific time. The banks in the United States provide this financial product to their customers. Main characteristics of Certificate of Deposit (CD)

In US, It insured by a US Government Corporation. These are generally held till the time it matures. At the end of the term, the money can be withdrawn along with the accrued dividend. It is provided by various credit unions and thrift institutions also. CDs are similar to Savings account in terms of insurance and Risk free. CDs are different from Savings account as it has a definite precise term (normally 3 months, 6 months, 1 year up to 5 years) and It has a fixed Interest rate.
Interest rate for CD

For higher deposited principal amount, the interest rate should also be high. Higher deposit term leads to higher interest rate the interest rate should also be high.
Smaller finance institutions generally offer high interest rates when compared to the bigger ones to attract more customers The interest rates of Personal Certificate of Deposit accounts are higher when compared to those of business CD accounts. Banks offer high interest rates when their products are not insured by the Government Corporation to compensate extra risk in those investments.
CD Ladder Strategy: Though an investment with longer term of deposit attracts a high interest, the deposited money is locked for a longer period of time. Such a scheme is not preferred in the increasing rate economy. In Ladder strategy, money is deposited for a longer term, in a way that a part of the amount matures every year. For example, a customer splits the money to be deposited in 3 CDs with term 3 year, 2 year and 1 year. At the end of one year, a CD matures and the customer reinvests it in a 3 year CD. The same cycle is followed in the second year. At the end of these 2 cycles, the depositor will have 3 CDs with term as 3 years. Hence the depositor gets the interest applicable for a 3-year CD, still having the benefit of one CD maturing every year. Ladder Strategy is not provided by any financial institution. The investor has to plan his investments to follow the ladder strategy.
Micro Finance
Microfinance is the financial help provided to the poor or low income people who are not capable of getting financial help or loan from big banks or financial institutions. They can obtain the microfinance from micro financial institution (MFIs), postal saving banks, credit unions or NGOs. The funds are usually a small amount. Microfinance is not just providing loans but also a series of other financial services to the poor. Microcredit Microcredit is a form of microfinance which is equivalent to small loans provided to the poor and needy people. Microfinance provides an array of financial services while microcredits are small loans. The ultimate objective of both is to remove poverty from the society. Microcredit can be loan from a moneylender, friends, any specialized banks etc. The loans are remunerated back in small repayments and can also be disbursed again if the first loan is repaid completely. Microfinance Credit lending models: There is various microfinance credit lending methods used for microfinance. They are mainly
Association: The association generally consists of a group of people of legal body which can be associated with fees collection, insurance, small credits etc. Community banking: An entire community is considered as one entity and loan is provided to them. These communities are generally formed with the help of NGOs. Cooperatives: It is a self-governing association of people who all come together to form a group in order to meet the same goal. All the members use the financing and savings scheme benefits provided by the cooperatives. Grameen model: This is mostly used in the rural areas where a unit bank is set up for large number of villages. The bank employees then visit these villages to identify the prospective customers and group of people eligible for microfinance loan. Then a group of 5 borrowers are formed and only 2 of them are eligible for the loan. The other members are eligible to these loans only when the 2 members have repaid their loans with interest within a period of fifty weeks. The group responsibility of the borrowers serves as the security for the loan. Individual model: Here, the loan is directly given to the borrower who has the full responsibility to repay the entire loan amount. Intermediary: They form a bridge between the lender and the borrower. These intermediaries help in increasing the credit worthiness of the borrowers by providing then training in financial services, education, opening saving accounts. The intermediary could be an individual, NGO or a microcredit programmes. Non Government Organizations: NGOs have always had an important role in the field of microcredit. They create awareness on the significance of microcredit, conduct workshops, training, seminars, etc. They are generally the intermediary between the lender and borrower. Main characteristics of Microfinance
The interest rate is very high for micro finance as there is no collateral involved in the microfinance lending. Generally the underprivileged and low income people are the clients of microfinance. Microfinance institutions prefer women borrowers than men to improve their social standing and increase overall domestic income. The main purpose of microfinance loans are mostly to start or finance small businesses, to fund education fees, housing rents, household purpose, medical expenses, weddings, etc.
Key Advantages of Microfinance

Increases opportunities for poor people in rural areas Improves their social standing Helps to finance important funding requirements. Eliminates social evils from the Society. Brings entrepreneur quality among the poor people by encouraging them to start new businesses.
Key Disadvantages/ Limitations of Microfinance
The target customers are concentrated to very small areas with low density population and less purchasing power. So market opportunities are less. Most people lack the entrepreneurial skill to utilize the loan amount to productive activities and there is a high chance of falling into further debt.
Different Bank Terms

Bank Rate
Bank rate is the rate at which the central bank provides money to the other financial institutions or banks. Bank rate enables the financial institutions (or banks) to borrow money from the central bank to fund any money need. Increase in bank rate leads to higher prime lending rate, the rate at which financial institutions lends money to other entities. So by increasing bank rate, the central bank can increase the interest rate in the market and reduce the demand. At the same time, as the lending becomes dearer, it reduces the lending by the financial institutions. Because of these two reasons bank rate hike is used to tame inflation.
Repo Rate
Repo rate (also known as Repurchase Rate) is the rate at which the Central Bank lends money to the banks on short term basis. Increase in Repo rate leads to higher short term borrowing rate for the banks which again leads to higher prime lending rate, the rate at which banks lends money to other customers or corporates. Increase in Repo rate mainly leads to higher interest rate on home loan, car loans, and corporate borrowings. The main effect is reduced demand of home, cars by the normal citizen and corporate loans by the Companies used for business expansion. It impacts the revenue and profit margin of the auto sector and housing sector companies aversely and makes the business and industrial expansion more expensive, thus reduce the industrial activity. Thats why increase in repo rate is very effective to control inflation. But at the same time, it hurts the economic and industrial growth severely. Central Banks job is to maintain the repo rate properly so that it wont affect the economic growth activity.
Bank Rate vs Repo Rate

The Repo rate and Bank rate are almost similar except the difference that Repo rate is applicable to short-term lending specially for overnight lending to banks by the central bank and governed by the short term interest rate and inflation target but Bank rate is applicable to long term lending by the central bank and governed by the long term interest rate and inflation target.
Both are used in the same manner to control the liquidity in the market and control inflation. But Bank rate mainly aims for long term effect and Repo rate mainly aims for short term effect. Like Chinas Central Bank uses its one year deposit and lending rate to control liquidity and inflation. This is same as Bank rate. While India uses the overnight lending and deposit rate to control liquidity and inflation. This is same as repo rate (for lending) and reverse repo rate (for deposit).
Reverse Repo Rate

Reverse Repo rate is the rate at which banks deposit their excess money with the central bank for short term only. Central bank uses this tool to reduce liquidity in the market when there is high liquidity in the banking system. If the reverse repo rate is high then the banks will prefer to deposit the excess money with the central bank, thus reduce the liquidity in the system. The money deposited with the central bank is risk free, thats why for high reverse repo rate banks always prefer to deposit the excess money with the central bank rather than lending it to the customers which involves significant risks. High reverse repo rate helps to reduce the lending by the banks and reduces the loan supply in the market. Lower loan supply decreases the lending for auto, home etc. which helps to tame inflation.
Cash Reserve Requirement (CRR)

Cash Reserve Requirement or Cash Reserve Ration (CRR) mandates the banks to hold a certain percentage of the deposit in the form of cash or cash equivalents. Banks can lend the rest of the money to the lenders after maintaining the reserve ratio or requirement. Banks do not normally keep the reserved cash with them; instead they deposit it with the RBI or invest in Government bonds or treasury bills which are considered to be cash equivalents. Cash Reserve Requirement is a very strong monetary tool with some important benefits. They are:

It helps to reduce the liquidity in the financial system. It is a very strong monetary policy tool to check the liquidity in the financial system. It encourages the banks to invest in the government bonds and treasury bills, which the government sells to borrow money from the market. It also reduces the risk of banking operation by restricting the lending percentage. Reserved money also helps the banks to cater any sudden liquidity crisis.
Statutory Liquidity Ratio (SLR)

Statutory Liquidity Ratio indicates the minimum percentage of total demand and liabilities the banks has to maintain as liquid assets at the close of every business day to support any sudden increase in withdrawal and cash demand. The liquid assets can be in the form of cash,
gold and government approved securities. It is an efficient monetary policy tool and the benefits it provides are

It helps to reduce the liquidity in the financial system by restricting banks to hold some liquidity with them. It encourages the banks to invest in the government bonds and treasury bills, which the government sells to borrow money from the market. It also reduces the risk of bank being default on sudden increase in demand and liabilities.
CRR uses total deposit as the reference while SLR uses the total demand or liabilities as the reference while calculating the money to be held. This is the main difference between SLR and CRR.
Banking Risks
Banks lend money to different businesses and borrowers to earn interest on the same; this is most important part of banks business. As the money is given to others on the agreement that it will be repaid by the borrower, there can be different cases where the banks either not able to recover the money or suffer some losses on the same. Risk is generally termed as any possibility of adverse and unexpected outcome which leads to losses or lower profit for the banks. This can happen due to any unexpected event or unexpected changes in the asset prices or earnings of the banks. Risks vary depending upon the type of business or investment since different factors affect businesses or investments in different ways. Also here the relationship between risk and return comes into picture as the banks provide loan to different businesses or individuals across different risk categories to earn higher returns on their investments. Higher return comes with higher risk only, it means if the bank tries to earn higher return; it can come only at higher risk. Subprime loans carry much high risk as they are given to the people with very low credit rating; which has led to one of the worst financial crisis in recent times. Risks arise from unexpected events which cannot be avoided at all, so how much risk a bank should take? Banks should take only those risks that it understands and should take them within manageable limits. These limits can be set by the regulatory authorities or the bank itself. For this, all the probable risks need to be understood and quantified properly. The mains risks that the banks are exposed to are mainly
1. 2. 3. 4. 5. 6. 7. 8. Credit Risk Market Risk Operational Risk Solvency Risk Compliance/Regulatory Risk Liquidity Risk Legal Risk Reputational Risk
Banks should be able to quantify all these risks and should have proper risk management methods to manage these risks. Failing to manage these risks can lead to huge loss to the banks
Credit Risk
Credit risk arises from the failure of counterparty to fulfill its contractual obligations. Credit risk can arise both from loan portfolio and investment portfolio. In case of loan portfolio, the risk that bank carries is that of default by the borrower of the loan. If the borrower defaults to repay the entire or some part or the loan then bank suffer loss of the amount that the borrower is unable to repay. This situation can arise from any unexpected event or accident or the borrower may just refuse to repay the loan amount. Higher risk comes with lower credit rating of the borrower and banks charge higher interest rate in order to compensate the higher risk, though the credit risk remains the same. In case of investments the bank invests in bonds, the issuer of bonds may default leading to loss for the bank. In case of transactions in securities or derivatives, bank suffers credit risk if counterparty has to pay the settlement amount to the bank and defaults on the same. The credit risk can arise for different swap instruments (like interest rate swap, currency swap etc.) as well where the counter party default to pay the settlement amount as per the contractual obligation. Credit risk is calculated based on the credit rating of the borrower or the counter party. Some banks have made it mandatory to check the credit rating of the counter party before going into any contractual agreement with the same.
Market Risk
Market risk arises from the unexpected movements in financial market variables like inflation, interest rate, foreign exchange rate etc. A banks investment and loans are exposed to these market factors which can lead to loss for any adverse movement. If the interest rate rises, the value of the assets in a portfolio increases and at the same time value of bonds decreases as bond prices are inversely related to the market interest rate. Suppose a bank has invested in a bond with par value USD 1000, coupon rate as 9% and yield rate at 9%. If the market interest rate rises, the market price of the bond decreases which can lead to loss in the bond portfolio. At the same time, inflation can reduce the purchasing power and reduces the value of the assets. High inflation leads to high interest rate which again reduces the market value of bonds, as explained before. Also high inflation affects the economic growth and reduces the expected rate of return from the market. Foreign currency risk arises if the banks operate in the foreign currency market. Suppose a bank buy one USD for Rs. 50 from a customer to sell it in the foreign currency market and
the Rupee appreciates by Rs. 1 per USD the next day, then bank incurs Rs 1 loss per USD due to the adverse foreign currency movement. All these risks arise from different market variables.
Operational Risk
For a bank, Operational risk arises from unexpected internal or external operations related events. The unexpected operational events can occur from failed internal processes, failed transactions, human or system errors and loss of data due to some natural disaster or hazards, which all result in loss for the bank. Operational risk can arise from both internal and external risk factors which need to be monitored and managed properly in order to reduce loss from the same. Internal Operational risk factors Human Resource Related risk factors are

Employee error Employee fraud or misdeed Loss of key employees Failure to follow the employment law properly Health and safety related issues with the employees
Process related risk factors are

Accounting and Reporting error which represents important financial numbers wrongly New Product or project risk which fails to deliver as promised/expected Settlement and payment related error Transaction error Audit related error which fails to identify mistakes Legal or contract related error regarding loan agreements and other contracts
System related risk factors are

System failure leads to loss of data Programming errors/bugs lead to incorrect data or transaction Security related issues or fails to protect sensitive customer information Failure to have proper data backup leads to loss of important data System Compatibility error Lower data quality due to poor database management processes Lower system capacity or system not able to handle huge data
External Operational risk factors Main external operations risk factors or unexpected events are
Legal or compliance error
Regulatory risk arising out of new regulations imposed by appropriate authority Supplier risk or failure to procure proper supply on time Fire or Natural disaster causing of loss in asset or data Physical security related errors Theft of money
Banks not only keep money from the customer but they also store very sensitive information about all of them. To protect both the data and money, banks should have appropriate risk management processes to handle all the possible operational risks mentioned above.
Solvency Risk
Solvency risk arises when a counter party is declared as insolvent and failed to honor the commitments and repay the bank as per the contractual agreement. Solvent parties have enough liquidity to honor all the commitments and at the same time they carry risk of becoming insolvent unexpectedly. Solvency risk is higher if the liquidity position of the entity is tight and financial leverage is very high which can lead to even bankruptcy if the entity fails to honor its minimum commitment. Suppose a bank has provided significant amount of loan to an aviation company with the contract to receiving the same within next 10 years along with the interest. Now if the aviation company fails to run afloat for next 10 years and declare bankruptcy in between, then the bank losses all the money it has lent to the company. For bankruptcy, the liquidation is done in which all of its assets are sold to repay the lenders first followed by preference shareholders and common equity shareholders. But for most the cases, the total amount from the sell proceed of the assets is pretty less compared to the original loan amount and the bank losses most of its money. Banks can also face solvency risk from themselves where the banks become insolvent due to lack of liquidity in the system. In this case, banks may be sold to other banks or get government help to keep afloat.
Compliance/Regulatory Risk
Compliance Risk arises due to non-compliance with regulatory standards and consequent levy of penalties, fines on banks or facing any other regulatory action by the appropriate authority or the Central Bank. Compliance with regulatory requirements is critical for longterm survival of a bank and to retain the banking license. Banks should have enough liquidity with them to meet the regulatory standards and maintain the minimum regulatory reserve requirements set by the regulatory authority. If the regulatory requirements are changed, banks have to oblige the new requirements as well within the given time frame without fail. Failure to meet the regulatory requirements can lead
to hefty fine or cancellation of banking license by the regulatory authority. Thus it has significant risk to the banking business. The regulatory risk may still arise due to the following reasons:

Lack of proper compliance organization Wrong Compliance Interpretation Absence of Compliance reviews
Lack of proper compliance organization Banks have to set up proper compliance department in order to track all compliance requirements, seek clarity of those requirements and to communicate such requirements to various business units, responsible staff and locations. Along with this, interaction with regulatory authority and training all the required staffs are also considered to main responsibilities of the compliance department. Absence of such department can lead to huge misunderstanding and possess high risk for the banks for possible fine or license cancellation. If one bank operates in multiple countries, they have to keep separate compliance department for each country to take care of various regulatory requirements in order to avoid any possible compliance risk. Wrong Compliance Interpretation Compliance risk can also arise from wrong interpretation of some regulatory requirements. Some organizations follow more stringent regulatory practices which sometime can go against the regulatory requirements and increases compliance risk. Sometime absence of expert compliance or legal official can lead to wrong interpretation of the compliance requirements. Absence of Compliance reviews Most of the regulatory requirements mandate proper review by outside committee to make them more effective and compulsory for the banks. Sometimes banks do the compliance review done by outside parties in order to make sure that all the regulatory requirements are satisfied and all the necessary measures are in place. If the banks fail to have proper review and compliance confirmation done regularly, it can expose the banks with possible compliance or regulatory risks.
Liquidity Risk
Liquidity risk refers to the risks arising either out of lack of liquidity of the holding shares or assets at the time of selling or out of lower liquidity holding of the banks as cash or cash equivalents. The first one is referred to as market liquidity and the second one is referred to funding liquidity. Market Liquidity Risk
Market liquidity risk arises when the holding assets or shares dont have adequate liquidity due to absence of buyers. In that case banks may need to sell the shares at much lower price than the original one, leading to loss. Suppose a bank holds share of XYZ Company but these shares are not traded in the stock market anymore due to absence of buyers. If the bank wants to sell the shares in the stock market, then it has to sell them at much lower price in order to complete the transaction. This can lead to significant amount of loss or reduce the actual profit from the investment. The same thing has happened to the mortgage lenders during the subprime crisis when the price of the mortgaged houses fell significantly due to absence of new buyers and banks had no other options left except selling them in deep loss. This can be possible for market traded corporate bonds as well. Thats the main reason banks should check the market liquidity of a share or bond before investing in them. Funding Liquidity Risk Funding liquidity risk arises if the banks do not have sufficient liquidity to meet its liabilities when the depositors withdraw their money or to provide new loans to the borrowers. This situation can arise due to liquidity tightening by the central banks or mismanagement of the existing liquidity. In both cases, banks are not able to generate required liquidity to meet its obligations and continue business operation. In most of the cases, funding liquidity crisis is driven by the market liquidity crisis. If there is significant drop in market liquidity, banks have to sell their holdings at loss and they fail to generate the minimum liquidity for funding. During subprime crisis in 2008, first the price of the houses dropped which prompted the banks to sell their mortgaged houses at loss. That has led to severe liquidity crisis throughout the worldwide financial market. Bankruptcy declaration of some big banks has worsened the condition far beyond our imagination.
Legal Risk
Legal risk refers to the risk of loss arising from contracts which cannot be enforced legally. The laws and legal systems differ from country to country. Multinational banks with operations in different countries are more vulnerable to this risk as different countries have different legal terms. Suppose a bank has signed a contract with a borrower in a Country A which is valid as per the legal terms of the country. If the bank signs the same contract with another borrower in Country B where the legal terms does not support the contract agreements, banks can incur loss on that investment. As the legal terms do not support the agreements, it becomes impossible for the bank to recover the amount from the borrower.
Reputational Risk
Banking sector is very much competitive with large number of players in the market. Thats why banks need to depend on their existing customer business to increase their business and good reputations help them to retain their customers. Reputational risk arises due to loss of reputation for a bank. The loss of reputation may arise due to misguidance by bank representative, loss in portfolio, wrong wealth management services, poor customer services etc. In these cases, customers lose trust in the bank and opt for some other bank. Suppose an investment bank manages millions of US Dollars of a company where the risk details and return objectives are clearly specified and agreed upon by both the parties. Now to generate higher returns, the portfolio manager may invest in assets with higher risk then he is allowed to do so. If the investment suffers loss due to wrong investment, then the customer lose the trust in the investment bank completely and withdraw its whole investment from the bank. To reduce reputational risk, banks need to have proper risk management processes, provide superior customer services, recruit expert representatives and provide adequate training to all of its employees.
Risk Management
All the banks and financial institutions must have proper risk management in place in order to mitigate all the possible risks that we have already specified in other posts. Now we will go through different risk management strategies that the banks or financial institutions can adapt in order to lower their risk exposure or mitigate their risks. The main Risk Management Strategies are

Risk Avoidance Strategy Risk Mitigation Strategy Risk Transfer Strategy
Risk Avoidance Strategy

The easiest risk management strategy is to avoid risk by not taking an exposure to a loan or financial assets which have higher risks. Banks may decide not to provide any loan or funding to some specific sector with high credit risk and borrowers with low credit rating in order to reduce its risk exposure. Suppose the whole airline sector is struggling due to high ATF price and lower travel due to global slowdown. In this case, banks can completely avoid lending any new loans to any airline company in order to safeguard itself from any potential loss. The same thing is applicable for individual lenders as well. Banks may simply refuse to provide any loans to borrowers with low credit rating in order to reduce their risk exposure. During subprime
crisis, Banks provided loans to house buyers with very low credit rating at very high interest rates which led to one of the worst financial crisis ever. For financial markets, banks may decide not to deal in complex derivatives for trading purposes and keep their exposure limited. Risk avoidance can also be a regulatory strategy, where regulators restrict banks from taking certain exposures in complex derivatives and high risk financial instruments. But complete risk avoidance is not possible for a bank as it reduces its interest income on the loans it has provided to other borrowers. Also banks earn high income through different types of derivatives transactions. So this risk avoidance strategy is mainly applicable when the banks do not understand the risk or are unable to manage the same or the reward for taking such risk is not sufficient.
Risk Mitigation Strategy

The most important risk management strategy is Risk mitigation where the banks use all their expertise and different methods to mitigate their risk exposures. Risk can be mitigated in number of ways like diversification, continuous monitoring of the risk exposure and proper due diligence before providing loans. Diversification ensures that the risks that are specific to entities are diversified away by investing in different entities. For example, banks can limit its loan exposure to a particular industry or sector so that poor performance of the sector does not affect much to the bank. By investing in different non-correlated sectors, banks can easily reduce their total risk exposure. Suppose real estate and auto sector are highly interest sensitive sectors while pharmacy and FMCG are very low interest rate sensitive sectors. Banks can choose to invest in all these sectors at the same time, so that the total interest rate can be reduced significantly. This is applicable for countries as well and that is why large banks try to spread their operations globally so that it mitigates the risk of being exposed only to one country like political or any country specific risks. Investment in Gold, Risk free assets, Government bonds etc. offer lower return along with lower risk exposure. Banks invests some percentage of their total funds in these instruments to safe guard their capital. Regulatory authority of most of the countries have made it mandatory for banks to invest some percentage of their overall capital in government bonds, pension funds etc. in order to reduce their risk exposure.
Risk Transfer Strategy

Sometimes banks invest in attractive instruments with higher risk in order to earn higher profit. To mitigate such risks banks use risk transfer strategy where it transfers the credit risk to another party that is willing to take the risk.
This strategy has become very popular in USA just before the subprime crisis where banks had transferred their subprime credit risk and mortgage risks to other insurance companies at certain premiums. They have used complex financial instruments like Asset based securitization and Mortgage based securitization and credit default swap etc. to transfer the risk to third parties. Too much risk exposure in subprime and mortgage loans of some insurance companies like US Insurance giant AIG proved as disastrous for those companies when much higher than expected number of borrowers went default and they had to pay the entire insured amount to the banks. Credit default swap is one of the most popular risk transfer strategy that is being used by most of the banks and financial institutions even now as well. Banks can also hedge risks on their own by using different derivative instruments such as forward, futures, options and swaps etc. Currency swap helps them to transfer currency risk and interest swap helps them to transfer interest rate risk to counter parties. All these are explained in the derivatives segment.
Risk Management through Compliance

There has been lots of financial crisis in the world history and each crisis prompted for stricter and more effective compliance rules. The financial crisis of 2008 was the most severe one which had led to bankruptcy of big global banks and recession in most of the developed economies. The crisis underlined the importance of sound financial system and risk management. Over the time due to increased competition in the financial market, different banks and financial institutions increase their financial leverage in order to make big profits. They have used borrowed capital to invest in complex derivative instruments which increases their risk exposure as well and makes them more vulnerable to any negative sentiment in the market. Financial sector is the back bone for any economy and it has to be well established in order to support economic growth. If the banking system fails, the entire economy will collapse and people will lose their savings. Therefore, its very important to control and regulate the entire banking system. Following are the different regulatory requirements imposed on the banks in order to improve their risk management and reduce their overall leverage.

Basel Norms Anti-Money Laundering Know Your Customer Sarbanes Oxley Act
Basel Norms
Basal Norms are the banking supervision and regulatory norms published by the Basel Committee on Banking Supervision (BCBS). There are three versions of the Basel Norms like Basel I, Basel II and Basel III; they are called as Basel Accords. Basel norms are widely used in the banking and financial sector across the world because of its effectiveness and usefulness. At the beginning representatives from central banks authorities of the G10 countries have meet at Basel to develop some standard regulatory recommendations for banks and financial institutions called Basel Accords. They dont have any authority to enforce these recommendations on a country but most of countries have accepted these recommendations for all the banks operating inside the country. Check the below links to get more information regarding all the Basel Norms
1. Basel I 2. Basel II 3. Basel III
Basel I
Basel I is the recommendation set published by central bank heads from G10 (Group of 10) countries in the world in 1988 which provides the norms of minimal capital requirements for Banks. Before publishing Basel II with better risk management, it was the widely used banking regulation guidelines in the world. Basel I was prepared mainly to handle the credit risk. To reduce the credit risk, it has suggested the banks to hold some capital with them equal to some predefined percentage of all the risk weighted assets. To do the same, assets of banks were classified into five categories based on the probable credit risk which starts from zero to 100% with 10%, 20% and 50% credit risk in the list. The example of asset with zero credit risk would be the government bond issued by the domestic countrys government and the example of asset with 50% or 100% credit risk would be the corporate debts based on the business risk. After classifying the assets based on credit risk, the total risk weighted asset is calculated after multiplying the asset weight with the credit risk percentage. After that based on the total risk weighted asset and the minimum capital requirement percentage (mainly 8%) the minimum capital requirement is calculated which the banks are required to hold with them. Let us see one example to understand this properly. Suppose one bank has total assets of 1000 USD in which 200 USD is invested in each type of categories with credit risk 0%, 10%, 20%, 50% and 100%. The total risk weighted asset would be = 200*0.00 + 200* 0.10 + 200* 0.20 + 200*0.50 + 200* 1.00 = 0+ 20 + 40 + 100 + 200 = 360 USD
Now if the minimum capital requirement percentage is 8%, then the minimum capital requirement will be 360* 0.08 = 28.8 USD. So 28.8 USD has to be held with the bank for the total asset of 1000 USD. Disadvantage of Basel I Banks have used the minimum held capital to implement credit default swaps to pass on the credit risk to other insurance companies. By doing this they can reduce the actual capital holding requirement significantly and expose the insurance companies in the credit risk. The credit default swap was the main reason behind US insurance giant AIG filing bankruptcy during the subprime crisis in 2008. Basel I, that is, the 1988 Basel Accord, primarily focused on credit risk. Assets of banks were classified and grouped in five categories according to credit risk, carrying risk weights of zero (for example home country sovereign debt), ten, twenty, fifty, and up to one hundred percent (this category has, as an example, most corporate debt). Banks with international presence are required to hold capital equal to 8 % of the risk-weighted assets. However, large banks like JPMorgan Chase found Basel Is 8% requirement to be unreasonable and implemented credit default swaps so that in reality they would have to hold capital equivalent to only 1.6% of assets.
Basel II
Basel I had been modified later to Basel II in 2004 to make it more effective to regulate the banks. While Basel I had considered only the credit risk, Basel II has considered other risk factors as well and suggested international standard guidelines to guard all the banks against the same. Basel II has published the new international standards to calculate the minimum capital requirement to guard the banks against all types of possible financial and operational risks. Three Pillars of Basel II Basel II used three pillars to deal with all risk management for the banks. The three pillars are 1. Minimum Capital Requirements 2. Supervisory Review 3. Market Discipline All these pillars will be explained now with more details. Minimum Capital Requirements Basel II has introduced two more risks along with credit risk to calculate the minimum capital requirement for the banks. They are Market risk and operational risks. The Market risks mainly deals with the market related issues and macro-economic factors while the operational
risk deals with the banking business functions operational and regulatory failures which also increases the risk of losing money. Basel II requires banks to hold capital for all these three risks market risk, operational risk and credit risk. Basel II has also introduced different methodologies to calculate these different types of risks. Credit Risk can be calculated by these three methods 1. Standardized Approach: This is the most commonly used approach to find the credit risk. Here in this approach, the banks use the ratings provided by the global external rating agencies to calculate the credit risk percentage. Suppose for investment in bonds with credit rating AAA has 10% credit risk and investment in bonds with credit rating BBB has 50% credit risk. This does not require any investment by the bank as the credit rating process is completely external and completely dependent on the credibility of the external credit rating agencies. 2. Internal Rating Based Approach: This approach is used by the banks without depending upon the external credit rating agencies. Here the banks develop their own statistical model to calculate the probability of default based on the client details and clients business. From the probability of default they calculate the default rate of a particular group of customer and risk percentage for the same. As this is completely internal process, Banks need prior approval from the local regulator (central bank of the country) to use this approach to calculate the credit risk. Banks are also required to use the other important parameters provided by the Regulator to calculate the Risk Weighted Assets (RWA). 3. Advanced Internal Rating Based Approach: As the name suggests this is the advanced version of earlier used internal rating based approach to calculate the market risks. Here with the proper approval, large Banks can use their internally developed parameters to calculate market risk components and their risk percentages. Operational risk can be calculated by these three methods 1. Basic Indicator Approach: This is the simplest approach to calculate the operational risk. Based on this approach, the banks must hold some capital for operational risk which is a fixed percentage of the total annual gross income from the banking operations. The fixed percentage amount is calculated based on the average risk over the previous three years. This is mainly used by banks without significant operational risks. 2. Standardized Approach: Here the banks divide their business into eight categories for which a separate beta factor is assigned based on the risk involved in that particular business function. The beta for each business function is calculated based on the industry wide operational risk involved for that particular business line. The capital for each business line is calculated based on the past three year average and after that the capital is multiplied with the corresponding beta value to achieve the minimum capital requirement for the operational risk involved in each business function. The whole sum gives the total minimum capital requirement for operational risks.
3. Measurement Approach: Here the banks develop their own statistical model to calculate the operational risk based on their operations and business system performance and failures. Banks use probably to calculate the operational defects and system errors to finally achieve the operational risk requirement. Banks are required to get the necessary approval from the local regulator or the central bank before using this method. Market risk denotes the Macro-economic risks related to the market like high interest rate, inflation, equity risk, currency exchange rate risk etc. Market risk is calculated based on VaR or Value at Risk. Supervisory Review This is the second pillar of Basel II norms which deals with the supervisory and regulatory part of the first pillar risk management processes. It provides the framework about how the central bank or the country regulator supervises and regulates different banks and their risk management processes. With the supervisory and regulatory review power, it also provides some more framework and processes to deal with other risk areas in the banking and financial systems like strategic risks, liquidity risks, legal and political risks which were not included in the first pillar. Here not only the countrys central bank or regulatory authority review the banks risk management process, but banks can also review their own risk management processes to handle probable risks properly. Market Discipline Financial and banking system is very important for a country and it acts as a back bone for the whole economic system. Stability issue in the financial and banking system can derail the economic and GDP growth. The same thing has happened during subprime crisis in US which led to worldwide recession in 2008 and 2009. The worldwide banking and financial system went into deep crisis due to subprime lending and lower stability in the financial system. After that the third pillar of Basel II norms, Market Discipline has become very much important to keep the financial and banking system stable and properly functioning. These norms make compulsory for banks to share the financial and lending details to the regulators, investors and analysts so that they can analyze the banks financial health. Banks are also required to publish their lending exposure in different market segments and the adopted risk measurement and management process for the same. It always lead to good corporate governance system and helps the banks to gain customer and investor confidence regarding their business functions and processes. Use of Basel II Basel II is the most widely used norms for banking and financial sector. After the introduction in 2004, it has witnessed lots of progresses.
Because of its effectiveness to regulate banking processes and manage risk, it was widely accepted by most of the countries in the world.
Central Banks of most of the countries including all the developed economies has made it compulsory for all the domestic banks to comply with the Basel II norms. Because of introduction of new efficient risk measurement and management processes, it helps banks to manage their risk much better. It helps central banks of the countries to supervise all the domestic banks operations and functions. It improves the corporate governance process among the banking and financial companies. It prepares the banking and financial systems to withstand any probable financial or liquidity crisis in the future.
The last point is very much important if we consider the subprime lending crisis which had put the whole worlds financial system into its worst financial crisis after the great depression. So why did this happen if the banks had implemented the Basel II norms? Was that a failure of Basel II norms? No, actually it was not the failure of the Basel II norms. It was the failure of the central regulatory authorities who failed to regulate or supervise the banks properly and review their risk exposure. Basel II norms provides the risk measurement and management process with more supervisory and regulatory power but it neither stops banks to derive complex derivatives to increase the risk exposure without changing the minimum capital requirement guidelines nor protects the banks from taking huge exposure in the very risky subprime lending market without even reviewing the credit rating of the customers. Banks have created complex derivative like credit default swap, Collateral Debt obligations (CDO) and Mortgage Backed Securities (MBS) and diversified the risk to other financial institutions to satisfy the Basel II norms. All these steps failed at that time and spooked the financial market. The subprime crisis has happened because of the banks and financial institutions, which had taken different steps to bypass the Basel II norms to increase their exposure in the subprime market. The regulatory authorities or the central banks have also failed to scrutiny their risk exposure and risk management properly. After this financial crisis, the Basel Committee on Banking Supervision (BCBS) has started thinking of some more stringent and superior norms to protect the financial system. Thus Basel III was born from Basel II after some modification. The Basel Committee on Banking Supervision (BCBS) is still working on the Basel III norms.
Basel III
After the latest financial crisis in 2008-09 which led the whole world into recession, the Basel Committee on Banking Supervision (BCBS) has started working on the Basel II norms to strengthen the financial regulations and supervisory process to protect the financial system from another financial crisis. It also aims to improve the banking minimum capital requirements and regulatory requirements to review and regulate banks risk exposure and liquidity condition in much better way.
The norms aim to tighten up the banking system in every country to withstand any financial shock by focusing on all the risks that the banks are vulnerable to. It aims to plug the gaps in the existing Basel III guidelines to make the banks for resilient to any financial crisis in the future. These guidelines will ensure that the banks are well capitalized and well maintained to manage all the kind possible financial and operational risks. New Norms of Basel III Basel III has added some new norms or requirements or modified some old Basel II norms for the banks to improve their minimum capital requirement. As per Basel III norms,

Banks are required to hold 5.5% of common equity. Capital Conservation buffer should be 2.5% Minimum common equity tier 1 capital plus capital conservation buffer: 8%. Additional Tier 1 capital: 1.5% Tier 2 Capital: 2% Banks are required to hold 7% of Tier I capital of risk-weighted assets (RWA). Minimum total Capital ratio (both Tier 1 and 2): 9% Minimum total capital ratio plus capital reservation buffer: 11.5% Capital base will be increased and new definition for capital will be introduced to calculate different capital base. The risk coverage and measurement process will be modified. Risk management process will be improved to make it more effective. The overall economic quantity (Procyclical) with the increase in economic activity will be reduced to check the liquidity in the market. It will protect the financial system from any financial bubble.
Basel III norms and requirements are supposed to be released by the end of 2011 and all the Group 20 (G20) countries have committed to adopt the new Basel III norms and requirements by 2012. With the adoption of Basel III, the G20 country leaders expect to protect the global financial system from any crisis or financial meltdown. Indias central bank the Reserve Bank of India has also issued Basel III guidelines for all the Indian Banks. As per the timeline, all banks will have to maintain the minimum common equity of 5.5% by 31st March 2015 and minimum capital conservation buffer of 2.5% by 31st March 2018.
Anti-money Laundering
Money laundering indicates the criminal and illegal processes by which the black money or funds from illegal activities enter into the financial system. Banks play the most critical role in avoiding the money laundering as laundered money is integrated into the economy corrupting the existing financial institutions. Banks have been used as a means for laundering money since a long time as the customers often hide their source of income properly before investing the money in different banking
products. Banks also fail to identify the money laundering cases. Banks can also prosecute their employees if they are involved in money laundering activities. Employees are also provided with adequate training in order to train them about different money laundering cases. In order to stop money laundering, Central banks from different countries have introduced norms for record keeping, reporting, account opening and transaction monitoring to check the incidence of money laundering. Anti Money Laundering (AML) is the range of regulations and procedures that have been designed to prevent money laundering. The key points are

Financial Action Task Force (FATF) was set up in 1989 which aims to ensure global action against money laundering It monitors the money laundering policies of member states and evaluates their progress towards the implementation of measures to end money laundering. It also publishes new guidelines to stop money laundering across different countries It can pass laws to confiscate and forfeit proceeds of crime, and require financial institutions to report suspicious transactions, identify clients, and establish internal controls. After September 11, 2001 terrorist attack in USA, the FATF had added eight new recommendations to fight against financial transactions involving terrorism. With these new norms, the member countries can criminalize the financing of terrorism and associated money laundering, freeze and confiscate their accounts and report transactions suspected of being related to terrorism.
All these steps are taken in order to reduce money laundering activities across the global in order to protect the financial system.
Know Your Customer

All the regulatory authorities from different countries have made it very important for their banks to ensure that they should know all the customers they are dealing with. Adequate due diligence procedure is placed for both new and existing customers in order to stop money laundering and mitigate reputational, legal and other risks. For this, central banks have applied Know Your Customer (KYC) norms for all the banks operating in the country. The KYC guidelines include a proper customer acceptance policy, customer identification program, extensive due diligence procedures and monitor all the transactions including suspicious ones. Key steps involved in implementing KYC by a bank

Capture all the information from the customers (New as well as existing customers). All the vital information needs to be collected by the bank before offering them any financial services. Validate all the information by verifying all the supporting documents submitted by the customers. The verification process requires customers to submit all the relevant supporting documents to the banks.
Evaluate risk and compile the risk score for each customer after validating his details. Recognize all the customers based on risk before offering them any financial services. Banks should perform proper investigative if it finds any suspicious transaction by the customers. Proper investigation is necessary before continuing business with them. Banks should report any regulatory breaches to the appropriate regulatory authority immediately to take necessary actions.
It should monitor transactions and records of the customers continuously and take prompt action whenever required. Proper KYC standards help banks to protect their reputation and reduce their legal, operational and other risk exposures. The KYC Standards are not only applicable to banks but also for other financial institutions including the non-banking financial institutions which deal with the customers. In India, KYC is mandatory for all the customers to invest in mutual funds.
Sarbanes Oxley Act (SOX)

Sarbanes-Oxley Act was introduced in 2002 to ensure investors confidence in financial statements and to prevent / reduce number of financial scams. The Act has significant impact on way different companies report and disclose their financial information. It also includes all the banks and financial institutions as well. Some of the disclosure requirements are as follows:

It must include disclosure of all off-balance-sheet arrangements and known contractual agreements with other parties Must disclose if a Code of Ethics exists, and must make the Code publicly available through its Web site or SEC filings Waivers to the Code must be reported and disclosed properly Made corporate accountability mandatory which requires CEOs and CFOs to certify that the information presented is correct or accurate. Authorities are held responsible for any false or misleading information provided and may be punished for such offense.
A companys annual report must contain a report from management on internal control which should include

Managements responsibility for establishing and maintaining an adequate internal control structure and procedures for financial reporting Identifies the framework used by management to evaluate effectiveness Should be attested as true by external auditor and auditors cannot perform management functions without impairing independence
Investment Banking and its Functions

Banking is comprised of Consumer Banking, Commercial Banking, Global Corporate and Investment Banking and Asset Management. An investment bank offer financial services for clients, such as the trading of derivatives, fixed income, foreign exchange, commodity, and Equities or advisory services for mergers and acquisitions. Investment banks are defined as companies that help other companies in increasing financial capital in the capital markets, through things like issuance of stock and bonds. An Investment bank offer financial services for clients, such as the trading of derivatives, fixed income, foreign exchange, commodity and Equities or advisory services for mergers and acquisitions. Investment banks perform, Initial Public offerings (IPO), trades on securities and bonds and they also act as brokers.
Investment Banking Functions

Investment banks have many functions to perform. Some of the most important functions of investment banking are as follows:
IPOs: Investment Banks facilitate public and Private Corporations Initial Public Offering known as IPO (issuing securities in the primary market) by providing underwriting services. Other services include acting as intermediaries in trading for clients and foreign exchange management. Investment management: Investment Bankers also provide advice to investors to purchase, manage and trade various securities (shares, bonds, etc.) and other assets like real estate, hedge fund, mutual funds etc. Investors may be financial institutions or big fund houses or private investors. The investment management division of an investment bank is divided into separate groups, namely, Private Wealth Management and Private Client Services. Boutiques: Small investment banking firms providing financial services are called boutiques. These mainly specialize in trading bonds, advising for mergers and acquisitions, providing technical analysis etc. Mergers and Acquisitions: Another major function of the investment banking include mergers and acquisitions (M&A) and corporate finance which involve subscribing investors to a security issuance, coordinating with bidders, or negotiating with a merger target. Structuring of Derivatives: This has been a relatively recent division which involves highly technical and numerate employees working on creating complex structured derivative products which typically offer much greater margins and returns than underlying cash securities. Merchant banking is nothing but the private equity activity of investment banks. Goldman Sachs Capital Partners and JPMorgans One Equity Partners are the current examples. (Note: Originally, merchant bank was the British English term for an investment bank.) Research is another important function of an Investment bank which reviews companies and writes reports about their prospects with buy or sell ratings. Though this division does not generate direct revenues, the information gathered or produced by them is used to guide investors and in some cases for Mergers and Acquisitions. Risk management is a continuously ongoing activity which involves analyzing the market and credit risk that traders are taking onto the balance sheet in conducting their daily trades, and setting limits on the amount of capital that they are able to trade in order to prevent bad trades having a detrimental effect to a desk overall.
In general, Investment banks
Acts as intermediary between issuers and investors
Provides Strategic, financial and valuation advisory services. Raises capital through the issuance of securities, private equity and debt. Advises companies in merger & acquisition and restructuring transactions Provides special products and services to the corporate and government clients.
Investment Banking Units

The units in the investment banking are divided in three types based on their trading activities and communication channel with the client base. These units are

Front Office Middle office Back Office
Front Office Front office is the division of Investment banks which communicates directly with the customers. Basic functions of Front office are

It captures the trades and entered into the system. It receive, amend or cancel orders from its clients over the phone or on the system. It also executes the trades which are entered manually or which directly come from exchange. Performs necessary selling and marketing of its investment banking services like merger and acquisition, equity research, fund raising etc. This division directly interacts with the clients to know their funding requirement and act accordingly.
Middle Office Middle office is the Trade processing system of the investment banks which provides support to the front office

It strictly monitors the trades and captures exception if any. It validates and does standardization of trade records received from a trade capture system. It also captures the profit flows or financial controls. It takes care of the settlement part involved in the transactions Trade Matching It takes care of all the related risk management activities which are very important for an investment bank after the recent subprime crisis in USA. It handles the treasury management, internal control and corporate strategies for the investment banking division.
Back Office Back offices provide support to both the front office and middle office of the investment banks. These are not noticeable to the customers; thats why these are called back office.
It carries out all the administration/management related activities
It performs functions like Settlements, Clearance, Record Maintenance, Regulatory compliance with government regulations and accounting. It keeps a documentation of companys sales and purchase transactions and updates the inventory (i.e. Database) as required. It validates the trading data It provides all the necessary trading information to the middle and front office periodically.
Investment Banking Trading steps

Three major steps involved in investment banking trading are as follows:

1. Order Execution 2. Trade Matching 3. Clearance and Settlement
1.
Order Execution
An Order is a direction given to dealer to execute a trade with the client at a certain price specified in the placed trading order. Dealers do a continuous market scanning to check for certain price to execute the trading order. Different types of trading orders are: Different Types of orders Market Order: A market order directs the dealer to execute a transaction at the current market price whatever the price may be. This execution happens instantly. Limit Orders: A limit order directs the dealer to execute a transaction only at a specified price or at a better price. A limit order is best used when the actual price at which the trade is done is more important than the time at which it is done. Since a limit order is always entered away from the current market price, it takes time to be executed. Sometimes the order is not executed at all during the market trading hours. Stop Order: A Stop Order will be executed if the price level is breached. Traders often use stop orders to protect profitable positions against unexpected market reversals. Stop Limit Order: A slightly more complex order strategy is the stop limit order, in which a limit order is activated when market prices move through a stop level. In simple words, if the limit price cannot be traded after the stop is penetrated; the order will not be filled. The stop limit order is most useful in markets where the price movements are unpredictable. Day Order: Day orders are valid for a particular day only. It expires once the trading for that particular day is over. Strategies of Execution Different types of order execution strategies used are as follows:
Best Execution: Best execution is a broker/dealers obligation to seek the best terms reasonably available when executing a transaction on behalf of a client. While there is no one standard of what determines best execution, speed of transaction, execution price, price improvement opportunities and liquidity are some of the deciding factors. National Best Bid and Offer: It is the consolidated quotation for a single security that is representative of the highest bid price available and the lowest offer price available among participating quoting market centers. Speed of execution: There are five basic points to an execution: broker receives order from client, broker routes order to market center, market center acknowledges order receipt, order is executed by market center and order confirmation is displayed to client. The time elapsed between when we route an order to a market center and when that order is executed by the market center is a common measure of execution speed. One more measurement is the total time from when we receive an order from a client to when an order confirmation is displayed to a client. 2. Trade Matching
In a trade, there are two types of fields which are primary fields and secondary fields. Trade matching is done based on following Criteria: Exact Match When all primary and secondary fields match. Primary Match Bucket- When only all the primary fields match but the secondary fields do not match. Suggested Match Bucket When one primary field does not match. Unmatched Bucket - When more than one primary field does not match. When a trade is not found in the exchange for a contra party trade, the contra party trade is sent as an advisory and exception is raised and sent to Trade Exception Manager. The trades coming from Front end flows to the Back office via Trade Flow Manager. It does necessary validations and enrichments and parses the message and sends it to backend to complete the trade execution process. 3. Clearance and Settlement
Here at this stage clearing and settlement of the amount is taken place based on the trading activities among the clearing members, investment banks/traders and customers.
Non-Performing Assets (NPA)

NPA stands for Non-Performing Assets. Alternatively, they are also termed as NonPerforming Loans (NPL) when the asset given as loan falls under the same category.
NPA refers to those loans that have stopped making any returns, i.e., defaulted loans. Formally, these are defined as loans on which debtors have failed to make contractual payments at the pre-determined time. The concept of NPA came into existence with the recommendations of the Narasimaham committee in the year 1992-93.As per the committee recommendation, NPA is defined as a loan asset which has stopped to generate any income for a bank whether in the form of interest repayment or principal repayment. In order to adopt international practices and to ensure more transparency, it was decided to adopt the 90 days overdue norm for identification of NPAs from the year ending 31/03/2004. In accordance with it, a Non Performing Asset should be a loan or an advance where:

Interest and/or installments of principal payments remain overdue for a period greater than 90 days with respect to a term loan. The account remains out of order for a period greater than 90 days with respect to an overdraft/cash credit. The bill remains overdue for a period greater than 90 days in the case of bill purchased or discounted. Interest and/or installments of principal remain overdue at least for two harvest seasons but for a period which does not exceed two half years in the case of an advance granted for agricultural purpose. Any amount to be received overdue for a period greater than 90 days with respect to other accounts.
NPLs result from what are termed Bad Loans. These loans can occur primarily due to two reasons:

Bad lending practices Banking crisis
As per The Reserve Bank of Indias (RBI) Website, the actual definition of NonPerforming Assets are An asset, including a leased asset, becomes non- performing when it ceases to generate income for the bank. A non-performing asset (NPA) is a loan or an advance where;
1. Interest and/ or instalment of principal remain overdue for a period of more than 90 days in respect of a term loan, 2. The account remains out of order as indicated at paragraph 2.2 below, in respect of an Overdraft/Cash Credit (OD/CC), 3. The bill remains overdue for a period of more than 90 days in the case of bills purchased and discounted 4. The instalment of principal or interest thereon remains overdue for two crop seasons for short duration crops, 5. The instalment of principal or interest thereon remains overdue for one crop season for long duration crops, 6. The amount of liquidity facility remains outstanding for more than 90 days, in respect of a securitisation transaction 7. Undertaken in terms of guidelines on securitisation dated February 1, 2006.
8. In respect of derivative transactions, the overdue receivables representing positive mark-tomarket value of a derivative contract, if these remain unpaid for a period of 90 days from the specified due date for payment.
Banks should, classify an account as NPA only if the interest due and charged during any quarter is not serviced fully within 90 days from the end of the quarter.
Problems caused by NPA and how to prevent that

NPAs do not just reflect badly in a banks account books, they adversely impact the national economy. Following are some of the repercussions of NPAs:

Depositors do not get rightful returns and many times may loose uninsured deposits. If there is a high number of non-performing assets in a banks portfolio, then in order to redistribute the losses, bank will charge a higher interest rate on the loans and lower rates on deposits. Bad loans imply redirecting of funds from good projects to bad ones. Hence, the economy suffers due to loss of good projects and failure of bad investments. When bank do not get loan or interest payments, liquidity problems may ensue. The banks may face a serious liquidity crunch when a large number of borrowers fail to pay interest. Bank shareholders are adversely affected.
Preventive Measures for avoiding case of NPAs Proper credit assessment of borrowers should be completed to avoid NPA cases. Credit risk should be assessed properly for each corporate which approaches the banks for loans. There are mainly 4 types of risks which should be studied for the assessment purpose. These are:
Financial risk- The risk that a company does not have sufficient cash flow to meet all the financial obligations. It is the risk a shareholder bears when a company uses debt financing in addition to equity financing. Industry risk- Risks companies face due to Industry related issues. It means if the industry is going through a slowdown, a particular firm cannot outperform in the market and will eventually suffer from it. Business risk-The risk that a company will not have sufficient cash flows to meet its expenses on its operations. This means there are chances that the company will not have adequate cash to carry out day to day operations. Management risk-The risks associated with ineffective, destructive and a non-performing management, which can hurt shareholders and the company and fund being managed.
The top 2 risks are objective in nature and they can be studied by the financial /annual reports of the corporate borrowers as well as the research reports . But as far as the bottom 2 risks are concerned, they are subjective in nature and should be assessed with help of in depth analysis for better precision. The credit risk assessment exercise would be repeated annually for the risk grades under the acceptable levels of credit risk and biannually for others for assessing grades as per assessment.
How to Resolve NPA Problem

Worldwide, the common and successful approach towards NPA management is the establishment of Asset Management Companies (AMC). These companies use public or bank funds to remove NPAs from the bank books. Now, there are several proactive measures that are being implemented. Few of them are:

Corporate Governance Better credit information to cut down on fresh NPAs Prudential Supervision Efficient, capable management Well developed capital markets that can offer the mechanism and liquidity required to write off bad loans Securitization
The detailed level Solutions to resolve NPA problems are: 1. One time settlement / compromise scheme (OTS)

It is an option which is provided to the borrowers who have defaulted while repaying back their loans to the banks or financial intermediaries. This might be because of the losses or damages incurred by the borrowers in their business. There is no set of rules which will be applicable to all the borrowers; it in turn varies from person to person and business to business. Here, it not only considers the debt paying ability of the borrower but also considers the collateral provided by the borrower to strengthen the credit quality. If the borrower has 100 per cent security, the bank will not consider the OTS. In such cases, an investigation will be conducted to know where the funds have gone and for which purpose they have been used up. The borrower should be co-operative to make the repayments The restructuring option is not applicable to those businesses which are already closed. In that case, the banks will file a suit against the borrower in compliance with the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act 2002.According to this act, the bank will take the custody of the physical properties of the borrowers and will sell it in the market.
OTS is used mainly for small and medium enterprises that have taken loans from banks and are under the category of NPAs. 2. Debt Recovery Tribunals
The Debts Recovery Tribunal has been constituted under Section 3 of the Recovery of Debts Due to Banks and Financial Institutions Act, 1993. It was constituted for receiving claim applications from the banks against the borrowers who have defaulted. Initially, these tribunals were able to recover huge parts of NPAs but it was the case for small borrowers.
For the large corporate borrowers, even debt recovery tribunals cannot recover the loans effectively. This was due to the fact that cases against the big borrowers were pending in the civil courts without any result. This created big problems for the lenders (banks) which led to the enactment of a more stringent act called as the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interests Act, also called as SRFAESI Act. According to this strict act, the lenders can take the possession of the assets of the defaulting borrowers without giving any notice and without the need to go through rigors of a Court procedure.
3. Asset Reconstruction Companies The term asset means acquisition by a reconstruction company of any right or interest of any bank or financial intermediary in any financial assistance for the purpose of realization of such financial assistance. According to the guidelines framed by Reserve Bank of India, the functions of an Asset reconstruction company are:

Managing the business of the borrower properly. Selling or leasing a part of the business of the borrower Rescheduling the debts which need to be paid by the borrower to the lender. Settling all the dues which need to be paid by the borrower. Taking possession of the secured assets.
4. Securitization of assets
It is defined as the process of packaging of the illiquid assets of the banks and converting them into marketable securities which can be sold to the investors. The investors can in turn get ownership for it. In case there is a probability of occurrence of NPAs in banks, the banks will transfer the collateral, provided by the borrower at the time of taking the loan to SPV and in return take cash so as to avoid the situation of Non-performing assets.
NPA Indian Perspective

According to the Reserve Bank of India, there are sectors which have created distressed assets, the major ones among them are power distribution sector companies, airline sector and the telecom sector. According to the government sources, infrastructure projects will need $1 trillion in the coming five years. The power sector has caused more stress as compared to the other sectors. In order to revive from the damage caused by distressed assets, these sectors will need greater inflow of funds in the coming few years. The reason for increase in the number of Non-Performing assets is the increase in interest rates due to which the debt servicing ability of the corporate sector got reduced. Important Committees regarding NPA
Numbers of Committees have given their recommendations regarding default loans from time to time. 1. The Tandon Committee (1973): It was the first committee in Indian Banking sector to set a proper quality wise grading system for advance portfolio. This was followed by the Chore Committee (1980) which has recognized the need for close watching the quality of loan portfolio, 2. Pendharkar Committee (1981): It recognized the need for classifying advances into various categories to index the overall quality of the portfolio of assets. It was the starting point for introducing the health coding system of categorical bank loan portfolio by the RBI in 1985. 3. Narasimham Committee submitted its first report on November, 1991 and gave more specific criteria for prudential norms of a) asset classification, b) income recognition, and c)provisioning and capital adequacy norms. The Narasimham committee has recommended prudential norms on assets classification, income recognition and provisioning. Income is not recognized on accrual basis but it is booked as income only when it is actually received. Depending on the type of default the assets are classified as under:

Standard assets: These are assets which earn interest regularly and are treated as good advances. Substandard assets: These assets come under the category of NPA for a period less than 12 months. Doubtful assets: These are the assets which remained non- performing for more than one year. Loss assets: The assets which are virtually incurring loss for the bank and have to be written off out of the profits earned by the bank. The committee had recommended that assets classified under last three categories are to be considered as NPAs.
4. Narasimham Committee gave its second report in 1998. It strongly opposed the merger of strong banks with weak banks as this would cause a negative impact on the quality of assets of the stronger bank because of the contaminated portfolios of the weak banks. The committee has not given any suggestions to deal with the extremely high nonperforming assets of Indian banks, but has suggested that the idea of an Asset Reconstruction Fund be considered. Steps taken India to lower NPAs The key steps taken in India to lower NPAs are:

Enactment of the Companies Act (Second Amendment), 2002 so as to strengthen the existing corporate rehabilitation mechanism. Enactment of the Securitization of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI). Setting up of the Asset Reconstruction Company of India Ltd (ARCIL), jointly by State Bank of India, IDBI Bank and ICICI Bank.
Money Market
Money Market is the financial market for short-term borrowing and lending which deals with the short term fund requirements of different financial entities. It offers short-term liquid funding instruments such as Treasury bills, Commercial paper, Certificate of Deposit etc. The money market consists of financial institutions and dealers who wish to either borrow or lend for short period of time, typically up to one year. Main characteristics of Money Market

The government, banks and the financial institutions are main players in the money market. The funds are available for the period of a single day to one year. This is very safe investment and has low interest rate that is suitable for temporary cash storage. An important term in the Money Market is Trading. This engages Treasury bills, Commercial Paper, Bankers Acceptances etc. It gives liquidity funding for the global financial system. Money Market plays a very important role in the economy. The money market takes care of the requirements of market participants who are short cash and long cash by balancing the demand and supply of short term funds.
The basic functions of Money market are

To borrow for the short time period as the borrowing period is usually less than a year. To help the banks meeting the Government Regulatory Requirements like SLR, CRR etc. To generate return with lower risk. To generate return on the surplus funds. To maintain the liquidity by investing in cash equivalent instruments
Benefits of an efficient Money Market An efficient money market provides numerous benefits to the economy.

It improves liquidity management and hence lowers costs. It allows banks to manage interest rate risk as well as the maturity structure of assets and liabilities It allows corporates to lower the costs of short term funding and provides them with a good alternative to long term borrowing. It provides access to a wide range of buyers for government securities, thus enabling them to achieve better pricing on its debt For the central bank, it helps to implement monetary control through indirect methods It also helps in the development of both primary and secondary securities markets as well as foreign exchange and derivatives markets.
Common Money Market Instruments Most commonly used money market instruments are

Certificate of Deposit Repurchase Agreement Commercial Paper
Certificates of Deposit Money market mutual funds Treasury Bills Government bonds Corporate bonds Debentures Participation Certificates
Key Players in Money Market

Government The Central Bank Corporate Units Financial Institution Banks Mutual Funds Foreign Investors Market Makers (Primary Dealers)
Money market operators also include other institutional players viz. Mutual Funds (MFs), Foreign Institutional Investors (FIls), etc. The level of participation of these players varies largely depending on the regulations.
Money Market Instruments and Features

Money market involves transfer of funds in exchange for financial assets. Because of the nature of the money market, the instruments used in it represent short-term financial claims. Though there is no statutory definition for the money market instruments, it is accepted that the maturity profile of money market instruments varies from one day to one year. With short-term liquidity being the main purpose of the money market, various instruments have been developed to suit these short-term requirements. For instance, the amount of funds required by banks to meet their statutory reserves will vary from one day to a fortnight. Similarly, corporate may require funds for their working capital purpose for any period up to a year. Here is a broad classification of the money market instruments depending upon the type of issuer and the requirements they meet Government Securities

Treasury Bills (T-Bills) Government Dated Securities
Banking Sector Securities

Call and Notice Money Market Term Money Market Certificates of Deposit Participation Certificates
Private Sector Securities

Commercial Paper Bills of Exchange Money Market Mutual Funds Corporate Bonds Debenture
Except for their debt nature, the securities above differ from each other in their characteristics relating to maturity, issuer, type of investors, the risk-return profile, liquidity, marketability, negotiability, transferability, etc. Money market instruments, however, do not include any equities. Here is a brief discussion of various money market instruments. Government Securities The RBI on behalf of the government issues all T-BiIIs and Government dated securities. Being risk-free securities, they set the benchmark for the interest rates of the other money market instruments. Though the government issues these two categories of securities, they serve different purposes while meeting the governments fund requirement. . Treasury Bills Treasury bills are short term, money market instruments issued by the RBI on the behalf of Indian Government in the form of discount instruments. At the end of the tenor, holders of T-Bills are paid a fixed amount called Maturity Value. Being issued by the government they are considered to be risk-free. Due to this, they are highly marketable. Investors in T-BiIIs are Banks, Primary Dealers, Financial Institutions for Primary Cash Management, Insurance Companies, Provident Funds (if eligible), Non-Banking Finance Companies, Foreign Institutional Investors and State Government. Government Dated Securities These are medium to long-term government securities. Unlike the T-BiIIs which are issued at a discount, these securities carry a coupon rate. In spite of being long-term instruments, these government securities form a part of the money market due to their liquidity. Being government securities, these dated securities have fairly high liquidity and hence form part of the money market. These instruments set a benchmark for the long-term interest rates. Issuers will clearly be the central/state governments and other governmental bodies while the investors will be banks, FIs, other institutional investors and individuals. Banking Sector Securities The banking system has a very vital and active role in the money market. The transactions taking place in these securities are large in size, both in terms of the volumes traded and the amount involved in the transactions. The short-term requirements of banks vary from a single day to up to a year to meet the reserves and accommodate credit. Based on this requirement, various instruments/markets with differing maturities have developed. Call and Notice Money
Call money is a money market instruments wherein funds are borrowed/lent for a tenor of one day/overnight (excluding Sunday/holidays). These funds represent borrowings made for a period of one day to up to a fortnight. However, the mechanism adopted to lend funds to the call and the notice money markets differs. In the call money market, funds are lent for a predetermined maturity period that can range from a single day to a fortnight. Notice Money is a money market instrument, where the tenor is more than 1 day but less than 15 days. Here, the lender simply issues a notice to the borrower 2-3 days before the funds are to be repaid. On receipt of this notice, the borrower will have to repay the funds within the given time. While both these funds meet the reserve requirements, banks, however, mostly rely on the call money market. It is here that they raise overnight money i.e., funds for a single day. Purpose of Call and Notice Money Market

To meet the deficits and use the surplus money. To meet CRR. Inter-bank market. Interest rate is market determined and calculated on Actual/365 day basis. Borrower and lender are required to have current accounts with Reserve Bank of India.
Term Money Short-term funds having a maturity of 15 days and over are categorized as term money. Banks access this term money route to bring greater stability in their short term deficits. While making a forecast of the fund requirements, banks will be in a position to assess the likely surplus and deficit balances that are to occur during the forecasted period. In view of such forecast, banks assess the amount that needs to be borrowed/lent in order to prevent any severe liquidity mismatch. Certificates of Deposit (CDs) CD is a negotiable money market instrument issued as a promissory note for funds deposited at bank or other eligible financial institution for a specified time period. Banks issue CDs to raise short-term funds having a maturity of 15 days to 1 year. These instruments are issued to individuals/corporate/institutions, etc. These are promissory notes which require the holder to establish his identity before redeeming the amount. They are issued at a discount to face value and transferable. The funds raised through certificate of deposits form a part of the deposits and hence attract reserve requirements. Certificates of Deposit is

Unsecured Negotiable instruments. Issued at a discount to face value and the discount is market determined. CDs are discounted bills. Freely transferable. Banks are not allowed to grant loans against CDs or to buy back their own CDs.
All Banks and DFIs are eligible issuers of CDs. Banks can issue CDs from 15 days (reduced to 7days) to one year maturity. DFIs can issue CDs with an initial maturity of one year to three years. Participation Certificates (PCs) The major activity of a bank is credit accommodation. This service of the banks, apart from increasing the risks, may place them in a tight liquidity position. To ease their liquidity, banks have the option to share their credit asset(s) with other banks by issuing Participation Certificates. These certificates are also known as interbank participations (IBPs). With this participation approach, banks and FIs come together either on risk sharing or non-risk sharing basis. Thus, while providing short-term funds, PCs can also be used to reduce risk. The rate at which these PCs can be issued will be negotiable depending on the interest rate scenario. Private Sector Securities Commercial Papers (CPs) CPs (Commercial Papers) may be defined as short-term, unsecured, negotiable promissory notes with fixed maturity issued by rated corporate. Commercial Papers (CPs) are promissory notes with fixed maturity, issued by highly rated corporate. This source of short-term finance is used by corporate as an alternative to the bank finance for working capital. Corporate prefer to raise funds through this route when the interest rate on working capital charged by banks is higher than the rate at which funds can be raised through CP. The maturity period ranges from 15 days to 1 year. Commercial Papers (CPs) are

CPs are essentially short term Instruments. CPs are an unsecured form of borrowing. CPs are negotiable instruments. Unlike CD, the issuer can buy-back its own CPs. CPs are issued as a discounting instruments.
Corporate, Financial Institutions and Primary Dealers can issue Commercial Papers. Individuals, Corporate, Unincorporated Bodies, Insurance Companies and Banks are the eligible investors of Commercial Papers. Bills of Exchange It is a financial instrument that facilitates funding of a trade transaction. It is a negotiable instrument and hence is easily transferable. Further, depending on the repayment period and the documents attached, these bills of exchange are classified into different types. The duration of these bills generally ranges between 1 to 6 months. Money Market Mutual Funds (MMMFs) Since the operations in the money market are dominated by institutional players, the retail investors participation in the market seems to be limited. To overcome this limitation, the
Money Market Mutual Funds (MMMFs) provide an avenue to the retail investor to invest in the money market. Retail investors normally deposit short-term surplus funds into a savings bank account, the returns from which are relatively low. The returns from MMMFs will be higher than the interest earned in a bank. Further, this provides adequate liquidity and the investor can plan for short-term deployment of funds. These funds have high safety levels since the investments are in high quality securities, i.e., government/bank/highly rated corporate securities. These represent a low-risk and highreturns avenue to the retail investor in the money market. The Money Market mutual Fund / Liquid Funds are the funds that invest in short term liquid instruments. Although Money Market Funds have low risk, there are differences in the risk within and between categories of these funds like Funds investing in the Government Treasury Bill and Call or Notice Money and Funds investing in the securities like Commercial paper, Certificate of Deposit, Treasury Bills etc. Corporate Bonds/Debentures Bond or Debenture is a formal certificate issued by the companies or government agencies acknowledging the indebtedness. The public sector enterprises, financial institutions and the private corporates approach the public to finance their requirements through loans. They can issue either be short- or long-term bonds and debentures. The bond market consists of three different categories of issuers government owned Financial Institutions (FIs), Public Sector Units (PSUs) and private corporates. Some examples of bonds are Regular bonds, Tax saving bonds, floating rate bonds by ICICI, priority sector bond by NABARD, capital gains bond by National Housing Bank, Deep Discount bonds by IDBI, etc. Repo Transaction Apart from these instruments that enable short-term fund management, another popular mechanism to deploy/borrow short-term funds in the money market is known as the repo transaction. It is basically a contract that is entered into by two parties which may include the RBI, a bank or an NBFC. As per this contract, one party sells certain securities to the second party with an agreement to buy them back on a predetermined future date at a predetermined rate. This transaction raises short-term funds to the party selling the securities. From the purchasers angle, the same repo transaction becomes a reverse repo transaction. The reverse repo transaction enables one party to purchase securities with an agreement to sell them at a later date. Thus reverse repo helps adjust the short-term surplus. The underlying securities that are bought and sold are generally government securities. The nature of the transactions and the time involved in the repo/reverse repo transaction generally varies depending upon the regulations. The Indian money market repos/reverse repos are for a minimum period of one day. While there is no statutory limit to the maximum period, it normally does not exceed 3 months. Repos with RBI can be for the minimum period of one day at the discretion of RBI. Repos are normally done for a minimum maturity period of one day and a maximum maturity period of fourteen days. A REPO is a transaction in which two parties agree to sell and repurchase the same security at a mutually decided future date and price. Such a transaction is called Repo when viewed from the perspective of seller of securities and Reverse Repo from the point of view of supplier of the fund.
Purpose of Repo

To meet shortfall in cash position, To augment the returns on funds held. To borrow securities to meet regulatory requirement. RBI uses Repo and Reverse Repo deals as a convenient way of adjusting liquidity in the system.
The securities eligible for trading are:

GOI & State Govt. Securities Treasury Bills PSU bonds, FI bonds & Corporate bonds held in Dematerialized form
Eligible Participants:

Person maintaining a Subsidiary General Ledger account with RBI, Mumbai Person not maintaining SGL accounts with RBI but maintaining Gilt accounts with a bank or custodian who is permitted by RBI to maintain an Constituent Subsidiary Ledger account (CSGL) with the PDO at Mumbai. Any Scheduled Bank. Any NBFC registered with RBI other than Government Companies. Any Mutual Fund registered with SEBI. Any Housing Finance Company registered with National Housing Bank. Any Insurance Company registered with the IRDA.
Risks involved in Money Market Instruments

Apart from ensuring appropriate liquidity, investors should also consider the risks present in the money market investments. Investments in the money market are basically unsecure in nature. While the unsecured nature does indicate a higher risk, the risks associated with money market, however, are not necessarily due to the unsecured nature but more due to the fluctuations in the rates. The level and the type of risk exposure that can be associated with money market instruments/investments areMarket Risk/Interest Rate Risk These risks arise due to fluctuations in the rate of the instruments, and are of prime concern in money market investments. Due to the large quantum of funds involved in the money market deals, and the speed with which these transactions are executed, the values of the assets are exposed to fluctuations. Further, if these fluctuations are wide, it may lead to a capital loss/gain since the price of the instruments, including the government securities, declines. This risk can be minimized by enhancing liquidity since easy exit can help curb the capital loss. Reinvestment Risk
Reinvestment risk arises in a declining interest rate scenario. Investors who park their funds in short-term instruments will, at the time of redemption, have to reinvest these funds at a lower rate of interest. And since the existing securities will be having higher coupons/YTMs, their value generally rises in such situations to bring down the Yields. All money market instruments are exposed to this risk. Default Risk Lending decisions primarily focus on assessing the possibility of repayment since the first risk that the lender will be exposed to is the default risk. Except for the sovereign securities, all other investment/lending activities have the probability of default by the borrower in the repayment of the principal and/or interest. It is due to the absence of the default risk, that the government securities are considered as risk-free securities. Inflation Risk Due to inflation, the average prices for all goods and services will rise thereby reducing the purchasing power of the lender. The risk that arises due to the inflationary effect is known as inflation risk/purchasing power risk. All money market instruments are exposed to this risk. Lenders will generally ensure that their contractual rate of interest offsets this risk exposure. Though the capital market has designed instruments to hedge against this risk, they are yet to be introduced into the money market. The Capital Indexed Bonds (CIBs) issued by RBI is an instrument designed to minimize/eliminate the inflation risk. With a maturity of 5 years, these CIBS earn a 6 percent return on the investments. The principal amount is adjusted against inflation for each of the years and the interest is then calculated on this adjusted principal. Further, upon repayment, the principal amount is adjusted by the Index Ratio (lR) as announced by the RBI. Currency Risk A risk of loss is inherent in the multi-currency dealings due to the exchange rate fluctuations. Currency risk refers to this type of risk exposure. The money market players operating in overseas money market instruments will be exposed to this risk. Also, when the institutional investors like banks sell foreign currencies to play in the money market, they may be exposed to currency risk. Political Risk Most of the measures adopted to bring economic stability will have a direct/indirect implication on the money market instruments and operations. This is due to the fact that the money market activity reflects the money supply position in the economy, the interest rate and the exchange rate structures, etc. Thus, any policy decisions adopted by the Central Government will have an impact on the money market. In the Indian context, it is the policy measure taken by the RBI, and sometimes the Ministry of Finance (MoF) that has an impact on the money market. There is yet another important and rather interesting feature of the money market that explains the lower level of the default risk. Money market players have to honor obligations as a universally accepted code of conduct. However, as observed earlier, the money market
players are mostly large institutional players, having a good standing in the market with a good rating. Of the risks that the money market instruments are exposed to, the volume and the quantum of transactions generally put the market/interest rate risk at a higher level.
Banking System in India

The Banking System in India consists of the following types of banks

Reserve Bank or Central Bank Development Banks Public Sector Bank. Foreign Banks Private Sector Banks Cooperative Banks Regional Rural Banks Local Area Banks
The Reserve Bank of India The Reserve Bank of India is the Central Bank of the Country and came into being by the Reserve Bank of India Act 1934. It was nationalized in 1948. Key functions of RBI

Acts as Central bank that regulates other banks in India It issue domestic currency and regulates there movement The banker to the Government of India and the State governments. It manages the public debt and has the obligation to transact the banking business of the Central Government. It undertakes to accept money on behalf of the Government and make payment on its behalf. Acts as the bankers bank. Commercial banks maintain their current account with the Reserve Bank of India. Manages the volume of credit created by the commercial banks to ensure price stability. Manages the foreign exchange rate and intervenes whenever required Devise all the monetary policy measures in order to control liquidity in the system The lender of Last Resort. It will lend to banks in trouble. It devises norms for External borrowing of the domestic companies. It stores the forex reserves and gold for the Government and supports the importers with the foreign currency during crisis time. Regulates all the NBFCs (Non-Banking Financial Corporations) and Co-operative banking institutions of a country. As per ne Micro Finance Bill passed in 2012, RBI also regulates all the Microfinance institutions in India
Development Banks
These were set up to give long term finance for the development of the country. The main list of banks which were set up with the same purpose is provided below

Industrial Credit and Investment Corporation of India Ltd (ICICI) The Industrial Finance Corporation of India (IFCI) The Industrial Development Bank of India (IDBI) The Industrial Reconstruction Bank of India (IRBI) and The National Bank for Agriculture and Rural Development (NABARD)
ICICI, by a reverse merger in 2002, became a normal commercial bank. IDBI was converted to a commercial bank in October 2004 and merged with IDBI Bank on March 31, 2005. It is expected that the other development banks, having outlived their utility would also be either converted to commercial banks or merged with commercial banks. Public Sector Banks These are banks in which Indian government owns the majority stake and has control over the management and activities. The largest is the State Bank of India which was formed by the merger of the Presidency Banks the Bank of Bengal, the Bank of Bombay and the Bank of Madras in 1921. It was then known as the Imperial Bank. It was nationalized in 1955 by the passing of the State Bank of India Act, 1955. The other nationalized banks came into being on July 19, 1969 when Mrs. Gandhis Government nationalized fourteen banks that had deposits of Rs. 50 crores or more. On April 15, 1980, six more banks having demand and time liabilities of not less than Rs.200 crores were nationalized. This was done to take banking to the villages and serve the developmental needs of all sectors of the economy. Foreign Banks These are branches of banks incorporated outside India. The larger ones that have been operating in India for many years are Standard Chartered Bank, Citibank, American Express Bank, ABN Amro, BNP Paribas and Hong Kong and Shanghai Banking Corporation. In March 2004 the RBI issued guidelines permitting NRIs and Foreign Institutional Investors investing in the banking sector. This permitted aggregate foreign investment from all sources up to a maximum of 74 percent of the paid up capital of the bank while the resident Indian holding of the capital was to be atleast 26 percent. It also provided that foreign banks could only operate through one of the following branches. Wholly owned subsidiary or a subsidiary with an aggregate foreign investment of upto a maximum of 74 percent in a private bank. In the first phase foreign banks will be permitted to set up wholly owned subsidiary by conversion of existing branches into a wholly owned subsidiary. These must have a minimum capital of Rs. 300 crores and must ensure sound corporate governance. They will have flexibility to open more than 12 branches a year and branch expansion in areas with lower banking presence. Permission for acquisition of shareholding in Indian banks will be limited to banks identified by the RBI for restructuring. Private Sector Banks
These are banks which are not government owned or controlled. Their shares are freely traded in the Stock Markets. These may be divided into:

Old Private Sector Banks such Federal Bank, Dhanalakshmi Bank, Catholic Syrian Bank New Private Sector Banks like ICICI Bank, HDFC Bank, IDBI Bank, Axis Bank (Earlier known as UTI Bank), Kotak Mahindra Bank and Yes Bank.
Cooperative Banks Cooperative Banks are those that are created by a group of individuals to support either a community or a religious group. They operate in metropolitan, urban and semi urban centers to cater to the need s of small borrowers. These are controlled by the RBI and by State Cooperative Acts. Regional Rural Banks These came into being on October 2, 1975 when 5 regional rural banks were established under what became the Regional Rural Banks Act 1975. These were to bridge the gap in rural credit granting loans and advances to small and marginal farmers, artisans, small entrepreneurs and persons of small means engaged in trade, commerce, industry or other productive activities within their area of operation. Local Area Banks Local Area Banks came into existence in 1999 and licences were given for these banks as it was felt that regular commercial banks were not financial the rural/ agricultural sector adequately. Licences were given to open branches in three districts. Branches in urban/ semi urban areas were granted only after ten branches were established in rural areas/ villages. Four licences were in total granted two in Andhra, one in Punjab and one in Gujarat. They were opened with an initial capital of Rs. 5 crores.
Co-operative Banks in India

Co-operative Banks are government supported financial agency in India, which are organized and managed with the dictum of co-operation, self-help and mutual help. It functions with the no profit and no loss model. As other banks in the country, Co-operative banks perform all the basic banking functions like borrowing and lending of credits. In India, Co-operative Banks are working for nearly hundred years. Co-operative Banks are considered as one of the important financial institutions in the country. The major contributions of these banks are mostly in rural areas where they play the most vital role in rural financing and micro financing. The major strengths of co-operative banks are their easy local reach, transparent interaction with the customers and their efficient services to common people. Objectives of Co-Operative Banks
Engage in rural financing and micro financing Main objective is to remove the dominance of common man by the middle man and money lenders. Ensure credit services to farmers at low rate of interest providing socio-economic condition to the people. Provide financial support for the needy people and farmers in the rural areas Provides personal finance services for those engaged in small-scale industries and selfemployment driven activities for peoples in rural areas as well as in urban areas
Categories of Co-operative Banks The need of Co-operative banks in India is much important to support the financial requirements of the people. To provide a much established support to every person in the country and for the development of the nation, Co-operative banks are categorized at various dimensions and at various levels. The Co-operative Banks can be divided into two categories based on their functions. They are,

Long Term Co-operative Credit Institutions Short Term Co-operative Credit Institutions
Long Term Co-operative Credit Institutions functions and provide services at three levels:

State Level District Level Village Level
Short Term Co-operative Credit Institutions are further divided into three sub-categories:

State Co-operative Banks District Co-operative Banks Primary Agricultural Co-operative Societies
Apart from these classifications, the co-operative banking structure in India is further divided into five main groups:

Primary Urban Co-operative Banks Primary Agricultural Credit Societies District Central Co-operative Banks State Co-operative Banks Land Development Banks
Functions of Co-operative Banks

The Cooperative Banks functions with the objective of fulfilling the credit requirements and needs of people living in the rural and urban areas. Perform multiple activities and functions at large extent to carry out developments and regulation in the society that strengthen the co-operative movements.
Primary Urban Co-operative Banks (PUCBs): The Urban Co-operative Banks are those that function in urban and semi-urban areas. Generally it is referred as Primary Co-operative Banks. The functions of PUCBs are:

Lending money to small borrowers and businesses Provide working capital loans and term loans Provide advances against shares and debentures
Primary Agricultural Credit Societies (PACS) These institutions act as a core of Indian Co-operative movement. The main objectives of PACS are:

Raising the capital of the bank to provide loans and support for customers Motivating the habit of savings amongst customers and collecting deposits To provide services and inputs to people for their welfare and development To support and motivate various income augmenting activities
District Central Co-operative Banks (DCCBs) The Primary Agricultural Credit societies are affiliated to the DCCBs. The functions of DCCBs are:

Act as a support centre for district central financing agencies Arranging credit to primaries Managing banking business Approve, supervise and control implementation of policies
State Co-operative Banks (SCBs) The District Central Co-operative Banks are in turn affiliated to SCBs. The functions of SCBs are:

Serve as balancing centre in the States Organise provision of credit for credit worthy farmers Carry out banking business Leader of the Co-operatives in the States
Land Development Banks (LDBs) The LDBs are used to meet the needs of agricultural sector through long term credits. The LDBs functions at two levels. One is the Central LDBs operating at the state level and the other is Primary LDBs operating at district level or taluka level. The functions of LDBs are:

Provide services to meet the requirements for developing areas Providing loans on the security of mortgages Raising their resources by floating debentures in the market
Although, Co-operative banks mainly do business in the agriculture and rural areas, some groups like PUCBs, DCCBs and SCBs operate in semi-urban, urban and metropolitan areas also. Products and Services The Products offered by the Co-operative banks includes: Deposits

Savings Bank Account Current Account Recurring Deposit Fixed Deposit Cash Certificate
Loans

Loans to Salaried Employees Home Need Loans Loans to Pensioners Loans under Women Entrepreneur Development Scheme Building Mortgage Loan Education Loan Housing Loan Loan to Physically Challenged Persons
The Services offered by the Co-operative banks includes:

Clearing Safe Deposit Locker Automated Teller Machine (ATM) Demand Draft / Pay Order
Regulation Co-operative Banks in India are registered under the Co-operative Societies Act and are regulated by Reserve Bank of India.
Banking System in USA

From regulatory perspective, the Banking System in the USA is very different from the Indian banking system. Bank in United States can be classified into 2 main categories:

Federally chartered national banks State-chartered banks
National banks are incorporated and operated under the laws of the United States. These banks are subject to the approval office of the comptroller of the currency (OCC). Membership of Federal Reserve System is required for all national banks. The biggest advantage of belonging to the Federal Reserve System is that deposits in the member banks are automatically insured by the FDIC. The FDIC protects each account in a member bank for up to $100,000 if the member bank becomes insolvent. State-chartered banks are granted authority by the state in which it carries out business and are under the regulation of an appropriate state agency. State-chartered banks can choose to belong to the Federal Reserve System to ensure they are insured by FDIC. Non-members banks of the Federal Reserve System can also be protected by the FDIC if they can meet certain requirements and submit an application for the same. Based on business activities, banks in the Unites States can be divided into mainly 3 types. They are

Commercial banks Savings & Loan Associations Credit Unions
Commercial banks are in the business of deposit taking and lending. They provide a range of products and services for individuals as well as businesses. Savings & Loan Associations provide savings account facilities for the purpose of deposits and offer mortgage lending also. Most of the savings & loan associations provide a wide range of services similar to a commercial bank. Credit Unions are non-profit financial cooperatives offering personal loans and other consumer banking services.
Mortgage Banking
The word mortgage means A conditional conveyance of property as security for the repayment of a loan and the banking associated with it is called as Mortgage Banking. According to the definition by Mortgage Bankers Association of America, Mortgage Banking can be defined as The Origination (Loan creation),Sale(Secondary Marketing), and Servicing (Loan Service) of mortgage loans secured by either residential or commercial real estate. In the simplest term, Mortgage Banking is a transaction between the Borrower and the Mortgage Banker. A Mortgage Banker serves as the middleman between a consumer and a service, or a range of services. The borrower is considered the consumer, and the service provided is the financing of his or her loan. The Mortgage Banking process is however cyclic which helps the mortgage bankers to generate more money from the investors for more lending. The following diagram refers the entire process
Mortgage Banking Process Flow The mortgage banking flow can also be explained using the following example:
1. A Borrower decides that he or she would like to purchase a home for which he needs loan from the bank or lender. 2. The Borrower goes to a Mortgage Banker who provides financing for the purchase by making a loan to him. The Mortgage Banker is the middleman between the Borrower and the investor in the mortgage market. 3. After the Mortgage Banker has made several loans their company may decide to pool these loans together and sell them to an outside investor to make a short-term profit. 4. The proceeds from this sale are then used to pay for the operating expenses of the mortgage banker, which allows the company to make (originate) more loans.
The following list gives a detail overview of the different participants in the mortgage banking process. Borrowers: As we already know that borrowers are the one those who takes the loan as and when needed. The Borrower which can be an individual or a corporate may take a Loan to buy a house or a commercial property. Borrowers can use the mortgage banking transaction for two purposes. A purchase money transaction is the acquisition or property through the payment of money or its equivalent. This is the method used by all the first-time home buyers that require financing. A refinance transaction is the repayment of a debt from the proceeds of a new loan using the same property as security. Lender: Lender provides the Loan to the Borrower when needed. In mortgage banking, the lenders are mainly the banks and financial institutions etc who provide direct loans to the borrower. Investors: Companies, Government Agencies who buy loans from Lenders. Raise money from the financial market by issuing bonds / Mortgage Backed Securities (MBS). Investors
provide the required fund to the lenders so that they can service new loans whenever they come across in order to gain high returns on the capital investment. Private investors purchase whole loans or invest in pieces of the loans as investments:

Investors buying pools of loans Investors buying Mortgage Backed Securities (e.g. insurance companies, mutual funds) Investors buying Interest Only and Principal Only strips Mortgage Banks own loan portfolio (Community Banks, Regional Banks, National Banks)
Service Agencies: Agencies who collect money from borrowers towards repayment of loans and funnel it to investors. As the borrower repays his part to the bank from which he has borrowed, these agencies make sure that the Investors get his part as he has purchased that Loan. Credit Reporting Agencies: Report Credit Score and Transaction Details of Borrowers which are very important for the lender to approve the loan and fix the interest rate. Lower credit score indicates higher risk and higher interest rate as well. Appraisers: Evaluate and appraise the value of the subject property against which the loan has been taken. They are the third party which provides the value of the property independently to remove any confusion regarding the valuation of the property. Brokers: These are the middleman who brings the borrowers to the lenders. They make the processing of loans faster as they are well aware of the needful that is required for loan processing. For that they earn some fees from the borrowers for the help. Insurances Companies: They provide the required insurance to the large amount of funds the lenders and investors are investing. For the same, they charge a premium on the funds insured.
Mortgage Loan Process

The mortgage loan process involves many steps from generating money from the investors to process the loans to the borrowers. The entire process is explained below

Origination Processing Underwriting Closing Post Closing Ware-housing Secondary Marketing Servicing
Origination: Loan Origination is the first step of this cycle. It is the process by which a borrower applies for a new loan and a lender or bank processes that application. It actually includes all the steps from taking a loan application through disbursal/declining of funds.
To apply the loan, the borrower has to fill some application in advance. The borrower typically sits with a sales agent who assists him in completing the application form, selecting appropriate product options (such as payment terms and rates), collecting required documentation selecting add-on products (such as payment protective insurance ), and eventually signing a completed application. Processing: Processing is the collection of the documentation and verification to support information provided on a Loan application. Some of the required documents to process mortgage loans are

Loan application. Like in USA, URLA 1003 which is the Uniform Residential Loan Application provided by Fannie Mae Verification of Income and Employment Appraisal Tax Returns Credit Report
Underwriting: Underwriting is the evaluation of loan documentation provided by the lender that approves or denies the loan. It will result in the approval or rejection of the Loan. However there are certain key factors that drive this process. These key factors can be also called as the 5Cs.

Capability: it refers to the borrowers ability to repay the loan based on sufficient income. Loan processor has to verify the income information in the loan application. Capital: it refers to the borrowers ability to make a down payment, pay for the closing cost, and other funds which are required at closing. The sources of the funds have to be clearly listed in the application since they all need to be verified in the file. Credit: it refers to the amount of a borrowers outstanding debt. It is considered in the qualifying ratios and determining the borrowers combined loan to value ratio (CLTV). For first mortgage, LTV (Loan to Value) and CLTV will be equal. LTV determines whether mortgage insurance is required Collateral: it refers to the value of the property mortgaged as security for the loan. The value is verified through a property appraisal by a licensed appraiser. Character: it refers to the borrowers willingness to repay the debt, which is different to Capability.
Closing: Closing is the signing and recording of loan documentation, plus the disbursement of loan funds. The various steps in this process are:

The Borrower pays all Closing costs (fees). All outstanding underwriting conditions or stipulations are met. Legal Documents are prepared and signed. Deed of Trust (also called Mortgage) Property is pledged as security for the loan. Truth-In-Lending Disclosure Document that discloses terms and costs of loan (APR, P&I). Initial Disbursement Title / Hazard Insurance are obtained. Loan Amount is disbursed either to the borrower or the seller of the property directly.
Post-Closing: The post-closing consists to two important parts: Document Tracking & Loan Delivery.
Document Tracking: Document Tracking is maintaining the correctness and status of Final Documents of closed loan files. This process consists of the following sub-process.
Document Control o Track Status and Location of Legal Documents o Identify when documents are due, late, received, reviewed Document Correction o Record Errors in Legal Documents o Record missing documents for funded loans o Take necessary action
Loan Delivery: Shipping and delivery is the packaging of closed loan files for delivery to an investor. Warehousing: Warehousing is the financing of loans from closing of loans to sale this to an investor. Warehouse banks provide the required funds to the lenders or banks in order to complete payment to the borrowers. Secondary Marketing: Secondary marketing is the sale of existing loans to investors, and management of the risk associated with mortgages. The secondary marketing department essentially begins the mortgage banking process by selling the mortgage loans to investors in order to raise money from them. The normal responsibilities of the secondary marketing department include:

Selling of all mortgage loans Managing interest rate risk Setting rates and pricing Managing the loan pipeline and warehouse Managing agreements and commitments with investors
Servicing: Servicing is the collection, recordation and remittance of monthly mortgage payments to investors. Servicing (Loan Administration) involves all administrative activities like

Collection of monthly payments of borrower towards repayment of loan Recording payments and calculating the Unpaid Balance (UPB) after each payment Disbursing the payment amounts to the appropriate stake-holders (e.g. investors, insurance companies, etc.) Servicing fee towards servicing loans is the largest contributor to the income of the lender Investor usually pays a premium to obtain Servicing Rights from the lender Lenders also use Servicing to advertise other loan products and expand business.
Different types of Mortgage Products

Fixed rate mortgage
A fixed-rate loan is a mortgage that allows borrowers to fully amortize a mortgage by making equal monthly payments of principal and interest for a pre-determined term and a constant interest rate. Interest rates remains fixed throughout the loan period. Do not vary according to the market price Advantage

Spread out of payments as smaller payments are made over a long period of time. As the interest rate does not change, buyers are protected from sudden increase in monthly mortgage payments if interest rates rise. Easy to understand Fixed rate offers the strength and stability to borrowers. Permit borrowers to make extra payments in order to shorten the term of the loan or to make lump-sum payments to retire the loan early.
Disadvantage

Qualifying for the loan is more difficult as the payments are less affordable If interest rates fall, the interest rate on the loan doesnt change and neither does the monthly payment. Higher monthly payment than other mortgage choices.
Adjustable Rate Mortgage An adjustable rate loan is a mortgage that permits the lender to adjust its interest rate periodically depending on the movement of a specified index or reference rate (e.g. LIBOR, COFI Index, etc.). Some are referred as hybrid: since they offer a fixed rate for the first few years. The most popular ARM loans are the 3/1, 5/1, and 7/1 ARMs. 3/1 indicates that the rate is fixed for 3 years and then adjusts every 1 year after that. An Adjustable Rate Mortgage is a loan where the interest rate frequently adjusted during the loan period. Interest rates change according to the base rates of the central bank and cost changes in the credit markets. Option ARM It is an ARM on which the interest rate adjusts monthly and the payment adjusts annually, with borrowers offered options on how large a payment they will make. The options include interest-only, and a minimum payment that may be less than the interest-only payment. The minimum payment option could result in a growing loan balance, termed negative amortization (i.e. the loan balance actually increases). For this reason, Option ARMs have higher risk profiles. HELOC A Home Equity Line of Credit (HELOC) is a mortgage loan, which is usually in a subordinate position, that allows the borrower to obtain multiple advances of the loan proceeds at his/her own discretion, up to an amount that represents a specified percentage of the borrowers equity in a property.
Balloon Mortgage The mortgage which leaves a balance due at the period of maturity being not fully repaid over the loan term is called a balloon mortgage. Because of the payment being done in large size, the final payment is referred to as the balloon payment. It may have either fixed or floating interest rate A balloon mortgage consists of equal monthly payments based on a 15 to 20 year amortization, but does not fully amortize the loan. At the end of the balloon term, generally 3, 5, 7, or 10 years, a large final payment is due, equal to the remaining balance on the loan. Like Example: The balloon mortgage called for payments of USD 5000 per month for 5 years, followed by a Balloon Payment of USD 150,000 Balloon Loans: The Balloon loans are the short-term mortgage loans (usually of 5 7 years) similar to a fixed rate mortgage Loan. A balloon loan allows the consumer to borrow a large amount of money over a short amount of time but with low monthly payments. Balloon Payment: The final instalment of a loan to be paid that is considerably higher than prior regular instalments. A short-term mortgage in which small periodic payments are made until the completion of the term, at which time the balance is due as a single lump-sum payment. People with irregular or seasonal sources of income find a balloon payment useful for budgeting their expenses. People who know their income will greatly improve within the next few years. The major disadvantage of this mortgage is to pay the high amount of money at the end of term. If the borrower is unable to repay the balloon payment when it is due, he must return the item bought with the loan to the lender, thereby losing the money paid out in earlier installments. Reverse Mortgage Reverse mortgages are for individuals who already own a home with no or very little indebtedness. The lender makes either a one-time or periodic payments to the borrower. These payments result in a negative amortization. Repayment of the resulting balance is generally only required upon the borrowers death or sale of the property. The main Objective for the same is to address the financial needs of senior citizens owning self-occupied property (house), for leading a decent life. Key characteristics

This product is extensively sold in developed countries to ageing individuals who own property. Some Reverse Mortgage products provide payments till the individual is alive, as against a fixed time period. Such products benefit elderly people who have no steady sources of income for their expenses.
At the end of these payments, the property belongs to the lender.
Mortgage Backed Securities

Term mortgage means the loan provided against the physical asset. Mortgage backed securities are the chunks of fixed income securities which are backed by the physical assets in its early life cycle. First the bank provides the required mortgage loan to the borrower. Now the next step is the schedule of repayment which is decided by the bank along with the borrower. This schedule includes monthly payments which in turn includes principal and interest components. Once the schedule is set, the guarantee (asset) is added to the portfolio of the bank. This portfolio includes interest rate, maturity date, monthly installments, etc. This bank along with similar small scale banks will now look for other bigger organizations, Governmental agencies, Quasi-Governmental agencies or privately held entities to in turn sell those contracts or mortgages to them. These Governmental or Private agencies now have varying mortgages in their pool or portfolio with similar characteristics like interest rate, maturity date, monthly installments, etc. These organizations now will break those mortgages into chunks of fixed income securities and will sell it in open secondary markets. These securities are then known as Mortgage Backed Securities. Investors can invest in such securities thereby getting rights to claim interest and principle earned by the common pool of the organizations who own those pools of securities. Different types of Mortgage Backed Securities Based on some market driving factors and analysis, we have several kinds of Mortgage Backed Securities. Let us know see the 3 important and widely used types of MBS: Pass Through: Pass through is the simplest form of MBS in which the issuer collects principle and the interest from the pool of mortgages and then distributes it among the investors proportionately (on pro rata basis). This kind of MBS is likely to be impacted by the market risks such as prepayment. Collateralized Mortgage Obligation (CMOs): These are quite complex kinds of MBS where the cash flow is directed towards the investors based on the structure and the priority of the security. Pool of mortgages is divided into classes based on criteria like maturity, expected prepayment date etc This helps to bring in some degree of predictability to the experienced investors. Distribution of principle and interest is also based on the class an MBS lays. Stripped MBS: Stripped MBS are the special types of MBS which are strategically created for experienced investors by dividing the pool of chunks further into 2 kinds of securities as below:
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Interest Based: These securities come into the category of MBS where the cash flow is based on the component of Interest paid by the borrower. Principle Based: These securities come into the category of MBS where the cash flow is based on the principle paid by the borrowers
Investors can maximize their holdings and profit by investing in various Stripped MBS depending upon the Interest Paying or Principle Paying capabilities of various Chunks of Securities. Underlying assets on which mortgages are issued also fall into 2 broader categories. Depending upon the following categories also an MBS is analyzed in terms of risk and profitability by the market analysts and investors: Prime: Prime Mortgages are the secured ones. These are referred to those mortgages which are verified in terms of documents of the asset and income of the borrower. Subprime: These are non-verified and are also known as weak mortgages. These carry risk of defaulting.
Asset Backed Securities

Any financial security if at all backed by a loan, lease or receivable against assets other than real estate and mortgage backed securities can be defined as an Asset Backed Security. Let us analyze the definition for a better understanding. A financial security is a contract between the issuer (of security) to the investor (who lends money) in accordance with some pre-agreed guidelines. If this security is backed by loan or lease or receivables (other than real estate and mortgage backed) then that security is an Asset Backed Security. ABS are opportunities for the financial institutions/organizations to increase their liquidity ratio, best usage of the capital they have and helps in generating fee based income. The Asset backed Securities have been used by most of the banks to raise wholesale money from the market. Before the credit crunch, it was a convenient way to raise money from the market and subsequently use it for rolling out more new products. Securitization is a structured finance process that is carried out to reduce and mitigate the risk of wide variety of assets and corporate products. The process involves repackaging of wide number of low value high risk assets into a securitized product with low risk profile and high value. Securitization of a wide variety of assets and products is done due to inherent benefits provided by the repackaging of cash-flow producing financial assets into securities that can be sold to investors. It allows the bank to offload a variety of high risk low value products off its balance sheet and reduce further risk. How Banks Sell Asset Backed Securities:
These are sold through specialized Asset Backed Commercial paper conduits or Special Purpose Vehicles (SPVs). The selling banks sell a pool of Assets to a Special Purpose Vehicle (SPV). The SPV in order to fund the purchase issues mortgage or Asset backed securities which are sold to investors in capital markets. This transfers the risk of these securities from the Bank to the buyers of Asset backed securities. The following is the list of Assets which are normally securitized by banks: Mortgages, Vehicle loans, Real Estate loans, corporate loans etc. How banks buy Asset Backed Securities: The issuing party (SPVs created by banks) raise funds by promising to repay a lender in accordance with terms of a contract. So the banks buy ABS (Asset Backed Securities) through these SPVs. Types of debt instruments used for ABS (Asset Backed securities) include notes, bonds, certificates, mortgages, leases or other agreements between a lender and a borrower. Most bonds backed by mortgages are classified as an MBS (Mortgage backed securities). Factors used to determine the price of Asset Backed securities are provided below: Rating provided by various rating agencies: The ABS with high risk profile gives high rate of interest and the one with low risk gives offers less interest rate. The rating agency decides the rating of ABS based on the following factors: Collateral Credit Quality: It is the most important factor for rating an ABS. The agency evaluates whether the collateral is of sufficient quality to be able to provide cash flows to pay the principal plus the interest. Seller/ servicer Quality: The rating agency looks at the servicers performance, history, experience, underwriting standards adopted for loan origination, servicing capabilities and financial strength. Cash flow stress and payment structure: Rating agency analyzes ABS cash flow projections under different scenarios to the various tranches (bond types). Legal structure of the bank and the SPV (special purpose vehicle) floated by the bank: The Banks float SPVs to separate securitized products from their balance sheet. The rating agencies analyze the structure of securitized assets so that even in case of bankruptcy of issuing bank, the SPV of the bank remains safe and free of any liabilities/ responsibilities. Market Data Sources: Traders and money managers use market data sources e.g. Bloomberg, BankScope and Intex to analyze and correctly price Mortgage backed security pools. This data includes the following details:
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Financial data Holdings data Subsidiary data
This data is downloaded daily/ weekly from these websites and fed in a database used for analysis. Advantages:

They bring in pool of financial assets that otherwise could not have easily traded in their individual existing form. By selling the financial assets to pools reduces the risks of the companies besides freeing their capital. Even if the instruments trade badly; the owner of ABS (bank) would pay the price of bankruptcy rather than originator.
Disadvantages:

They are expensive due to management and system costs and are subject to risks of impairment, credit loss etc to Issuers! There is considerable amount of risk involved for the investors also such as liquidity risk.
Securitization
Securitization is a process whereby assets (e.g. Mortgages) are removed from the banks balance sheet and sold to a Third Party. The bank continues to service the assets and maintains direct relationship with customers. The third party then issues Securities to Investors. These Securities are backed by assets purchased from the bank. Investors invest in Securities and receive regular repayment from the third party. This repayment consists of interest during the tenure and principal at the end of maturity. Third party can be a Special Purpose Vehicle (SPV) or Limited Liability Partnership (LLP) based on the Securitization need. Securities can take form of Securitization Notes or Covered Bonds based on the type of Securitization. The basic structural flow of securitization:
Securitization Process Securitisation Products

ABS Asset Backed Securities: Debt securities (bonds) whose performance is solely determined by the performance of an underlying pool of specified assets (collateral) CMO Collateralised Mortgage Obligation: A pool of mortgage loans used as collateral for ABS the term is now used to refer to the bonds themselves. CLO Collateralised Loan Obligation: As above, but the assets are commercial loans, usually unsecured. CBO Collateralised Bond Obligation: As above, but the assets are bonds, typically high yield bonds or ABS CDO Collateralised Debt Obligation: Portmanteau term for CMOs, CLOs and CBOs OC Over collateralisation: Value of collateral in excess of the face value of the bonds issued against it: improves the risk of the bonds
Benefits

Quick re-financing (funding) capability. Ease the regulatory capital charge by moving assets off their books, resulting in less idle cash with the bank. Ability to separate financial assets from credit, performance and other risks associated with the bank. Securitization benefits the economy as a whole by bringing financial markets and capital markets together.
Risks associated in Mortgage Loans and MBS

Below are the risks associated with Mortgage loans
Credit Risk is the risk to earnings from borrowers failure to meet the banks contract
Interest rate risk to earnings from fluctuation of interest rates in market Price risk is the risk to earning from changes in the values of foreign exchange, equity etc Transaction risk is the risk to earnings from delay of services and product delivery. Liquidity Risk is the risk from banks inability to manage the unplanned decreases in funds resources. Compliance Risk is the risk to earnings from the violation of rules, laws and ethical standards by the underwriter or broker. Strategic Risk is the risk to earnings from the improper strategies applied in mortgage lending business
Below are the major risks associated with Mortgage Backed Securities

Default Risk: Payment default or credits are the most common risks in MBS market. It happens whenever borrowers are not in position to pay their mortgage installments. Prepayment: Prepayment risk is something which is not at all easily predictable. Depends upon interest rates in market, economic growth, and employment opportunities, extra sources of income, etc, borrowers might call off the loan by pre paying the entire principle amount. This leads to pre-closure of the loan. Prepayment increases risk for the MBS investors as it impacts their future agreed receipt of payments. Low Returns: Mortgage Backed Securities usually have low returns as compared to the stocks and other corporate bonds when compared in terms of annual return. Long Maturity: MBS are normally offered for long maturity and one might get stuck in them for that much duration. We can however sell the MBS into the secondary market according to the prevailing market situation.
Banking Terms/Glossary Banking Terms C Banking Terms F Banking Terms I Banking Terms M Banking Terms P Banking Terms S Banking Terms V
Banking Terms A Banking Terms D Banking Terms G Banking Terms J & K Banking Terms N Banking Terms Q Banking Terms T Banking Terms W
Banking Terms B Banking Terms E Banking Terms H Banking Terms L Banking Terms O Banking Terms R Banking Terms U Banking Terms X, Y &Z
Banking Terms A
Posted on May 1, 2012 by admin in Banking. Term 1003 Form AAA Meaning A standardized application form to be filled in by the borrower. This is also known as the Fannie Mae form. This is the best credit rating provided by any Credit rating agency This is normally termed as almost risk free investment.
ABA
ABA is the unique nine digit number which is given by American Bankers Association. It is used to identify the bank. The first nine digits denote the ABA number. The ABA number was developed in 1910 by the American bankers association. This number is assigned to the banks or financial institution which holds an account with the Federal Reserve Bank. The ABA transit number is assigned by the American Bankers Association. It is a numeric coding that indicates and facilitates the amount of check payments, balances and dues that are to be cleared among different banks at the clearing house.
ABA Transit Number
Abandonment Turning a property to an insurer and claiming the value. ABO ABO is an abbreviation for the term Accumulated Benefit Obligation. It is basically the measure of the liability of the pension plan of an organization and is calculated when the pension plan is to be terminated. A legal document given to a particular person who is unqualified rite for some property. Absorption is a term related to real estate, banking and finance fields. It means the process of renting a property that is newly built or is recently renovated. The term absorption time is used to define the time period that is required to complete the process of absorption. A method of depreciation of fixed assets, where the rate of depreciation is higher during the early years compared to later years. Acceleration usually empowers the lender to accelerate the time period. In the process, the lender demands a full and final payment of the debt or loan, before the allotted time period for repayment. It is the contractual relation with the bank and the customer where customers amount can be kept safely. Reference numbers will be given which are called as Account Number. The total amount of money in a particular bank account, along with the debit and credit amounts, the net amount is also termed as the account balance. The total amount in the credit and debit transaction should be balanced.
Absolute title Absorption
Absorption Time Accelerated Depreciation Acceleration
Account
Account Balance
Account History The history of the particular account number for a specified period of time, which shows the details of the transaction. Account The process of reviewing and matching the balance of ones personal check Reconciliation book with the bank statement is called account reconciliation. The checks that are issued will be noted in the check book. Once the check is cleared
the balance in the check book and the bank statement should match. It helps the account holder to keep track of the money so that the bank statement can be verified. In case of corporate accounts, account reconciliation helps in cash management and helps the business to prevent from fraudulent activities. Account Routing Number Account statement It is the unique number to associate the bank with the account.
It is the transaction details happened for that particular account either for a month or week accordingly. A financial record that indicates the transaction and its effect on an account (usually bank account), in terms of debit and credit.
Account Value An account value is the total value of any account, applicable when a person has many accounts and transactions in the same bank or financial institution. Accounts Payable Accounts payable is a list of liabilities of an organization or an individual that are due but not paid to creditors. Account payable is termed as current liability in the balance sheet.
Accreting Swap Accreting swap is a swap of interest which has an increasing notional amount. Accretion Bond An accretion bond is basically a bond that has been purchased at a discount and whose book value is incremented to the par value or the face value. Accrual Accrual bond Accrual rate Accrued Interest If bank is accumulating amount from customer, then it is called accrual. Accrual is the process of accumulation of interest or money. Long term bond which pays no interest until all prior bonds retire. The interest is accrued and then added later on at the time of maturity. It is the annual rate which is stated and the interest is calculated using that. Accrued Interest is the interest, accumulated on an investment but is not yet paid. Often, accrued interest is also termed as interest receivable. Some banking books prefer to call it as the interest that is earned, but not yet paid. It is the interest from the issued date or the last payment date to the settlement date. Accumulated depreciation is the total all the periodic reductions from the book value of fixed assets. ACH stands for Automated Clearing House. It is a secure payment transfer method in US which connects all financial institutions and banks. It is the central network for electronic funds transfer transaction. ACH follows the
Accumulated Depreciation ACH
rules and regulations of NACHA and Federal Reserve System. ACH transactions are faster, easy and immediate than paper checks or cash transactions. Acquiring bank The bank accepts the payments for the products or services of the merchants on behalf of them. Mainly this is done using credit cards. Active Market This is a term used by stock exchange which specifies the particular stock or share which deals in frequent and regular transactions. It helps the buyers to obtain reasonably large amounts at any time.
Active Tranche Active tranche basically stands for REMIC or Real Estate Mortgage Investment Conduit. The REMIC tranche is basically a bond that is backed up by a large set of mortgages. The principal and interest that are paid by the borrowers, are transferred to the people who hold tranche (tranche refers to a portion or money) in REMIC. Actual Delay Days Additional Security Actual delay days are also simply known as delay days. The actual delay days are the actual days of the lag times. The lag time is the time period that starts after the expiry of the last date of repayment. This is a security that has been offered by the borrower to the lender and is not financed by the lender.
Adjustable Rate This is also a floating rate, but with certain difference. A floating rate generally relates to short-term loans and the interest rate is adjusted at frequent intervals whereas an adjustable rate is adjusted at the end of a fixed period such as 3 years or 5 years and is thus quoted for long-term loans. Adjustable Rate Adjustable Rate Mortgage (ARM) is the loan in which the rate of interest is Mortgage adjusted periodically. The rate of interest can move higher or lower in the (ARM) same ratio as per the selected index. ARM loans may include caps on interest rate increases in a given time period, and over the life of the loan. As the name suggests the payments made by the borrower will change with the changing rate of interest. It is also known as variable-rate mortgage or a floating-rate mortgage. Adjusted balance The balance remains due to the payments made during current billing cycle which are subtracted from the previous billing cycle.
Administrative Administrative float is the frame of elapsed time that is required in order to Float complete the paper work, in order to administratively sort the checks, or for that matter, any type of currency and negotiable instruments in the bank itself or in the clearing house. Adverse Action The Adverse Action Notice informs the applicant of denial of credit based on Notice information in the credit report. The notice should indicate which credit
reporting agency was used and how it may be contacted. Affidavit Affiliate Affinity Marketing A written statement made before notary public or an authorized person. A bank controls an organization through stock ownership. Affinity marketing is a highly focused, cause-related marketing in which a ready-made relationship is taken by a party and adapted for own use.
Affluent Market This comprises customers and prospects with high net worth individuals belonging to professional or business background. Aftermarket Also known as Secondary Market. Refers to the market wherein an investor purchases and sells previously issued Securities, Stocks, and Bonds etc. from another investor instead of the issuer. The major stock exchanges are the obvious examples of liquid secondary markets where the stocks of publicly traded companies are available for trading. Example of stock exchanges New York Stock Exchange(NYSE), NASDAQ, BSE etc. In this contract, the undertaker agrees to sell all the offering, but the securities issuer has the right to cancel the entire deal if the undertaker couldnt manage to sell all the offering. The undertaker cannot dupe the investors by stating that all of the securities in the undertaking cannot be sold if its not true. Alternative minimum tax, also known as the AMT, is a type of tax that is levied by the United States government and is a type of Federal income tax. The alternative minimum tax (AMT) is basically levied on the individuals and organizations that misuse and take advantage of tax benefit schemes that are in monetary terms exorbitant, if rationally compared to their annual incomes.
All-or-none Contract
Alternative Minimum Tax
Amalgamation It means merger. As and when necessity arises two or more companies are merged into a large organization. This merger takes place in order to effect economies, reduce competition and capture market. The old firms completely lose their identity when the merger takes place. American Depository Receipts Amortization American Depository Receipts (ADR) is a negotiable instrument that represents an ownership interest in securities of a non-US company. American depository receipts are traded only on US based stock exchanges The paying off of debt in regular installments over a period of time is known as Amortization. Unlike other repayment models, each repayment installment consists of both principal and interest. Amortization is chiefly used in loan repayments (a common example being a mortgage loan). Payments are divided into equal amounts for the duration of the loan, making it the simplest repayment model. A greater amount of the payment is applied to interest at the beginning of the amortization schedule, while
more money is applied to principal at the end. Amortization Period Amortization period is the time period that is considered from the inception of the credit, investment or negotiable instrument and ends upon the maturity or expiry of the instrument.
Analytical VAR An analytical VAR is also known as the correlation VAR. An analytical VAR is basically the measurement of a financial instrument, portfolio of the financial instruments or an entitys exposure to the reductions in its value resulting from changes in the prevailing interest rates. Annual Percentage Rate (APR) Annual Percentage Rate (APR) is an expression of the effective interest rate that the borrower will pay on a loan, taking into account one-time fees and standardizing the way the rate is expressed. In other words the APR is the total cost of credit to the consumer, expressed as an annual percentage of the amount of credit granted. APR is intended to make it easier to compare lenders and loan options. It is actually is a measure of the cost of credit on a yearly basis. The APR allows you to compare various kinds of mortgages based on the yearly cost of each loan. The annual percentage yield or APY is basically a very accurate and calculated measure of yield that is paid on a standard bank deposit account. Annuities are contracts that guarantee income or return, in exchange of a huge sum of money that is deposited, either at the same time or is paid with the help of periodic payments. Some of the common types of annuities include the deferred, fixed, immediate or variable variants. Contract sold by insurance companies which gets the premium on monthly basis for the benefit of the life of a person. AML stands for Anti Money Laundering. A set of procedures, standards, rules or regulations designed to stop generating money through illegal actions. Money laundering is hiding illegal money, that is got through illegal activity like bribe, theft, cheating or through other criminal activity. This term is mostly used in banks, financial institutions or any legal industry. AML laws are induced in all legal industry to prevent money laundering. Predicted interest a savings account will earn on a particular future date. Refers to banking not only by ATMs, Tele-Banking and internet banking, but also to core banking solutions brought in by banks where customer can deposit his money, cheques and also withdraw money from any branch connected with the system. All major banks in India have brought in core banking in their operations to make banking truly anywhere banking.
Annual Percentage Yield (APY) Annuities
Annuity Anti Money Laundering
Anticipated interest Anywhere Banking
Appraisal
A professional opinion, usually written, of the market value of a property, such as a home, business, or other asset whose market price is not easily determined. It is usually required when a property is sold, taxed, insured, or financed. This fee related to an independent appraisal of the home the borrower intends to purchase. An appraisal surplus is the difference between the historical cost and the appraised cost of the real estate. Appreciation is an estimate of the market value of a piece of property by a qualified appraiser. It can also be considered as increase in value of an item, specifically the increase in market value of real estate. Buying the financial instrument in one place or market and selling the same with increase in price in another market or place.
Appraisal Fee Appraisal Surplus Appreciation
Arbitrage
Arbitrage Free Arbitrage free is a type of financial model that generates market structures that exclude scenarios generated by the arbitrage transactions and dealings. Arbitration Arbitration is an alternative dispute resolution mechanism provided by a stock exchange for resolving disputes between the trading members and their clients in respect of trades done on the exchange. It is an Adjustable Rate Mortgage Loans or Variable Rate Mortgage Loans in which interest rate is changed periodically. Due payments or loans.
ARM Loans Arrears
Ascending Rate Bonds for which the coupon rate increases with time as per earlier defined Bond rate. The coupon rate increases after certain intervals. Ask price Asset The security is sold at a price which is lowest and been asked. Any item of economic value owned by an individual or a company, especially that which could be converted to cash. Examples are cash, securities, accounts receivable, inventory, office equipment, real estate, a car, and other property. On a balance sheet, assets are equal to the sum of liabilities, common stock, preferred stock, and retained earnings. Asset and liability management is the coordinated management of all the financial risks inherent in the business conducted by financial institutions. In real practice, asset and liability management aims at minimization of loss and maximization of profit.
Asset and Liability Management
Asset Backed A security that is backed with the help of some kind of valuable assets, is Security (ABS) known as an asset backed security. Sometimes, ABS is also referred to as the monthly rate of repayment of a secured loan.
Asset-Backed Type of security that is backed by a pool of bank loans, leases, and other Securities (ABS) assets. Most ABS are backed by auto loans and credit cards these issues are very similar to mortgage-backed securities. Assignment An assignment is the transfer of any contractual agreement between two or more parties. The party that assigns the contract is the assignor and the party who receives the assignment is the assignee. The same price as the nominal amount of a security. It is called as automated teller machine which dispenses money when a valid card is used. These do the job of a teller in a bank through Computer Network. ATMs are useful to dispense cash, receive cash, accept cheques, give balances in the accounts and also give mini-statements to the customers.
At par ATM
ATM usage fee The fee charged by the banks for their ATM usage to the customers. At-the-money The exercise price of a derivative that is closest to the market price of the underlying instrument. Auction It is a process of selling a commodity through bidding process. Whose ever makes the highest bid, gets the commodity which is being sold. The buyers make the bid taking into consideration the quality and quantity of the commodity. A flow of transaction from initiation to finalization or vice versa. Authorized capital is the maximum number of shares that a company is allowed to issue for raising capital as per the Memorandum of Association (charter) of that company.
Audit trail Authorized Capital
Automated Automated Clearing House is a computer-based clearing and settlement Clearing House facility established to process the exchange of electronic transactions (ACH) between participating depository institutions. Such electronic transactions have taken the place of paper cheues. ACH processes large volumes of both credit and debit transactions which are originated in batches. Rules and regulations governing the ACH network are established by NACHA-The Electronic Payments Association, formerly the National Automated Clearing House Association, and the Federal Reserve (Fed). Automatic A depositors savings account from which funds may be transferred Transfer Service automatically to the same depositors checking account to cover a check Account (ATS) written or to maintain a minimum balance.
Banking Terms B
Bad debt Balance
Term
The amount which can not be received in future. The balance is the actual amount of money that is left in the account. Sometimes, the term balance also refers to amount of the debt that is owed. Balance of payment shows the relationship between the one countrys total payment to all other countries and its total receipts from them. It shows the countrys 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
Meaning
Balance of Payment
Balance of Trade Balance of trade refers to the total value of a countrys export commodities and total value of imports commodities. Balance of trade is a part of Balance of payment statement and it includes only visible trade. Balance sheet The statement which consists of the companys accounts at the end of the accounting year.
Balance transfer Transferring of amount from one account to the other. Balance Transfer The balance transfer fee is charged by the bank for the transfer of balances Fee from one source of credit to another. It also refers to the transfer of fees from one bank account to another. Balanced Budget Balance budget happens when the total revenue of the government exactly equals the total expenditure incurred by the government. But nowadays, the government has to regulate a number of economic and social activities which increase the expenditure burden on the government and results in deficit budget. Balloon Mortgage A Balloon Mortgage is a loan in which after a set term, the entire balance of the loan comes due. This type of loan generally has a lower interest rate, and has a higher risk to the borrower. The loan can be done like an adjustable with a set term of 2, 3, 5,7,10 years. Or in a Home Equity Line of Credit, or Fixed Rate Second Mortgage where after a set period of time it becomes due. For example, a 30/15 Balloon is a second mortgage where the payment is based on 30 years; however the note becomes due after 15.
Balloon Payment A final installment for the loan which is huge than the previous installments is called Balloon Payment. For example if a customer has paid only the interest during the loan tenure, at the end of the period he has to settle the principal amount with the interest amount to close the loan which is huge than the other monthly interest payment. The advantage of balloon payment is monthly payment prior to balloon payment is small. Bancassurance Bancassurance refers to the distribution of insurance products and the insurance policies of insurance companies by bank branches or its
employees. Banks charge a fee for the same. Bank Its the financial institution where deposits, lending, transactions of money happen. It is also an establishment that helps individuals and organizations, in the issuing, lending, borrowing and safeguarding functions of money. A bank account is an account held by a person with a bank, which helps them can deposit, safeguard his money, earn interest and also make check payments. It is an extension of the bank in a particular area, easy access for the customer. It is the code given by the bank supervisor body or the bankers association to the bank. Bank Credit includes Term Loans, Cash Credit, Overdrafts, Bills purchased & discounted, Bank Guarantees, Letters of Guarantee, Letters of credit. The interest deducted for annual basis in advance of loan. Cheque drawn by a bank to another bank for its own amount in the other.
Bank Account
Bank branch Bank code Bank Credit Bank discount Bank draft
Bank Holding Company that owns, or has controlling interest in, one or more banks is Company (BHC) known as Bank Holding Company (BHC). The Board of Governors is responsible for regulating and supervising bank holding companies, even if the bank owned by the holding company is under the primary supervision of a different federal agency (OCC or FDIC). Bank holiday Bank Note Normal holiday held for a bank either its the normal week ends or the government holiday. It is the term used synonymously with paper money or currency issued by a bank. Notes are, in effect, a promise to pay the bearer on demand the amount stated on the face of the note. A banknote (often known as a bill or simply note) is a kind of negotiable instrument; a promissory note made by a bank payable to the bearer on demand, used as money, and under many jurisdictions is used as legal tender. The Bank employee who has the authority to sign and agree for documents on behalf of the bank. Bank Ombudsman is the authority to look into complaints against Banks which violate norms and rules set by the RBI. This Scheme was announced in 1995 and is functioning with new guidelines from 2007. This scheme covers all scheduled banks, the RRBs and co-operative banks. Bank rate is the rate at which central bank (RBI) lends money to other banks or financial institutions. If the bank rate goes up, long-term interest rates
Bank Officer Bank Ombudsman
Bank Rate
also tend to move up, and vice-versa. Bank Statement A periodic record of a customers account details containing all the transactions done during a particular period. Bankers bank Bankers draft Bankers Lien A bank which does business with other banks and not with the public. Central bank of a country acts as Bankers bank. A Bank draws funds using draft against funds deposited in another bank Bankers lien is a special right of lien exercised by the bankers, who can retain goods bailed to them as a security for general balance of account.
Banking Cash Banking Cash Transaction Tax (BCTT) is a small tax on cash withdrawal from Transaction Tax bank exceeding a particular amount in a single day (BCTT) Banking industry Banks are collectively called as Banking industry. Bankrupt An entity or an individual is called as bankrupt if unable to meet its/his financial duty. A bankruptcy refers to economic insolvency, wherein the persons assets are liquidated, to pay off all liabilities with the help of a bankruptcy trustee or a court of law. Bankruptcy is a legally declared inability of an individual or an organization to pay the creditors.
Bankruptcy
Barcode Labeling A Barcode is a printed code that consists of a series of vertical bars with different thickness. Barcodes are capable of being read and decoded by barcode scanners. They are used in various industries as application tools and to track supply chain. Basel Norms The Committee on Banking Regulations and Supervisory Practices, popularity known as Basel Committee. Their norms are termed as BASEL I, BASEL II and BASEL III.
Basis Point (bps) One basis point is one-hundredth of a percentage point. It is normally used for indicating spreads or cost of finance. Basket Trading BCS Bear Markets Best Efforts Contract Basket Trading provides a facility to create offline order entry file for a selected portfolio. Business Credit Services Unfavorable markets associated with falling prices and investor pessimism. The undertaker agrees to do his best to sell the offering at a pre-determined price, but does not buy the securities and also does not guarantee that issuing company will particular set amount for it. It limits the responsibility of the firm to the shares that it can sell and all unsold shares are absorbed by
the issuer. Bid price Bid-ask Spread Bilateral Billing Cycle The price which is the highest offered by the dealer to purchase a given security. The difference between a dealers bid and ask price. Bilateral Netting is arriving at net obligations (i.e. netting) of securities and funds between two brokers / parties. A billing cycle is a time period that covers the credit statement, for which no interest rate is charged.
Billing Statement A billing statement is a summary of all transactions, payments, purchases, finance charges and fees, that take place through a credit account during a billing cycle. Bills of Exchange It is a financial instrument that facilitates funding of a trade transaction. It is a negotiable instrument and hence is easily transferable. Further, depending on the repayment period and the documents attached, these bills of exchange are classified into different types. Black Money Blank cheque Blank endorsement Bloomberg It is unaccounted money which is concealed from tax authorities. All illegal economic activities are dealt with this black Money. A cheque which is signed by the account holder where the amount field is left blank. An endorsement where there is no payee and so the payable to the bearer which is done on a commercial paper. Bloomberg Trade book is a global electronic agency brokerage. Bloomberg Trade book provides agency broking services to institutional investors and broker dealers. Blue Chip refers to the big companies with sound and solid financial records. It is considered to be the most safe investment in the equity market. A bond is a debt security, in which the authorized issuer owes the holders a debt and is obliged to repay the principal and interest at a later date, termed maturity. Other stipulations may also be attached to the bond issue, such as the obligation for the issuer to provide certain information to the bond holder, or limitations on the behavior of the issuer. Bonds are generally issued for a fixed term longer than ten years. In this case the company creates new shares by distributing free shares to its shareholders. A process used to ascertain and record the indicative subscription bids of interested investors to a IPO or FPO. It makes the overall subscription
Blue Chip Bonds
Bonus Issue or Stock Dividend Book Building
process transparent and investors can see the book building completely. Book Value The amount of stockholders equity in a firm equals the amount of the firms assets minus the firms liabilities and preferred stock. The book value of an equity share tends to increase as the ratio of reserves and surplus to the paid-up equity capital increases.
Bounced Check A bounced check is nothing but an ordinary bank check that any bank can refuse to encash or pay because of the fact that there are no sufficient finances in the bank account of the originator or drawer of the check. BR Act Brick & Mortar Banking Banking Regulation Act Brick and Mortar Banking refers to traditional system of banking done only in a fixed branch premises made of brick and mortar. Now advancement of technology has changed the complete dynamics of banking services.
Bridge Financing Bridge financing is a loan where the time and cash flow between a short term loan and a long term loan is filled up. Bridge financing begins at the end of the time period of the first loan and ends with the start of the time period of the second loan, thereby bridging the gap between two loans. It is also known as gap financing. Bridge Loan Broker Brokerage fee Brokers Budget Deficit A loan made by a bank for a short period to make up for a temporary shortage of cash. Licensed individuals by stock exchanges to enable investors to buy and sell securities. The amount charged by the brokers as commission. Brokers are the intermediaries in a transaction between buyers and sellers of securities. Budget may take a shape of deficit when the public revenue falls short to public expenditure. Budget deficit is the difference between the estimated public expenditure and public revenue. The government meets this deficit by way of printing new currency or by borrowing. Bull is that type of speculator who gains with the rise in prices of shares and stocks. It refers favorable markets associated with rising prices and investor optimism. When the government fails to check inflation, it raises income tax and the corporate tax. Such a tax is called Buoyancy.
Bull
Buoyancy
Banking Terms C
Term CAD Call Money
Meaning Current Account Deficit Call money is a money market instruments wherein funds are borrowed/lent for a tenor of one day/overnight (excluding Sunday/holidays). These funds represent borrowings made for a period of one day to up to a fortnight. A type of Option derivative. Call Option is the right to buy the underlying securities at a specified exercise price on or before a specified expiration date. Call report is one of the important reports which US banks should maintain. It a Quarterly Report. It will contain all basic financial information. FFIEC (Federal Financial Institutions Examination Council) have one standard form to get data from Banks. Bonds that give the issuer the right to redeem the bonds before their stated maturity. This call option feature increases the bond price. An adjustment cap is the maximum rate that a persons interest rate can be increased or decreased each time his or her adjustable rate mortgage (ARM) is adjusted. Capital can be defined as funds raised by a business through the sale of stock plus retained earnings. In economics, capital or capital goods or real capital refers to already-produced durable goods available for use as a factor of production. Capital goods may be acquired with money or financial capital. In finance and accounting, capital generally refers to financial wealth especially that is used to start or maintain a business.
Call Option Call Reports
Callable Bonds Cap-Adjustment
Capital
Capital Adequacy This is the level of capital required for a bank or financial institution to carry out its activities of lending. It is expressed as a percentage of value of assets. For example, for commercial banks, every USD one hundred millions of assets may require Capital of USD ten millions. Capital Adequacy CAR is a ratio of total capital (Tier 1 and Tier 2) divided by risk-weighted assets. Ratio (CAR) It denotes the liquidity position of a bank. Capital Gain Capital Market It denotes the amount by which the proceeds from the sale of a capital asset exceed its original purchase price. The market in which corporate equity and longer-term debt securities (those maturing in more than one year) are issued and traded is known as Capital Market. Capital structure refers to the make-up of a companys balance sheet. In particular, the ratio of debt to equity and, within that debt, the mixture of long and short maturities is known as Capital Structure. It refers to the way a corporation finances itself through some combination of equity, debt, or hybrid
Capital Structure
securities.` Capitalization This refers to equity capital, certain types of bond s and reserves and surplus generated by the bank/ financial institution. It is also known as shareholder funds. Loan pricing must be done in such a manner that loans generate enough profit to add to the reserves and capital of the bank. A limit on the amount that the payments of an adjustable rate mortgage can increase or decrease during the mortgage term. Caps is the consumer safeguards on adjustable-rate mortgages that limit the increase or decrease of interest rate changes per year or during the life of the loan, and/or a limit on the amount that monthly payments can change. These are subsidiaries of multinational manufacturing companies such as auto manufacturers. They exclusively finance consumers for purchasing products of their parent companies. Carried interest is the share of profits due to the fund manager after the cost of investment has been returned to investors. Carried interest is usually expressed as a percentage of the total profits of the fund. An arrangement through which the bank gives a short-term loan against the self-liquidating security Highly liquid, very safe investments that can easily and cheaply be converted into cash are known as Cash Equivalents. Examples include US Treasury bills, money-market funds and short-term certificates of deposit (CDs). Cash flow is a term that refers to the amount of cash being received and spent by a business during a defined period of time, sometimes tied to a specific project. Cash flow is calculated by adding net after-tax income plus any book keeping expenses that result in items being deducted but not paid out in cash. The cash reserve is the total amount of cash that is present in the bank account and can also be withdrawn immediately.
Cap-Lifetime Caps
Captive Finance Companies Carried Interest
Cash Credit (CC) Cash Equivalents
Cash Flow
Cash Reserve
Cash reserve Ratio CRR is the amount of funds that the banks have to keep with the RBI. It affects (CRR) the liquidity position of the banks and hence their ability to lend. Reduction of CRR increases liquidity in the market. Cash sorter Cashiers Check This machine is used for sorting cash notes. This is used inside bank or the financial institution. A cashiers check is nothing but a banks check, demand draft or tellers check guaranteed by the bank. It doesnt bounce because the face value of the check is paid by the customer when it is issued. These checks contain the payee name, remitters name and amount. A cashiers check is secured because the amount is paid to the bank or institution at the time of check issuance. And the
receiver is guaranteed to receive the money when cashing the check. Cashline C-D ratio Central Bank Certificate of deposit (CD) It is the name given to an ATM machine by its bank, Royal bank of Scotland. Credit-Deposit Ratio A central bank is the governing authority of all the other banks in a country. Its main purpose is to work as a bankers bank and to regulate all the other banks. A certificate of deposit or CD is a money-market time deposit, a financial product commonly offered to consumers by banks, thrift institutions, and credit unions. Such CDs are similar to savings accounts in that they are insured and thus virtually risk-free; they are money in the bank. They are different from savings accounts in that the CD has a specific, fixed term (often three months, six months, or one to five years), and, usually, a fixed interest rate. The cheque will be certified saying the customer who has given the cheque has amount in his account. Charge off loan is an uncollectable amount from the lender. Principal amount and the accrued amount for till date will remove from the lenders account. They may remove partially or fully. This may called partial or fully charged off loans. Accounts receivables that will most probably remain uncollectible and will be written off are known as charge-offs. These appear as an expense on the companys income statement and reduce the net income. A charge-off happens when a bank declares a borrower account as Uncollectible and hands it over to a collection agency which tries to get the person to pay off at least a portion of the balance due. Check 21 is the US federal law which helps the bank to handle more checks electronically. It helps the bank to process checks faster and more efficient. It replaces paper check with digital check which is called a substitute check during transactions. Check 21 Act is not related to ACH rule and so it doesnt follow NACHA rules.
Certified Cheque Charge off loans
Charge-offs
Check 21 Act
Checking Account A Checking Account or demand deposit account is a deposit account held at a bank or other financial institution, for the purpose of securely and quickly providing frequent access to funds on demand, through a variety of different channels. Because money is available on demand these accounts are also referred to as demand accounts or demand deposit accounts. Cheque Cheque book A written order directing a bank to deposit the amount in that particular given account. A book which holds the cheques leaves.
Cheque clearing
This term is used for debiting amount from an account and then crediting amount using cheque to another account. This process is called as cheque clearing. Each cheque inside the cheque book is called as cheque leaf.
Cheque leaf
Cheque Truncation Cheque truncation, truncates or stops the flow of cheques through the banking system. It takes place at the collecting branch, which sends the electronic image of the cheques to the paying branch through the clearing house. CHIPS CHIPS stands for clearing house for interbank payment system. It is privately held clearing house in US. It is used to transfer and settle funds in US dollar. Chips is used for making large value transaction between banks. To be a member of chips participants should have an account with Federal Reserve Bank. I_ Customer Identification File. Its a 6 digit number which tells the customer relationship with the bank. Its appearing as first 6 digit in the account number. Clearing is a process of exchange of money and securities between brokers using a form of netting. Clearing bank is one which settles the debits and credits of the commercial banks. Closed economy refers to the economy having no foreign trade (i.e., export and import). Such economies depend completely on their own internal domestic resources. A fund with a fixed number of shares issued, and all trading is done between investors in the open market. The share prices are determined by market prices instead of their net asset value.
CIF Reference Number Clearing Clearing Bank Closed Economy
Closed-end (Mutual) Fund
Closed-end Credit Closed-end Credit is a kind of agreement in which advanced credit plus any finance charges are expected to be repaid in full over a definite time. Most real estate and automobile loans are closed-end agreements. Most real estate and auto loans are closed-end. Close-ended Loans Close-ended loans are those loans where an additional amount of loan is not available and the terms of loan remain unchanged. The amount, the duration and repayment are all fixed at the time of sanctioning a close-ended loan. Closing Closing Costs The finalizing of the sale of a property, as its title is transferred from the seller to the buyer, also called settlement. Fees and expenses, over and above the price of the property, incurred by the buyer and/or the seller in the property ownership transfer. Examples are title searches, lawyers fees, survey charges, and deed filing fees, also called
settlement costs. Closing Price The price of a share quoted at the end of a trading day on an exchange is know as Closing Price. Different exchanges have different rules for determining the closing price. Some exchanges use the last price at which a trade has taken place; others use the mid-price. Combined Loan To Value (ratio) (CLTV) is the proportion of loans (secured by a property in relation to its value. It is actually the ratio of the total mortgage liens against the subject property to the lesser of either the appraised value or the sales price. The term Combined Loan To Value adds additional specificity to the basic Loan to Value which simply indicates the ratio between one primary loan and the property value. When Combined is added, it indicates that additional loans on the property have been considered in the calculation of the percentage ratio. CML stands for Capital Market Line The co-borrower is a person who signs a promissory note as a guarantee that the loan would be repaid. Thus the co-borrower plays the role of a guarantor and is equally responsible for the loan. Art and practice of making coins is called coinage. The metal is melted and moulded to shape into a coin. This refers to the physical security which is available to the Lender [bank] from the borrower customer. The bank has a right to take possession of the security in case of non-payment by borrower and the bank ensures that the borrower signs a suitable agreement to this effect. Thus in case of a car loan , if the borrower defaults on payment, the bank can repossess the car and sell it to another person and recover a part of the outstanding loan. In case of a home loan, the bank can take possession of the house based on the mortgage created by the borrower in its favour.
CLTV (Combined Loan-to-value)
CML Co-borrower
Coinage Collateral
Collateralized Collateralized Borrowings Lending Obligation (CBLO) is a money market Borrowings instrument for borrowing against the securities, held in custody by the Clearing Lending Obligation Corporation of India Limited for the amount lent. (CBLO) Collection When the loan is not repaid as per the terms and conditions of the loan agreement, the lending bank has to get it collected either through in-house collections department or through an outside collection agency. It is the item presented for deposit such as cheque whose amount needs to credit to the depositors account.
Collection item
Commercial Bank Bank which provide the loans for business purpose. It deals with the banking services through its branches in whole of the country. Operation of current
accounts, deposits, granting of loans to individuals and companies etc. are various functions of the commercial bank. Commercial Paper Commercial paper is a money market security issued by large banks and corporations. It is generally not used to finance long-term investments but rather to purchase inventory or to manage working capital. It is commonly bought by money funds (the issuing amounts are often too high for individual investors), and is generally regarded as a very safe investment. As a relatively low risk option, commercial paper returns are not large. There are four basic kinds of commercial paper: promissory notes, drafts, checks, and certificates of deposit. Commercial Paper Commercial Paper (CP) is a fairly new instrument which was originated in US. It (CP) helps private companies with good credit rating to raise money directly from the market and investors. They raise money by issuing commercial papers in tight money market conditions through sources other than banks. Commission Commitment This is a fee collected for the service given by the bank for a particular kind of transaction. Bank has committed to give the particular amount. That amount will contractually funded by the bank in the future.
Commitment Fees Banks will charge customer for unused credits that has been promised at a particular date in future. Commodity Futures Trading Commission This was established under the Commodities Futures Trading Commission Act of 1974 .It has authority and responsibility to make possible more effective regulation of the commodity futures markets. The Commission is empowered to regulate various transactions such as Options in Commodities. The commission is based in Washington, DC and maintains offices in several cities in USA.
Commodity swap A Commodity swap is a swap agreement through which a floating or spot price is swapped with a fixed price over a specified period. This is mainly used for Crude Oil where one firm swaps the floating price of crude oil with the fixed price over a specified period. Common Stock Equity investment which represents ownership in the company. Each stock represents a fractional ownership interest in the firm by the investors who own the same. A bank needs a minimum amount or a credit balance as deposit to grant a loan.
Compensating balance
Compound interest Compound interest is the interest that is compounded on a sum of money that is deposited for a long time. It is the interest calculated using the principal and accumulated interest.
Consumer Credit
Consumer credit is the credit and loan facility that is provided to the consumer for the purchase of goods, services and real estate property. Most consumer credit is unsecured in nature.
Consumer Lending The term Consumer Loans/ Credit has been defined by the Board of Governors of the Federal Reserve. The definition refers to short-term and intermediate term debts owed by individuals to financial institutions, retailers, and other distributors. Consumer Protection Act It is implemented from 1987 to enforce consumer rights through a simple legal procedure. Banks also are covered under the Act. A consumer can file complaint for deficiency of service with Consumer District Forum, State Commission or National Commission depending on the amount. A note which must accompany every security transaction with all the necessary transaction related details.
Contract Note
Conventional Loan A loan underwritten according to guidelines established by Federal National Mortgage Association (FNMA), Federal Home Loan Mortgage Corporation (FHLMC) or a private investor and insured, if necessary, by a private mortgage insurance company. A mortgage that is not insured or guaranteed by the government, as opposed to a government mortgage is conventional loan. Convertible Bond Bonds which allow the bondholder to exchange the bond for a specified number of shares of common stock in the firm after a certain duration. Co-operative Bank Co-operative Banks are government supported financial agency in India, which are organized and managed with the dictum of co-operation, self-help and mutual help. It functions with the no profit and no loss model. As other banks in the country, Co-operative banks perform all the basic banking functions like borrowing and lending of credits. Cooperative Banks Cooperative Banks are those that are created by a group of individuals to support either a community or a religious group. They operate in metropolitan, urban and semi urban centers to cater to the need s of small borrowers. These are controlled by the RBI and by State Cooperative Acts. Core Banking Solutions (CBS) Through core banking solutions, all the branches of a bank are connected to a central system and customers can do banking with any branch through this facility. It is mainly driven by technology which makes banking process simpler and easier.
Corporate Banking It denotes banking services for large companies. Corporate Bond Long-term debt issued by private corporations. The rating is determined by the financial strength and reputation of the company.
Corporate Lending When the borrower is an Incorporated Company or a Business Entity and the borrowing is for meeting business requirements, it is known as corporate
lending. Correspondent account Correspondent banking Correspondents It is an account created by the domestic banking institution to receive deposits from foreign financial institutions. The transaction between a big bank and a small bank where the big bank provides deposit, lending and other services. Correspondent is usually a term that refers to a company that originates and closes mortgage loans in its own name. Instead of selling those loans in pools, correspondents sell them individually to a larger lender, called a Sponsor.
Cost-push Inflation Cost-push Inflation happens due to an increase in production cost. Coupon Payment Coupon payment is the interest payment that the bond issuer pays to the bond holders at period intervals. Usually this rate is fixed throughout the tenure of the fixed coupon payment bonds, the coupon rate can be variable and based on LIBOR or other standard rates for floating rate bonds. Covered Warrants Derivative call warrants on shares which have been separately deposited by the issuer so that they are available for delivery upon exercise. CPA This is the abbreviation of Canadian Payments association. All banks in Canada are members under this act. This facilitates the flow of funds between institutions. Capital to Risk-Weighted Assets Ratio CRE stands for Commercial Real Estate. The Property which is used for the business. A contractual agreement in which a borrower receives something of value now and agrees to repay the lender at some later date. It is usually referred to as a loan. Credit Approval refers to agreement to lend to the borrower against specific application. The approval is a written communication from lender to borrower specifying amount of loan, repayment terms, security and guarantor requirements etc. This is a written report on the prospective borrower from an independent agency which maintains data bases on various types of borrowers such as borrowers in Car Loans segment or Housing Loan segment etc. This agency maintains records of a large number of borrowers and their repayment, their up to date financial position their repayment record etc. The report enables the bank to take decision on whether to end or not to lend by getting to know about his/her financials and past borrowings and repayment record. Its another kind of loan where the customer buys the goods and resettles the
CRAR CRE Credit
Credit Approval
Credit Bureau Report
Credit Card
amount within a speculated time period. It is a card for which the issuer pays the seller the amount for the goods purchased by customer and the customer repays the amount in installments. Credit Card Act This Act was passed to amend the Truth in Lending Act and to establish fair and transparent practices relating to the extension of credit under an open-end consumer credit plan and for other purposes. A credit limit is the maximum amount of credit that a bank or other lender will extend to a debtor, or the maximum that a credit card company will allow a card holder to borrow on a single card.Credit card companies will also allow you to change your credit limit, or limit the credit available to authorized users on the account. This is a written document prepared by the Credit Department / Top Management of the bank. This document details the various norms for lending adopted by the bank. The norms typically refer to desired borrower profile, minimum and maximum lending limits, lending products, interest rate structure for various loan products etc. This is a document for internal use of the bank/lender. This is the rating which an individual (or company) gets from the credit industry. This is obtained by the individuals credit history, the details of which are available from specialist organizations like CRISIL in India. An independent body which provides credit report on an individual based on data on his/her past borrowings and repayments, income, assets owned etc. This is the Risk that the Borrower of the bank finds himself unable to repay the loan installment[s] The credit risk may arise out of economic factor such as loss of job by the borrower after availing loan or deliberate non-payment of one or more installments. This is a number which is assigned to a borrower on the basis of his/her personal financial information and his/her past repayment record, if any. This score enables the Lender to assess the potential borrower in terms of his/her repayment capacity. The Lenders generally decide upon the Cut off Score[s] below which they will not lend and a higher score is looked upon more favorably than a lower score. This is an independent agency which analyses a loan application and arrives at probability that the borrower will fail to repay. Score refers to a number allotted to the applicant and the number signifies the level of risk of default repayment of loan. Monetary authorities restrict credit as and when required. This credit restriction is called credit squeeze. Monetary authorities adopt the policy of
Credit limit
Credit Policy
Credit Rating
Credit Reporting Agency Credit Risk
Credit Score
Credit Scoring Agency
Credit Squeeze
credit squeeze to control inflationary pressure in the economy. Credit union A financial institutions members avail loan from savings.
Credit Worthiness A creditors measure of an individuals or companys ability to meet debt obligations. An individual might be considered credit-worthy by one organization but not by another. Much depends on whether an organization is involved with high risk customers or not. Creditworthy The term refers to a person/applicant considered good for a specific sum of loan based on the individuals income, expenses, assets owned, past borrowing and repayment record etc. Two loan agreements connected by a clause that allows one lender to recall the loan if the borrower defaults with another, and vice versa. A monetary system in which the monetary base is fully backed by foreign reserves. Any changes in the size of the monetary base has to be fully matched by corresponding changes in the foreign reserves. Currency risk is a form of risk that arises from the change in price of one currency against another. Whenever investors or companies have assets or business operations across national borders, they face currency risk if their positions are not hedged. Currency swap involves exchanging the principal and fixed rate interest payment on that principal in one currency for the same principal and fixed rate interest payment on that principal in some other currency. It also helps companies to gain the comparative advantage by swapping the same principal and interest payment between the parties. The account for which there is no restriction on the number of withdrawals from this account and also the bank does not pay any interest on the balance maintained in this account. This account is also knows as transaction account as it facilitates different types of transactions with much ease. Current assets are assets that normally would be convertible into cash within the accounting cycle, usually one year. They include: stocks, debtors and shortterm deposits. In accounting, a current asset is an asset on the balance sheet which is expected to be sold or otherwise used up in the near future, usually within one year, or one business cycle whichever is longer. On the balance sheet, assets will typically be classified into current assets and long-term assets. The current yield refers to the yield rate at the current moment of time which helps to calculate the market price of the bond for trading purpose.
Cross default Currency Board
Currency Risk
Currency Swap
Current Account
Current Assets
Current Yield
Custodial Account The account created for the minor but it is maintained by their parents or guardian.
Customer Profitability Analysis
The customer profitability analysis (CPA) is a broader version of sophisticated pricing loans. The method advocates that a bank should take the customer relationship in its entirety into account when pricing a loan request. CPA focuses on the rate of return from the entire customer relationship that can be calculated using the following formula: Net before tax rate of return from the customer relationship = (revenue from loans and other services provided to the customer expenses from providing loans and other services to the customer)/net loanable funds used in excess of customer deposits
Banking Terms D
Posted on May 1, 2012 by admin in Banking. DDA
Term
DDA stands for Demand deposit account. It is the deposit account held at the bank or financial institution for secure and easy access of funds on demand. This deposit account doesnt earn any interest. It is only for transactional purpose. Demand deposit withdrawal can be made without prior notice to the bank. The most common accounts that come under demand deposit account are savings and checking account. ATM and online transactions are some demand deposit transactions. Dealers do not act as intermediaries; they take positions in securities on their own account. Dear money is that money which can only be borrowed at a high rate of interest. In dear money policy, bank rate and other rates of interest are high and as a result borrowing becomes expensive. It is a direct tax which is imposed on the estate of deceased person. Death duty or Death Tax is a form of personal tax on property which is levied when property passes from one person to other at the time of death of the former. Debenture is a fixed-interest long-term debt instrument used by governments and large companies to obtain funds. It is similar to a bond except the securitization conditions are different. A debenture is usually unsecured in the sense that there are no liens or pledges on specific assets. It is however, secured by all properties not otherwise pledged. Debentures are generally freely transferable by the debenture holder. In accounting, an entry on the left-hand side of an account recording where amounts are recorded in a double entry system of bookkeeping. Debit is a banking term that indicates the amount of money that is owed by a borrower. It also indicates the amount that is payable, or the amount that has been deducted from an account.
Meaning
Dealers Dear Money
Death Duty
Debenture
Debit
Debit Bureau
Debit Bureau is a data warehouse with decision support capabilities to help financial service companies and retailers make better debit decisionslike opening checking accounts, setting ATM withdrawal limits, accepting checks, and issuing debit cards. Its a plastic card used for dispensing money, inserting this in the ATM machine; the machine dispenses the required amount if the particular account has the amount. An amount owed to a person or organization for funds borrowed. Debt can be represented by a loan note, bond, mortgage or other form stating repayment terms and, if applicable, interest requirements. These different forms all imply intent to pay back an amount owed by a specific date, which is set forth in the repayment terms. It is also known as a liability. Debt burden is the total borrowing of an individual from all sources. A debt consolidation loan is a type of loan, where the bank or the lending institution provides the borrower with a loan that helps the borrower to pay off all his previous debts. Debt recovery is the process that is initiated by the banks and lending institutions, by various procedures like debt settlement or selling of collaterals.
Debit card
Debt
Debt Burden Debt Consolidation Loan Debt Recovery
Debt Repayment Debt repayment is the total process repayment of a debt along with the interest. Debt Settlement Debt settlement is a procedure wherein a person in debt negotiates the price with the lender of a loan to settle the entire debt. Deed Default Risk Deferred Fees It is a legal document conveying title to a property. The deed is also used to convey the property from the seller to the buyer. The possibility that a bond issuer/loan borrower will default i.e., fail to repay principal and interest in a timely manner. Deferred Fees are the cost which will use in Future. E.g. If a customer paid 6000 Rupees, they will account 1000 for a month. So it will be used for 6 months. Deflation is the reverse case of inflation. Deflation denotes continuously falling prices due to higher supply compared to lower demand. In this scenario, the general price level falls and the value of money rises. If a loan remains outstanding on a due date it is referred to as delinquency.
Deflation
Delinquency
Delinquency Loan A loan in which No payment had made for Past 30 to 60 Days.
Demand deposit A deposit from which withdrawal can be done without notice. Deposit The placement of funds into an account at an institution in order to increase the credit balance of the account is known as Deposit. It is the sum of money given to assure the future purchase of something. It can be refer as the liability owed by the bank to its depositor A deposit slip is filled by the depositor while depositing money in the bank. Deposit slip contains depositors name, account number, amount and date. These deposit slips are used to keep track of the money that is deposited to the bank on the day. It has two parts. One part acts as customer transaction receipt and the other has cash denomination details which act as audit trail for the bank. The individual or a company who puts the amount in a bank account. Debt capital comes from non-owners or outsiders. It is like a loan given to the company by outsiders. Warrants issued by a third party which grant the holder the right to buy (sell) the shares of a listed company at a specified price. Financial instrument whose value depends on the value of another asset. A direct deposit is a deposit in which funds are directly credited to the employees individual bank account. Without customer visiting the bank the funds is credited to his account. Paychecks, online transfer etc are some forms of direct deposit. There are many advantages of using direct deposits. They are processed faster than paper checks and allow quicker access to money. Payment reaches the account the day the check is issued. It avoids bouncing of checks. Unlike paper checks there is no fee or charge collected for direct deposits. A direct lender refers to a lender that funds his/her own loans. A direct lender can be one of the biggest financial institutions or a small independent finance company. When a borrower is disbursed loan directly by the bank, it is called direct lending. Wherein the securities of the company are directly offered to the investors instead of using an Underwriter. These are relatively less expensive than the public offering done by using an underwriter which is the traditional way of public offering. The underwriter usually charges the issuing company for selling its stocks to the public.
Deposit Slip
Depositor Dept Capital Derivative Call (Put) Warrants Derivative Instrument Direct Deposit
Direct Lender
Direct Lending Direct Public Offering
Discharged Debts Under the protection of the Bankruptcy Court debtors may be released from or discharged from their debts, perhaps by paying a portion of each
debt. These debts are known as discharged debts. Discount Bond Discount Points A bond selling below par to the bondholders due to lower yield rate than the market interest rate. Discount points are fees paid to a lender at closing in order to lower your mortgage interest rate. While buying points is sometimes a good decision, many times the purchase costs you more than it saves. One point is equal to 1 percent of the loan amount. Interest rate, at which an eligible depository institution may borrow funds, typically for a short period, directly from a Federal Reserve Bank is known as Discount Rate. The discount rate is a financial concept based on the future cash flow in lieu of the present value of the cash flow. Non-payment of a cheque by the paying banker with a return memo giving reasons for the non-payment. This refers to excess income over regular expenditure available in the hands of an individual. The process of increasing investment instruments in a portfolio in order to diversify risk. Dividends are payments made by a company to its shareholders. When a company earns a profit, that money can be put to two uses: it can either be re-invested in the business (called retained earnings), or it can be paid to the shareholders of the company as a dividend. The process of documentation leads to the lender obtaining various declarations from the borrower and the guarantor(s). A lump sum cash payment paid by a buyer when he or she purchases a major piece of property, such as a car or house is called down payment. The buyer typically takes out a loan for the balance remaining, and pays it off in monthly installments over time. One means of paying the amount drawn by a person on a bank or another person. It is the financial institution expected to pay the check presented for payment. The customer who gives instructions to the drawee for making payment to the other person. An internal audit of a target firm by an acquiring firm. Offers are often made contingent upon resolution of the due diligence process. DUNS Stands for Data Universal Numbering System. Its a 9 digit number which used to identify the business all over the world. It was created by Dun &
Discount Rate
Dishonour of Cheque Disposable Income Diversification Dividend
Documentation Down Payment
Draft Drawee Drawer Due Diligence DUNS Number
Bradstreet.
Banking Terms E
Early Withdrawal An early withdrawal penalty is basically a penalty that is levied by a bank Penalty because of an early withdrawal of a fixed investment by any investor. Earnest Money An Earnest Money (sometimes called earnest payment or simply Earnest, or alternatively a Good-faith deposit) is a deposit towards the purchase of real estate made by a buyer to demonstrate that he/she is serious (earnest) about wanting to complete the purchase. When a buyer makes an offer to buy residential real estate, he/she generally signs a contract and pays a sum acceptable to the seller by way of earnest money. The amount varies enormously, depending upon local custom and the state of the local market at the time of contract negotiations. The amount of annual earnings available for each share to common stockholders. This is an important parameter to analyze performance of a stock. E-Banking stands for electronic banking in which banking transactions are performed through exchange of electronic signals between banks and financial institution and customers. ATMs, Credit Cards, Debit Cards, Internet Banking and fund transfer devices like SWIFT, RTGS, NEFT etc. fall in this category. Economic integration appears when two or more nations coordinate themselves and their economies are linked up. An education loan or students loan, is specifically meant to provide students the fund required to complete higher studies. The period of repayment also starts after the completion period of the loan. E-Commerce is the paperless commerce where the exchange of business takes place by Electronic means.
Term
Meaning
Earnings per Share (EPS) E-Banking
Economic Integration Education Loan
Electronic Commerce (ECommerce)
Electronic Electronic Communications Networks (ECNs) are alternate trading systems Communications which provide investors with new execution choices. Networks Electronic Filing Electronic filing is the method of filing of tax returns and tax forms on the
Internet. Electronic Funds Transferring money between accounts electronically is called Electronic Transfer (EFT) funds Transfer. ATM, online payments are examples of Electronic funds transfer. These are easy, faster and efficient transactions. Encryption Endorse Endorsement Encryption is used to ensure the privacy and protect someones confidential financial information. Signing at the back of the check before cashing, giving it to someone else or depositing. Endorsement is basically the handing over of rights of a financial/legal document or a negotiable instrument to another person. The person who hands over his/her rights is known as the endorser, and the person to whom the rights have been transferred is known as the endorsee.
Equal Credit Creditworthiness is based on factors such as income, expenses, debt and Opportunity Act credit history. ECOA ensures equal chance to each customer. Equifax Equity Equifax is one of the three largest Credit reporting bureaus. It will identify theft insurance, Manage credits. This represents the ownership capital. A common stock or an equity share is the primary source of capital for the business without which business cannot exist. Warrants issued by a company which give the holder the right to acquire new shares in that company at a specified price and for a specified period of time. Escrow is a legal arrangement in which an asset (often money, but sometimes other property such as art, a deed of title, website, or software source code) is delivered to a third party (called an escrow agent) to be held in trust pending a contingency or the fulfillment of a condition or conditions in a contract such as payment of a purchase price. Upon that event occurring, the escrow agent will deliver the asset to the proper recipient; otherwise the escrow agent is bound by his or her fiduciary duty to maintain the escrow account.
Equity Call Warrants Escrow
Escrow Account An account in which a portion of the monthly payment is held by the lender on the borrowers behalf for the payment of future taxes, mortgage and hazard insurance, special assessments insurance, and other on-going payments as they occur. It can be considered as a trust account held in the borrowers name to pay obligations such as property taxes and insurance premiums. ESCROW Account This is an account in a bank / financial institution created by an agreement between the bank, the borrower and a third party (e.g., insurance
company). The customer usually deposits funds in this account towards a pre-determined use. Escrow Agreement Escrow Closing Bank will give the certification to indicate the assets are deposited in the bank. In certain regions, an escrow agent holds in escrow funds as well as documents to be signed by both the buyer and seller. Once all conditions of the closing have been satisfied, the documents and the funds are distributed by the escrow agents to the interested parties. Euro Inter Bank Offer Rate. It is a Daily Referenced Interest rate at which banks borrow money from other banks in European Market.
Euribor
Event-Triggered Event-triggered marketing is a tool to increase relevance, response and Marketing ultimately revenue by synchronizing the content and timing of marketing messages with customer needs and buying decisions. Exchange An exchange is a market place in which financial contracts are bought and sold; traditionally in a central, physical location called trading floor. More often, though, exchanges take place online between sellers and buyers of traded instruments. The price of one countrys currency expressed in another countrys currency. An exchange rate is a basically a rate, with the help of which one countrys currency can be exchanged with the currency of another country.
Exchange Rate
Exchange TradedExchange-traded fund is a mutual fund that trades like a stock. Fund Ex-dividend (XD) A security which no longer carries the right to the most recently declared dividend or the period of time between the announcement of the dividend and the payment (usually two days before the record date). For transactions during the ex-dividend period, the seller will receive the dividend, not the buyer. Ex-dividend status is usually indicated in newspapers with an (x) next to the stocks or unit trusts name.
Banking Terms F
Posted on May 1, 2012 by admin in Banking. Face amount Face Value
Term
Principal Value of a security mentioned on the face of the document. Face value is the value of a coin, stamp or paper money, as printed on the coin, stamp or bill itself by the minting authority. Face value is the original value of any security or negotiable instrument.
Meaning
Factoring
Factoring is a financial transaction where a company sells its account receivables to a third party or a bank at a discount for some immediate money to finance its urgent cash requirements. Normally every company has a credit policy which provides the byers some credit period to pay back all the pending dues; these are called account receivables and termed as asset for the company. This Act is enforced by the Federal Trade Commission and is designed to promote accuracy and ensure privacy of the information used in consumer reports. Federal National Mortgage Association (FNMA). An entity that purchases first mortgages from commercial banks, savings and loans, and mortgage bankers.
Fair Credit Reporting Act Fannie Mae
Farm Credit System A cooperative nationwide system of banks providing money to farmers and related businesses. FASB Financial Accounting Standard Board. Its the independent US Agency which establishes standards for Financial Accounting. These standards are called as generally accepted accounting principles which popularly called as GAAP. Foreign Currency Non-Resident (FCNR) accounts are the ones that are maintained by the NRIs in foreign currencies. The account is a term deposit with interest rates linked to the international rates of interest of the respective currencies. Federal Deposit Insurance Corporation. Its the independent US Agency which deposits up to USD 250,000 per institution as long as the bank is a member. Its the organization formed against bank failure. This is a member owned, democratically governed, no profit cooperative providing financial services such as deposit taking and disbursing loans to the members. The profits are share with members.
FCNR Accounts
FDIC
Federal Credit Union
Federal Economy It refers to a federation which is an association of two and more states. A federal state is a union of state in which authority is divided between the federal (or central) government and the state governments. In a federal economy both the centre and the states are independent in the exercise of this authority. Federal Funds Rate The interest rate at which banks borrow surplus reserves and other (funds Rate) immediately available funds is known as federal Funds Rate. The federal funds rate is the shortest short-term interest rate, with maturities on federal funds concentrated in overnight or one-day transactions. In the United States the federal funds rate is the interest rate at which private depository institutions lend balances (federal funds) at the Federal Reserve
to other depository institutions overnight. Federal Reserve Federal Reserve is the banking regulator in USA. It has twelve offices spread out in various states and implements monetary policy of the Federal Government. It also regulates the interest rates in the US markets. FHA loan is a federal assistance mortgage loan in the United States insured by the Federal Housing Administration. The loan may be issued by federally qualified lenders.FHA loans have historically allowed lower income Americans to borrow money for the purchase of a home that they would not otherwise be able to afford. The program originated during the Great Depression of the 1930s, when the rates of foreclosures and defaults rose sharply, and the program was intended to provide lenders with sufficient insurance. Some FHA programs were subsidized by government, but the goal was to make it self-supporting, based on insurance premiums paid by borrowers. Generally bank-note are backed by gold. But when they are not backed by gold and government securities replace gold, it is called fiduciary issue. Such fiduciary issue results in inflation. A final maturity is the date of maturity when a last, single loan matures from a pool of loans. The final maturity indicates the total and final payment of the pool of mortgage loans. It is the institution that collects money and invests them in financial assets. Bank comes under financial institution. A unique four-digit number assigned by U.S. Bank Network Services to find the institution. Financial Instrument is a legal Document representing the agreement which involves monetary value. A financial intermediary is basically a party or person who acts as a link between a security provider and securities buyer. Share broker and banks are the best examples of financial intermediaries.
FHA loan
Fiduciary Issue
Final Maturity
Financial institution Financial Institution Identifier (FIID) Financial Instrument Financial Intermediary
Firm Commitment This is a type of underwriting contract wherein the underwriter assures the Contract sale of issued stock at a predetermined price. The undertaker takes the risk involved in the sale so for the issuer, this is the safest underwriting contract; however the downside is that this contract is most expensive among the Underwriting contracts. This is the most common type of underwriting contract. Any loss that occurs in the trading or due to unsold shares will be shared between the participating underwriting firms according to their proportional participation.
First Mortgage
A mortgage that creates a lien against real property with the lien having first priority against other claims in the event of foreclosure is known as First Mortgage. Fiscal Policy refers to the Government spending and income to run a country and support the growth. It mainly deals with the Budget allocation, Government spending, Government income, taxation, fiscal deficit, Government borrowings, current account deficit and surplus and trade deficit and surplus. Anything a corporation owns is considered an asset. These are listed in a companys Balance Sheet in increasing order of liquidity, i.e. beginning with those that are not easily converted into cash. It can also be referred as assets and property which cannot easily be converted into cash. This can be compared with current assets such as cash or bank accounts, which are described as liquid assets. Its called as FD, one time investment and is not operational if used the expected interest will not be got. This refers to the rate of interest, which remains fixed for the entire duration of a loan. Thus, a consumer loan may carry a rate of interest, which is fixed at a specific percentage for the entire duration of the loan.
Fiscal Policy
Fixed Assets
Fixed deposit Fixed Rate
Fixed Rate (Loan) A loan in which the interest rate does not change during the entire term of the loan. For an individual taking out a loan when rates are low, the fixed rate loan would allow him or her to lock in the low rates and not be concerned with fluctuations. Fixed Rate Bonds Fixed Rate Mortgage Bonds bearing fixed interest payments until maturity date. A mortgage in which the interest rate and the amount of each payment remain constant throughout the life of the loan is known as Fixed Rate Mortgage. Fixed rate mortgages are characterized by their interest rate (including compounding frequency, amount of loan, and term of the mortgage). With these three values, the calculation of the monthly payment can then be done. The term fixture is used in the context of a real estate property, when assets like furniture are attached to the real estate and are also included in its book value. Banks, in many a cases, are known to include fixtures in the value, if the real estate property has been pledged as a collateral. It is either called for the floating rates for gold and share markets where the fluctuations happen. This refers to the rate of interest, which changes regularly, generally at monthly or quarterly intervals, during the duration of a loan. The bank,
Fixtures
Float Floating Rate
while lending at a floating rate of interest makes it clear to the borrower at what interval the interest rate will be adjusted. The interest rate may float with respect to the prime rate, which means that as and when the prime rate changes, the loan interest rate will change. The interest rate may be expressed as floating 2% above the prime rate. Floating Rate Bonds Bonds with interest payments proportional to current interest rates.
Floating Rate NotesFloating rate notes (FRNs) are bonds that have a variable coupon, equal to a (FRNs) money market reference rate, like LIBOR or federal funds rate, plus a spread. The spread is a rate that remains constant. Almost all FRNs have quarterly coupons, i.e. they pay out interest every three months, though counter examples do exist. At the beginning of each coupon period, the coupon is calculated by taking the fixing of the reference rate for that day and adding the spread. A typical coupon would look like 3 months USD LIBOR +0.20% Floor Brokers Follow-on Public Offering (FPO) Floor Brokers are the brokers i.e. intermediaries who receive orders from the public to buy or sell shares. Through which an already listed company can issue fresh shares in the market to raise more equity capital. Here the issue price is decided based on the current trading price which is normally kept a bit lower than the current market price to make people subscribe for it. A forbearance agreement is an authenticated agreement between a debtor and a creditor, and is utilized by the creditor, when the debtor initiates a debt settlement or the loan is defaulted, or the former becomes bankrupt. Foreclosure is the equitable proceeding in which a bank or other secured creditor sells or repossesses a parcel of real property (immovable property) due to the owners failure to comply with an agreement between the lender and borrower called a mortgage or deed of trust. Commonly, the violation of the mortgage is a default in payment of a promissory note, secured by a lien on the property. When the process is complete, it is typically said that the lender has foreclosed its mortgage or lien. Banks incorporated outside India but operating in India and regulated by the Reserve Bank of India (RBI), e.g., Barclays Bank, HSBC, Citibank, Standard Chartered Bank, etc. When the loan is in a currency of a country other than that of the borrower, it is a foreign currency lending.
Forbearance Agreement Foreclosure
Foreign Banks
Foreign Currency Lending
Foreign Exchange The foreign exchange (currency or forex or FX) market exists wherever one market currency is traded for another. It is by far the largest financial market in the world, and includes trading between large banks, central banks, currency
speculators, multinational corporations, governments, and other financial markets and institutions. Forfaiting The term refers to purchase of a trade debt or receivable at a discount. The instrument used in forfaiting is generally a bill of exchange. It is a method of providing medium and long-term finance to the seller/exporter, usually at a fixed rate of interest, to facilitate global trade. Factoring essentially involves purchase of inland receivables. In international trade transactions, forfeiting is much a more common form of financing export-related receivables. Forfaiting is purchasing of export bills where payment is expected to be received over a longer period in installments (deferred payment exports). It is done without recourse to the exporter if the bills are accepted by the importers bank also known as Avalling Bank. An Aval is an endorsement on the importers promissory note by the importer bank, guaranteeing the payment. When a material alteration is made on a document or a Negotiable Instrument like a cheque, to change the mandate of the drawer, with intention to defraud.
Forfaiting
Forgery
Freddie MacAn entity that purchases first mortgages, both conventional and federally Federal Home Loan insured, from members of the Federal Reserve System and the Federal Home Loan Bank System. Mortgage Corporation (FHMLC) Free Cash Flow Fully Assumable Mortgage A free cash flow is basically is a total of financially liquid assets that does not include capital expenditures and dividends. A mortgage that can be transferred from one owner to another qualified borrower without an increase in interest rate.
Future Value of an The amount to which a stream of equal cash flows that occur in equal Annuity intervals will grow over a period of time when it is placed in an account paying compound interest. Futures Contract A commitment to deliver a certain amount of some specified item at some specified date in the future.
Banking Terms G
Posted on May 1, 2012 by admin in Banking. Garnishee Order A court order instructing a garnishee (a bank) that funds held on behalf of a debtor (the judgment debtor) should not be released until directed by the
Term
Meaning
court. The order may also instruct the bank to pay a given sum to the judgment creditor (the person to whom a debt is owed by the judgment debtor) from these funds. Garnishment A court-ordered process that takes property from a person to satisfy a debt. For example, a person who owes money to a creditor may have her wages garnished if she loses a lawsuit filed by the creditor. Up to 25% of a persons wages can be deducted.
General Ledger General Ledger is the Repository of bank which tells the Asset details, liability details. This information should be update frequently. General Lien A right of the creditors to retain possession of all goods given in security to him by the debtor for any outstanding debt.
General property Taxes levied on real estate and properties. Taxes Generic Regulations Giffin Goods A generic regulation can span the entire industry and can be applicable to a number of industries at the same time. An example of the generic act is the USA Patriot Act 2001. Giffin goods have the positive relationship between price and quantity demanded and as a result demand curve of Giffin goods slopes upward. This phenomenon was first observed by Sir Robert Giffin in relation to the demand for bread by poor labours. Global Depository Receipts (GDRs) are the receipts evidencing underlying shares, which are issued simultaneously in more than one country. Global Restructuring Group which manages to rejuvenate customers by restructuring the business process. A government bond or government security is issued by the government which is considered to be almost risk free. Banks need to invest some part of their capital in government bonds. The time between use of credit to make purchase and the starting of interest of the amount charged.
Global Depository Receipts Global Restructuring Group (GRG) Government Bonds Grace period
Graduated A mortgage loan which provides for initial lower monthly payments, with Payment payment amounts increasing gradually over a period, usually up to 10 years, Mortgage (GPM) under the assumption that the borrowers income will also rise during the period. Grant A grant is any type of financial aid that is given by the government.
Gross Dividends Gross dividends are basically the total amount of dividends that are earned by an individual, or corporation in a particular year. Gross Domestic GDP or Gross Domestic Product denotes the market value of all the goods and Product (GDP) services produced within a country or a specific region for a given period of time. The goods include the manufactured products, agricultural products and all types of natural resources. The region can be a part of a country or a combination of multiple countries. Gross Income Gross National Product (GNP) Pre-tax net sales minus cost of sales. It is also called gross profit. GNP of a country is the total value of all the goods and services produced by enterprises or companies owned by that countrys citizens. Here the goods and services produced by some enterprise or firms located outside the country but owned by the countrys citizens will be included while calculating the GNP. Ground rent is the amount of rent that a leaseholder pays periodically to the owner for using a property
Ground Rent
Guaranteed Fees Its a guarantee fees charged by bank. Bank will take particular amount from the principal as a guarantee fees. If the customer cant pay back the money, the guarantee fees will reduce the risk. Guarantor A person who gives guarantees to the bank on behalf of the borrower that in case the borrower fails to repay, he/she will repay when the bank makes demand for repayment. The guarantor signs a Guarantee in favor of the bank to this effect.
Gun Jumping/ Trading on information that is yet to be made conspicuous to the general Jumping the Gun public. It is illegal as this means buying a new security before registration is done by the primary regulatory agency for securities industry Securities and Exchange Board of India (SEBI) for India.
Banking Terms H
Posted on May 1, 2012 by admin in Banking. Hawala
Term
An Underground banking system based on trust where transaction of money can happen without actual moving or leaving record for the transaction. Insurance coverage that compensates for physical damage to the property caused by fire, wind, or other natural disasters like earthquakes and floods is known as Hazard Insurance. HDI (Human Development Index) is a composite index measuring average achievement in three basic dimensions of human lifea long and healthy life,
Meaning
Hazard Insurance HDI (Human Development
Index) Hedge
knowledge and a decent standard of living. A combination of two or more securities into a single investment position for the purpose of reducing or eliminating risk. Hedge is a strategy that is used to minimize the risk of a particular investment and maximize the returns of an investment. HELOC stands for Home Equity Line Of Credit. It refers to a type of loan in which the borrower can get money from the lender when required within the agreed period. Borrowers home is kept as collateral for the loan. Unlike other loans the loan amount is not received by the borrower at once. It can be got in small installments against the collateral within the agreed period and amount. HELOC is like revolving credit or using credit card. HMDA is Home Mortgage Disclosure Act. HMDA is Home Mortgage Disclosure Act. According to this act, financial institution used to maintain data about home purchase, home purchase pre approvals etc.
HELOC
HMDA
HOA Homeowners association (abbrev. HOA) is the legal entity created by a real (Homeowners estate developer for the purpose of developing, managing and selling a Association) community of homes. It is given the authority to manage the common amenities of the development. Most homeowners associations are non-profit corporations, and are subject to state statutes that govern non-profit corporations and homeowners associations. Holding Period The holding period is the time duration during which a capital asset is held/owned by an investor. The holding period is taken into consideration, while pledging the asset as a collateral. Home Equity Loans The Home Equity Loan is one which allows the borrower to use the equity (ownership interest represented by the money already invested in the house) in his/her home as collateral for a loan.
Home The act requires banks to disclose mortgage lending information to verify Mortgage whether the housing credit needs of the community are being met. The Act Disclosure Act enables citizens and public officials to ascertain whether housing credit needs of local communities are being met by the lenders covered. Hot Money Hot money refers to the flow of funds (or capital) from one country to another in order to earn a short-term profit on interest rate differences and/or anticipated exchange rate shifts. These speculative capital flows are called hot money because they can move very quickly in and out of markets, potentially leading to market instability. Banks usually attract hot money by offering relatively short-term certificates of deposit that have above-average interest rates.
House Brokers House Brokers are employed by brokerage houses that are members of the
stock exchanges like NYSE. Hypothecation Here a borrower pledges collateral to secure a debt. The borrower retains ownership of the collateral, but it is hypothetically controlled by the creditor in that he has the right to seize possession if the borrower defaults. Normally followed in vehicle loans or finance arrangements.
Banking Terms I
Posted on May 1, 2012 by admin in Banking. IFSC Code
Term
Indian Financial System Code or IFSC code is an eleven character code assigned by RBI to identify every bank branches uniquely, that are participating in NEFT system in India Impound account is synonymous to ESCROW account. When a person indemnifies or guarantees to compensate any loss caused to the lender from his actions or others actions. Indemnity is a bond where the indemnifier undertakes to reimburse the beneficiary from any loss arising due to his actions or third party actions. The majority of independent brokers are direct access brokers who deal with the institutional public at low commission rates. An independent Director is a non-executive Director on the board of a company who has integrity, expertise and independence to balance the interests of the various stakeholders. The main reason of independent directors is to protect shareholders interest in the decision making and to improve the corporate governance in a company. Index is the published interest rate such as the Prime Rate, LIBOR, T-Bill rate, or the 11th District COF against which lenders compare other investments. Lenders use an index to establish and adjust interest rates on adjustable mortgages. Index Funds are the mutual funds that hold shares in proportion to their representation in a market index, such as the S&P 500, Nifty etc. Index trading provides a facility of buying and selling of stock exchange indices in terms of securities that comprise the index. An adjustable rate mortgage (ARM) is a mortgage where your interest rate and monthly payment vary over time.
Meaning
Impound Account Indemnifier Indemnity Independent Brokers Independent Director
Index
Index Fund Index Trading Index-ARM
Indirect Lending When the loan is originated by say a dealer, the application for loan is sent to the bank by the dealer who interacts with the prospective borrower. This is indirect lending involving three parties, namely the prospective borrower, the dealer and the bank. Inflation Inflation is the continuous increase in price of goods and products over a period of time. When the price of general articles or items goes up, it reduces the value of the domestic currency as the same currency is able to buy lesser quantity because of price increases. The first sale of the stock to raise money from the share market which helps a company to get listed on the stock exchange is called Initial Public Offerings (IPO). Through public offering the shares are offered to general public or the retail investors. It is the first sale of stock by a company to the public. The companies sell the stock so as to acquire more capital. This is usually done by smaller companies trying to expand by means of the capital acquired by the sale of the stocks. However, this can also be done by large private owned companies trying to become a Public company. This sale is generally done through a stock exchange. The pricing of the stock value is important as if it is priced high, then the potential buyers will be discouraged and if priced low, the company incurs loss. Once the IPO is finalized, the company becomes Public held as stocks of the company are now held by the public. The Securities and Exchange Board of India (Prohibition of Insider Trading) (Amendment) Regulations, 2008, defines an insider as any person who (i) is or was connected with the company or is deemed to have been connected with the company and who is reasonably expected to have access to unpublished price-sensitive information in respect of securities of a company, or (ii) has received or has had access to such unpublished price sensitive information
Initial Public Offering (IPO)
Initial Public Offering (IPO)
Insider
Insider Trading Trading activities performed based on Insider information which is illegal as per stock market regulations. Insolvent Insolvent is a person who is unable to pay his debts when they become due. Banks do not open accounts of insolvent persons as they cannot enter into contract as per law. An installment contract is a contract where the borrower pays a series of periodic installments that includes the interest of the principal amount. Installment credit is a debt or loan that is to be returned to the lender in a set of periodic installments. Auto loans, home loans and other types of loans are included in installment credit.
Installment Contract Installment Credit
Interest
The fee charged by a lender to a borrower for the use of borrowed money, usually expressed as an annual percentage of the principal; the rate is dependent upon the time value of money, the credit risk of the borrower, and the inflation rate. Here, interest per year divided by principal amount, expressed as a percentage. It is also called interest rate.
Interest Accrual The interest accrual rate is a percentage of interest that is calculated on the Rate basis of the rate of interest and is expressed in terms of annual percentage rate or APR. Interest bearing The financial requirement on which the interest is paid. Interest Rate Interest Rate Cap Interest Rate Swaps (IRS) The rate charged for the use of borrowed money. The interest rate is expressed as a percentage of the amount borrowed. These are the limits put on an adjustable rate loan which preclude the interest rate on the loan from increasing beyond a certain level in a given time period and the maximum level it can touch during the life of the loan. Interest rate swap is the most common type of swap which is called the Plain Vanilla. It is nothing but an exchange of fixed rate loan with a floating rate loan or vice versa. This is used to get the comparative advantage in the loan market to avail loan at the cheapest interest rate.
Interest Warrant When cheque is given by a company or an organization in payment of interest on deposit, it is called interest warrant. Inter-exchange This is popular among liquid commodities like gold and silver, where the arbitrage arbitrage can take place between the Indian exchanges and the foreign exchanges, where contract specifications are similar. Interim Interest It is the interest accrued right from the closing date up to the end of the month. Internet Banking Internet banking is a system which enables the customers to conduct their all banking related transactions through the Internet. Also known as Online banking. Intrinsic Value It is the difference between the exercise price of an option and the market value of the underlying instrument. Options that are at the money or out of the money have no intrinsic value.
Introductory rateIts the rate which will be for temporary period, after the introductory period the rate will increase to the standard percentage. Investment Adviser IPO price An expert who provides investment advice with respect to securities and is registered with the relevant regulator as an investment adviser. he price at which shares are offered in the primary market during Initial Public
Offering. Later, the stock price is determined by supply and demand. IRC IRS IRS Internal Revenue Code which tells about the tax liabilities and deduction. IRS is Internal Revenue Service. Its a government Agency which is responsible for collecting federal taxes and administering tax rules. It is a US government agency that collects taxes and enforces the internal revenue laws. It is bureau of the Department of Treasury.
Islamic Banking Islamic banking is same as conventional banking except that it follows principles of Shariah (Islamic law). The banking activity and all the transactions have to completely abide to Shariah rules. The very source of Shariah rules is the holy Quran and the teachings and followings by Islamic learned scholars. The Islamic law prohibits interest on both the loans and the deposits. Interest is also called riba in Islamic discourse. The argument against interest is that money is not good and profit should be earned on goods and services only and not on control of money itself. Issuing bank It is the bank which offers payment cards directly to consumers.
Banking Terms J & K

Posted on May 1, 2012 by admin in Banking. Joint Account Joint and Several Liability Joint Sector
Term
When two or more individuals jointly open/hold an account with a bank. This is a legal term utilized to point that two or more entities are individually entirely responsible, instead of being collectively responsible. When a sector is jointly owned, managed and run by both public and private sector, it is called joint sector. This sector indicates public-private partnership between the two. It pertains to an interest in the holdings, which are gained from judicial or court orders. Jumbo loans are the loans of $1 billion or more. Or, loans that exceed the statutory size limit eligible for purchase or securitization by the federal agencies. In the United States, a jumbo mortgage or loan is a mortgage with a loan amount above the industry-standard definition of conventional conforming loan limits. High-risk securities that have received low/junk ratings. This is a recognized term for high-yield sureties with quality standings below investment grade.
Meaning
Judicial Lien Jumbo Loan
Junk Bond
Key Rate Duration Holding all other maturities constant, this measures the sensitivity of a security or the value of a portfolio to a 1% change in yield for a given maturity. Kiosk Banking It is self-service solutions, allowing customers to service themselves with computer based touchscreen and making different sort of transactions. They are used for advertising, promotion and information purposes. By equipping them with necessary security conditions. Kiosks can be used for viewing or doing banking transactions. Know Your Customer (KYC) is the due diligence and bank regulation that financial institutions and other regulated companies must perform to identify their clients and ascertain relevant information pertinent to doing financial business with them. Know your customer policies have becoming increasingly important globally to prevent identity theft fraud, money laundering and terrorist financing. In a simple form these rules may equate to answering twelve questions, but this is the tip of the iceberg and regulators now expect much more. KYC should not be thought of as a format to be filled it is a process to be undergone from the start of a customer relationship to the end.
Know Your Customer
Banking Terms L
Posted on May 1, 2012 by admin in Banking. Laffer Curve Land Flip
Term
It represents relationship between total tax revenue and corresponding tax rates. The curve was first provided by American economist Prof. Arthur Laffer. A fraudulent practice in the real estate business of selling undeveloped land at highly inflated prices. A land flip occurs when a group of dishonest buyers trades the land among its members, increasing the price with each transaction. The group will then finally unload the property onto an unsuspecting outside buyer at a price that the buyer will likely never be able to recoup from its own sale of the land. Late charge is the amount charged to customer if they fail to pay the amount on time. Limitation Act of 1963 fixes the limitation period of debts and obligations including banks loans and advances. If the period fixed for particular debt or loan expires, one cannot file a suit for is recovery, but the fact of the debt or loan is not denied. A contract, through which, the owner (lessor) of a certain property, allows another (lessee) to use the same for a specified period, in exchange for a value called the rent. This is the rate of interest, which the bank charges to the borrower for the
Meaning
Late Charge Law of Limitation
Lease
Lending Rate
amount lent to him. This is a major source of income for the bank / lender. The Lending Rate is not same for all loan products of the bank and keeps changing from time to time. Letter of credit A letter given by the bank that grantees the payment of the customer, this substitutes the customers credit to the banks credit. If customer is not paying back, Bank has to take responsibility to settle the particular amount. Letters of Credit are covered by rules framed under Uniform Customs and Practices of Documentary Credits framed by International Chamber of Commerce in Paris. Letter of Offer A Letter of Offer is a document addressed to the shareholders of the target company containing disclosures of the acquirer/Persons Acting in Concert (PACs), target company, their financials, justification of the offer price, the offer price, number of shares to be acquired from the public, purpose of acquisition, future plans of acquirer etc.
Leverage Ratio Financial ratios that measure the amount of debt being used to support operations and the ability of the firm to service its debt. It can be of two types, financial leverage ratio and operating leverage ratio. Liabilities The liabilities of a company include its bank loans and overdraft, short-term debts for goods and services received (current liabilities) and its loan capital and the capital subscribed by shareholders. It can be defined as an obligation to other entities. This is the rate bid by banks on eurocurrecy. deposits .It is actually the international rate that banks lend to other banks. LIBOR (the London Interbank Offered Rate) has been defined as the rate at which a prime commercial bank is offered deposits by other banks in London. The LIBOR is fixed by the Britishers bankers association daily. Libor rates are considered as a benchmark by banks across the globe for setting their interest rates for adjustable rate mortgages. LIBOR will be slightly higher than the London Interbank Bid Rate (LIBID), the rate at which banks are prepared to accept deposits. The upper and lower limit for changes in the borrowers interest rate over the term of his/her loan.
LIBID LIBOR
Life Cap
Lifeline Account A bank account meant for customers with low incomes. These accounts are characterized by little or no monthly fees and no minimum balance criteria. Limit Order An order to buy (sell) securities which specifies the highest (lowest) price at which the order is to be transacted. The trading wont be completed if the share price fails to reach that limit price. The passive investors in a partnership, who supply most of the capital and have liability limited to the amount of their capital contributions.
Limited Company
Line of credit
An arrangement between customer and bank. Customer can withdraw the amount at any time based on demand up to the maximum amount permitted by bank. Customer need not to pay interest on unused amount. It refers to the termination (or winding up) of a registered company. Liquidation takes place because of companys insolvency. In liquidation, assets are turned into cash for settling outstanding debts and for apportioning the balance, if any, amongst the owners. Assets which can easily be converted into cash money are said to have liquidity. Examples are cash, cash equivalents, shares with high liquidity etc. The date on which Initial Public Offering stocks are first traded on the stock exchange Amount given to a person with the details like time of maturity, conditions of repayment and other variables.
Liquidation
Liquidity Listing Date Loan
Loan This is the process of monitoring loans that have been disbursed but not repaid Administration in full. Loan Application This is a standard form required to be submitted by the borrower to the lender. This is the first step in the loan approval process. This form provides certain personal and financial information about the borrower to the lender bank. The form requires the borrower to give personal details such as address, employment history, current borrowings, names and other details of personal sureties, bankruptcy or other court proceedings if any etc. Here declarations made in the loan application are signed by the borrower and are treated as declarations under oath. The prospective borrower is disqualified for loan in case any declaration made by him in this document turns out to be incorrect.
Loan-to-Value The loan-to-value (LTV) ratio is a mathematical calculation which expresses the Ratio amount of a first mortgage lien as a percentage of the total appraised value of real property. Loan to value is one of the key risk factors that lenders assess when qualifying borrowers for a mortgage. The risk of default is always at the forefront of lending decisions, and the likelihood of a lender absorbing a loss in the foreclosure process increases as the amount of equity decreases. Local Currency When a loan is in domestic currency of the borrower, it is called local currency Lending lending. Lock-in Period A guarantee given by the lender that there will be no change in the quoted mortgage rates for a specified period of time, which is called the lock-in period. Lock-in Rate Loss Given The interest rate percentage for the loan that will remain the same until funding is known as Lock in Rate. A term used to denote the actual loss incurred by a bank, in case of default by a debtor to pay off the loan. If there is any collateral pledged by the debtor, the
Default (LGD)
value of such assets will be reduced from the loan amount.
Banking Terms M
Posted on May 1, 2012 by admin in Banking. Margin Margin Margin Call
Term
Margin is defined as the difference between incomes generated on loans, investments, and cost of deposits. The margin is the rate percentage a lender adds to the index rate to determine the new interest rate on an adjustable-rate mortgage. Immediate requirement of money that the investor must deposit now in order to satisfy a minimum margin requirement set by an Exchange or by a bank / broking firm. It is achieved by multiplying number of the companys outstanding ordinary shares with the market price of each share. It is same as total valuation of a company determined by the market share price. An order to buy or an order to sell securities which is to be executed at the prevailing market price. It indicates the end of investment period of any fixed investment or security. After maturity, the investor is repaid the invested amount along with the interest that has been accumulated. Its the final payment date. Customer has to pay back the remaining balances on that day.
Meaning
Market Capitalization Market Order Maturity
Maturity Date
Merchant Banker An intermediary who provides IPO related and Investment banking related services like managing public issues, underwriting new issues, arranging loan syndications and giving advice on portfolio management, financial restructuring, mergers and acquisitions etc. Mezzanine Level A mezzanine level in general refers to an intermediate floor between two main floors of a building and hence is not counted as a storey of the building. In financial terminology, this refers to a company that is between a Startup and IPO or a company in which capital has been invested 6 to 12 months before going public. The capital committed at this level for a company has more risk and more potential return than an IPO but less than that of a startup company. MICR MICR MICR stands for Magnetic Ink Character Recognition. This character recognition technology is used in banks for cheque processing. These codes
are printed with magnetic ink or toner which contains Iron oxide. The bottom line of the cheque contains MICR code. A standard format is followed across banks to print this MICR code. Mostly it is of 14 characters in length. The MICR codes in a cheque can be read by a MICR reader. The first nine digits is the routing number which is otherwise called as ABA number which contains the bank and the branch code. Next few digits contain the account number which is followed by the cheque number. Micro Finance In micro finance, very small amounts are given as credit to poor in rural and semi-urban areas to enable them to raise their income levels and improve living standards. MIFOR is an interest rate derivative, which is calculated by adding dollar London Interbank Offered Rate (LIBOR) rates with the rupee-dollar forward premia. The MIFOR rate is hence, the borrowing cost from overseas. It denotes Banking services availability on Mobile device. With the help of MBanking or mobile banking customer can perform some basic banking transactions like checking bank balance, ordering a demand draft, stop payment of a cheque, Transferring funds etc.
MIFOR
Mobile Banking
Monetary Policy Monetary Policy is another important part of economics which is used by the Government or the central bank to maintain the liquidity in the market and keep long term interest rate stable. It also provides the favorable monetary platform for economic growth and stability with the aim of stable prices and low unemployment. Money Laundering Money Market When a customer uses banking channels to cover up his suspicious and unlawful financial activities, it is called money laundering. Money Market is the financial market for short-term borrowing and lending which deals with the short term fund requirements of different financial entities. It offers short-term liquid funding instruments such as Treasury bills, Commercial paper, Certificate of Deposit etc. The money market consists of financial institutions and dealers who wish to either borrow or lend for short period of time, typically up to one year. The Money Market Mutual Funds (MMMFs) provide an avenue to the retail investor to invest in the money market. Retail investors normally deposit short-term surplus funds into a savings bank account, the returns from which are relatively low. The returns from MMMFs will be higher than the interest earned in a bank. Its a written order for a payment of the sum of amount which can be got from the post office. Monopsony is that market situation in which there is only one single buyer of the product in the market. In other word, buyers monopoly is termed as
Money Market Mutual Funds (MMMFs)
Money order Monopsony
monopsony. Monthly Statement Moratorium statement including all the transactions performed in a month received by customers at the end of that month. R.B.I. imposes moratorium on operations of a bank; if the affairs of the bank are not conducted as per banking norms. After moratorium R.B.I. and Government explore the options of safeguarding the interests of depositors by way of change in management, amalgamation or take over or by other means. A mortgage is a method of using property (real or personal) as security for the payment of a debt. The term mortgage refers to the legal device used for this purpose, but it is also commonly used to refer to the debt secured by the mortgage, the mortgage loan.
Mortgage
Mortgage backed Lending related to immovable property and activity of construction of Lending residential premises is referred to as mortgage-based lending. Mortgage loans are generally given to home buyers to acquire now and pay for the acquisition over a period of time. Mortgage Bankers Major mortgage lending institutions such as Fannie Mae, Freddie Mac, or Ginnie Mae buy loans from Mortgage Bankers who are large enough to originate loans.
Mortgage Brokers A mortgage broker is an intermediary between borrowers and lenders to facilitate the loan process between these two parties. Mortgage Insurance purchased by the borrower to insure the lender or the government Insurance (MIP or against loss in case if the borrower default. MIP, or Mortgage Insurance PMI) Premium, is paid on government-insured loans (FHA or VA loans) regardless of borrower LTV (loan-to-value). PMI, or Private Mortgage Insurance, is paid on those loans which are not government-insured and whose LTV is greater than 80%. When the borrower has accumulated 20% of his homes value as equity, the lender may waive PMI at request. Mortgage Note The borrowers current mortgage note is the document that describes the details of a persons current loan. This note documents information such as the loan amount, interest rate, payments, late payment penalties, early pay provisions, etc. A mortgage refinance involves the replacement of current debt with another debt with more convenient terms and conditions.
Mortgage Refinance
Mortgage/Deed A debt instrument by which the borrower gives the lender a lien on property of Trust as security for the repayment of a loan. Multicurrency The loan involved many currencies.
loan Mutual Fund Mutual savings bank A company that invests in and professionally manages a diversified portfolio of securities and sells shares of the portfolio to investors. A bank owned by its depositors and is managed by a board of trustees.
Banking Terms N
Posted on May 1, 2012 by admin in Banking. NABARD
Term
National Bank for Agriculture & Rural Development was setup in 1982 under the Act of 1981. NABARD finances and regulates rural financing and also is responsible for development agriculture and rural industries. Non-Banking Financial Corporations National Electronic Funds Transfer Used to transfer from one account to other accounts in a different bank. A gradual increase in mortgage debt that occurs when the monthly payment is insufficient to cover the interest due, and the balance owed keeps increasing (at least in the first few years). A promise to pay the amount of money. Promissory note / bill of exchange signed by the borrower in favor of the bank and post-dated cheques issued in favor of the bank by the borrower towards loan repayments.
Meaning
NBFCs NEFT Negative Amortization Negotiable instrument Negotiable Instruments
Negotiable Order It is an interest-earning account on which checks may be drawn. Withdrawals Of Withdrawal from NOW accounts may be offered by commercial banks, mutual savings Account (NOW) banks, and savings and loan associations and may be owned only by individuals and certain nonprofit organization. NOW accounts are watched by the Fed as a determinant of money movement within an economy. Negotiation In the context of banking, negotiation means an act of transferring or assigning a money instrument from one person to another person in the course of business. Net asset value represents difference between the current market value of all the holdings (stocks, bonds etc.) including the cash and all the liabilities including all the redemption requests. The NAV is usually expressed as per share or unit amount and calculated by dividing the total net asset value by the number of total units.
Net asset value (NAV)
Net Income Net National Product (NNP) Net Worth
The amount that is left after paying the taxes is called the net income. When depreciation is deducted from GNP i.e., Gross National Product, we get Net National Product (NNP). Net worth (sometimes net assets) is the total assets minus total liabilities of an individual or a company. For a company, this is called shareholders equity and may be referred to as book value. Net worth is stated for a particular point in time. In personal finance, net worth is also used to refer to an individuals net financial position; similarly, it also uses the value of all assets minus the value of all liabilities (debt). National Housing Bank When the applicant furnishes minimum information, giving, only name, address, contact information for the employer and social security number, for the application of the loan, it is called a no-documentation loan. The consumer is not required to justify his/her total debt compared with his/her total income. These loans typically are continuing obligations such as car loans and student loans. These are bank holding companies which offer non-bank products and other services namely insurance.
NHB No Documentation Loan No Ratio Loans
Non- bank subsidiaries
Non-Performing NPA is Non-Performing Asset or Non-Performing Loan. Loan is the asset for Assets (NPA) the Bank. If banks are getting amount from Customer for past 90 Days, then it will be considered as Non-performing loan or non-performing asset. Non-Recourse Loan Non- sufficient funds Non-Accruing Loans A loan which is secured by collateral and for which the borrower is not personally liable, is called a non-recourse loan. It is used when there are insufficient funds in the account of the customer. This is mainly used when the cheque is presented for clearing. Loans in which No payments had made for more than 60 Days.
Non-Fund Based Non-Fund Based Limits are those type of limits where banker does not part Limits with the funds but may have to part with funds in case of default by the borrowers, like guarantees, letter of credit and acceptance facility. Non-Liquid Asset A possession or asset which cannot be changed into cash very easily is called non liquid asset. Best example would be Land, property etc. Non-Recurring Closing Costs Non-Resident A lump sum fees paid at a real estate set up, which includes appraisal, origination, title insurance, credit report and points, is referred to as nonrecurring closing costs. Accounts of non-resident Indian citizens opened and maintained as per R.B.I.
Accounts Notes Notice Money
Rules. A note is a negotiable record of an unsecured loan with a maturity of more than one year in other words, a bond. Notice Money is a money market instrument, where the tenor is more than 1 day but less than 15 days. Here, the lender simply issues a notice to the borrower 2-3 days before the funds are to be repaid. On receipt of this notice, the borrower will have to repay the funds within the given time. Non-Resident External accounts are the ones in which NRIs remit money in any permitted foreign currency and the remittance is converted to Indian rupees for credit to NRE accounts. The accounts can be in the form of current, saving, FDs, recurring deposits. The interest rates and other terms of these accounts are regulated by RBI.
NRE Accounts
Banking Terms O
Posted on May 1, 2012 by admin in Banking. Obligation Obligor ODFI
Term
Obligation is nothing but loan.
Meaning
Obligor is nothing but Customer or borrower who borrowed loan from a bank It is the abbreviation for Originating depository financial institution. This is mainly used in ACH (automated clearing house). This warrants that the transaction happens according to the rules. Off-Balance sheet items are the items which is not present in Bank balance sheet. The offer of new securities to the public by the issuer or by someone on behalf of the issuer. This refers to a card which is issued by a bank and has a VISA or Master card logo on it. It can be issued, either instead of or along with a ATM card. Oligopoly is that form of imperfect competition in which there are only a few firms in the industry (or group) producing either homogeneous products or may be having product differentiation in a given line of production.
Off balance sheet Offer for Subscription Offline Debit Card Oligopoly
Open Economy Open economy is that economy which is left free and the government imposes no restrictions on trade with areas outside that economy. Open End Credit A line of credit that may be used repeatedly up to a certain limit. Also called a charge account or revolving credit. It is actually an agreement by a bank to lend a specific amount to a borrower and to allow that amount to be
borrowed again once it has been repaid. Also called revolving credit or revolving line of credit. Open-end (Mutual) Fund There is no limit to the number of shares the fund can issue. The fund issues new shares of stock and fills the purchase order with those new shares. Investors buy their shares from, and sell them back to, the mutual fund itself. The share prices are determined by their net asset value. Open-ended loans come more from Credit Unions and are used for big-ticket purchasing without additional documentation being required. These loans are similar to Revolving Lines of Credit. The price of a share quoted at the beginning of a business day. The opening price can be either the first bid and offer prices of the day, or the price at which the first transaction of the day was completed.
Open-ended Loans Opening Price
Opinion Report This is a written report, which is taken by the lending bank from the existing banker of the subject. This report details relationship between the existing banker and the borrower. The report gives details of existing borrowings of the subject and banks opinion on the pat dealings of the subject. Option A security that gives the holder the right to buy or sell a certain amount of an underlying financial asset at a specified price for a specified period of time.
Origination Fee A fee charged by a lender for processing a loan application, expressed as a percentage of the mortgage amount. Bank will charge this fee to the customer. It typically cost 1% of the loan amount. Overallotment It is the offering wherein more securities than available are sold in the assumption that some orders will not be confirmed. It is also known as Green shoe. It is one of the ways for stabilizing the price of the issue post-pricing. A draft or check written for an amount that exceeds the funds in the account on which the check is drawn. An overdraft occurs when withdrawals from a bank account exceed the available balance which gives the account a negative balance a person can be said to have gone overdrawn. If there is a prior agreement with the account provider for an overdraft protection plan, and the amount overdrawn is within this authorized overdraft, then interest is normally charged at the agreed rate. If the balance exceeds the agreed terms, then fees may be charged and higher interest rate might apply. A service which permits a verification account to be connected to other savings or line of credit for facilitation of protection against overdrafts is called overdraft protection. To write a check for more money than what is present in the account.
Overdraft
Overdraft Protection Overdraw
Overhead Costs The term refers to certain costs, which have to be incurred by the business irrespective of volume of business. Costs such as salaries and allowances, rent on premises, electricity and water expenses are examples of overhead costs in business. Oversubscribed When an Initial Public Offering has got more subscriptions than actual shares available for offering. Investors and underwriters will often look to see if an IPO is oversubscribed as an indication of the publics perception of the business potential of the IPO company. Owner Financing When the seller loans the whole sum or a part of it to a buyer, it is called owner financing.
Banking Terms P
Posted on May 1, 2012 by admin in Banking. Par Value
Term
The face value of a security which the investor is expected to receive at the time of maturity with coupon or interest rates if applicable.
Meaning
Partially Partially Amortizing loan is a loan in which the periodic payments cover all of Amortizing Loan the interest charges but only part of the principal, therefore leaving an unpaid principal balance when the loan matures. Participation Participation is nothing but many banks will involve in one loan sanctioning. Customer will not aware of the participated bank details but they will know the bank who originated their loans. If the Bank is bought the participation from Other Bank who is the Loan Originator, then it is called Participation Bought.
Participation Bought
Participation The major activity of a bank is credit accommodation. This service of the banks, Certificates (PCs) apart from increasing the risks, may place them in a tight liquidity position. To ease their liquidity, banks have the option to share their credit asset(s) with other banks by issuing Participation Certificates. These certificates are also known as interbank participations (IBPs). Participation Sold Participatory Notes (PNs) Passbook Past Due If the Originator bank decides to involve some other banks also in loan process and sold their participation, then it is called Participation Sold. Participatory Notes (PNs) are a derivative instrument issued by the FIIs to their overseas clients, who are not registered with the Indian regulators. Its a record for the customer of how many transaction either debit or credit along with the details of the same. Loan on which payments had not made on time. E.g. Estimated Date is 9 Sep,
but they failed to pay the loan amount. Then on 10th Sep it will be treated as Past due loans. Pay down Pay off Statement Payable if Desired Repaying part of the outstanding loan Balance. Its also referred as letters of demand. It will show all the remaining balance details, Remaining terms, Interest Rate of the loans. Banks will prepare this only if the customer planned to pay off the amount early. A PID agreement is maintained between banks for processing the check. When a transit check arrives to the bank, the bank checks for the agreement file of the originator bank. If the agreement file is not available, then the check will not be sent to clearing house for clearing. The individual or a company to whom the check is written and who will receive the amount after depositing the check. The individual or a company who writes and deposits the amount and gives the check to the person who needs to receive the amount. Repaying the complete loan amount in scheduled time or in one or more prepayments. Paypass is used as alternative for cards. Rather than swiping the card (debit, credit, master card) after each purchase the payment can be made by tapping a pay pass in a payment device to the merchant. There is no fee collected for using Paypass instead of cards. It is safe and secure to use Paypass instead of card. An extra payment for not satisfying the contract. Penny stocks is a term used to define cheaply available stocks of typically lossmaking companies. Penny stock is used in the context of general equities. The stocks that typically sell for less than $1 share, although it may rise to as much as $10/share after the Initial Public Offering (IPO), usually because of heavy promotion. Perfect competition is the market in which there are many firms selling identical products with no firm large enough relative to the entire market to be able to influence market price.
Payee Payer Payoff PAYPASS
Penalty Penny Stocks
Perfect Competition
Perpetual Bonds Bonds with no maturity date. Personal Check It is the check drawn on a depositor institution by an individual against the individuals own funds. Personal Identification Number (PIN) Personal Identification Number is a secret number which an ATM card holder has to key in before he is authorized to do any banking transaction in a ATM .
Personal Loan Placing Plastic Money Pledge Point of sale (POS)
An unsecured loan usually made for the purpose of debt consolidation, vacation or the purchase of durable goods. It is also called a signature loan. Obtaining subscriptions for, or the sale of, primary market, where the new securities of issuing companies are initially sold. Credit Cards, Debit Cards, ATM Cards and International Cards are considered plastic money as like money they can enable us to get goods and services. A bailment of goods as security for payment of a debt e.g pledge of stock by a borrower to a banker for a credit limit. POS stands for Point of Sale. It is the location where the transaction occurs. POS limit is the daily limit set by the bank for the customer. It is the limit that the customer can spend using his credit or debit card.
Points/Discount The fee you pay up front to the lender at the time of closing. Each point you pay will equal one percent of your mortgage amount and for each point paid, your interest will normally drop by one-quarter of a percentage point. For example, if you are taking out a mortgage of $200,000 and were to pay 2 points at closing to get an interest reduction of of a percent, you would need to pay $4,000 for those points. Costs like origination fees can also be expressed in points. Portfolio Group of Investments held by investors.
Portfolio Lenders Any institution that lends its own money and originates loans for themselves is called a portfolio lender. Portfolio Risk This is the risk that in a given loan portfolio borrowers may not be able to repay. The lender would generally like to have mathematical estimate of such default e.g. in a home loans portfolio risk of default may be 1% of total portfolio value. An anti fraud service offered by US commercial banks to detect fraudulent checks. It is the process which matches the check number, amount, and account number presented for payment against the list of checks previously issued by the company to the bank. Any check found to be fraudulent will be sent back to issuer for examination. Issuing company sends the check number, amount, account number and date of all the issued checks to the bank in a file. The bank then compares the check will is arrived for clearing with the check list, if there is any mismatch then the check is rejected for payment. Normally used for cheques submitted later which is relative to the before payment. This is a slang phrase which refers to a situation where in a managing underwriter sells of all the available issues of the securities offered by the issuing company has been sold to the interested investors. Formally it is known
Positive Pay
Postdate Pot is clean
as Fully Subscribed. In case, all the securities have been issued and there is still interest in the issue, it means that the issue was probably underpriced and oversubscribed. PQLI PQLI is known as Physical Quality of Life Index which is used to assess the level of social development.
Pre-Authorized Customers account is debited on a preauthorization from the customer. This Payment preauthorization takes place in case loan payment or bill payment. This authorization from the customer will have the payment amount, credit account details and date. So that bank will debit customers account on the particular date with the amount mentioned in authorization agreement. Precision Marketing Preference Shares Premature Withdrawals Premium Sending the right message to the right people, through the right channel, and at the right point in time, is called precision marketing. A corporate security that pays a fixed dividend each period.During liquidation it gets preference after bonds but over the common equity shares. When terms deposits like Fixed Deposits, Call Deposits and Recurring Deposits are sought to be withdrawn before maturity , it is premature withdrawal. The price of an option is called its premium. So if you buy an option, you pay a premium, whereas if you sell an option (write an option), you receive a premium. The potential loss to the buyer of an option can be no greater than the initial price paid.
Premium Bond Bond selling above its par value Prepayment Prepayment is repayment of the total loan amount by a property owner whose mortgage is backing a mortgage-backed security (MBS).It is actually the payment made before its scheduled due date. This is the right of the borrower to repay the loan before its maturity. If the interest rates decrease, the borrower may prepay the loan and get it refinanced at the lower interest rate.
Prepayment
Pre-Qualification A preliminary stage prior to bidding process, where the applicant is verified of whether he has the resources and the ability to do a given job. Present Value Present value is the value on a given date of a future payment or series of future payments, discounted to reflect the time value of money and other factors such as investment risk. Present value calculations are widely used in business and economics to provide a means to compare cash flows at different times on a meaningful like to like basis.
Previous Balance Previous balance is an outstanding amount which appears on the credit card statement on date when it is generated.
Price/Earnings Ratio (P/E)
The measure to determine how the market is pricing the companys common stock. The price/earnings (P/E) ratio relates the companys earnings per share (EPS) to the market price of its stock.
Primary Market Primary market mainly deals with the initial public offerings of the shares. Companies use primary market to launch IPO and FPOs to raise money from the investors. Primary Offering The security issued by the company for the very first time to the public is called Primary Offering. The proceeds of the sale are received by the company. The capital raised through private offering helps the company to expand its business operations. Usually, the Initial Public Offering refers only to Primary Offering. Primary Security Primary Security is the asset, the purchase of which has been financed by the lender. Thus, in case of a car loan, the car purchased by the borrower is the primary security. Prime Banks will use one procedure to determine which type of loans a customer will fit based on FICO Score. If the score is more than 620, then they are eligible for Prime loan. Prime Rate is the rate that bank follows for the Eligible customers. This is the rate of interest at which the most creditworthy borrowers of the bank are offered loans and it is the minimum rate of interest charged by the bank. This rate includes a minimum amount towards credit risk [which is considered non-existent in case of prime borrowers]. The rate at which banks lend to their best (prime) customers. The principal is the amount of money borrowed. It is also the base on which interest is figured. Usually, each mortgage payment pays both some principal and interest, although there are interest only mortgages.
Prime Lending Rate
Prime Lending Rate (PLR) Principal
Principal Balance The portion of a loan not yet repaid, exclusive of interest or other charge is known as Principal Balance. It is actually the outstanding balance of principal on a mortgage, which does not include interest or other charges. Priority Sector Advances Consist of loans and advances to Agriculture, Small Scale Industry, Small Road and Water Transport Operators, Retail Trade, Small Business with limits on investment in equipments, professional and self employed persons, state sponsored organizations for lending to SC/ST, Educational Loans, Housing Finance up to certain limits, self-help groups and consumption loans.
Private Mortgage insurance provided by nongovernmental insurers that protects a Mortgage lender against loss if the borrower defaults. Insurance (PMI)
Privatization
The sale of government-owned equity in nationalized industry or other commercial enterprises to private investors.
Promissory Note Promissory Note is a promise / undertaking given by one person in writing to another person, to pay to that person , a certain sum of money on demand or on a future day. Proposal This is the written request for sanction of loan and the request is accompanied by various documents in support of the loan request. The proposal is prepared in a standard format finalized by the lender. Provisioning is made for the likely loss in the profit and loss account while finalizing accounts of banks. All banks are supposed to make assets classification and make appropriate provisions for likely losses in their balance sheets. This refers to the amount of income that the bank has to set aside for writing off loan losses during the financial year. It also takes into account the amount of capital required to support loans business of the bank. For example, if the bank has a portfolio of loans of USD 100 million, it may be required to set aside USD 10 million in the form of capital and another USD 10Millions may be required annually to write off loan losses. Public Sector Banks Public debt represents borrowing by the state and public authorities. All loans taken by the public authorities constitute public debt. The price at which new securities offering is given for public by the issuer. These prices generally change on a day to day basis. The public offering price is decided based on several factors- the profitability of the company, the trends in public, financial statements of the company, its growth rate and confidence of the investors confidence in the public. It is also known as Ask Price. Public sector signifies those undertakings which are owned, managed and run by public authorities. Public sector includes direct government enterprise, the nationalized industries and public corporations. In this sector of the economy the government acts itself as an entrepreneur. A bank fully or partly owned by the Government. A Planned Unit Development, or PUD, is both a type of building development as well as a regulatory process. A PUD is a designed grouping of varied and compatible land uses, such as housing, recreation, commercial centers, and industrial parks, all within one contained development or subdivision. It is a real estate project in which each unit owner has title to a residential lot and a nonexclusive easement on the common areas of the project.
Provisioning
Provisioning Requirements
PSB Public Debt Public Offering Price
Public Sector
Public Sector Bank PUD (Planned Unit Development)
Put Option
The right to sell the underlying securities at a specified exercise price on of before a specified expiration date.
Banking Terms Q
Posted on May 1, 2012 by admin in Banking. Qualified Opinion An auditors opinion mentioned in his report which holds some reservations regarding the process of audit is called as a qualified opinion. Quality Spread The difference between the yields of Treasury securities and non-Treasury securities, as a result of different ratings or quality, is termed as quality spread. The loan application is treated as a semi legal document and the declarations made by the borrower in this document are legally binding on him. Quick ratio is also called as the acid-test ratio. It measures the companys liabilities and determines its position to pay off its obligations.
Term
Meaning
Quasi Affidavit
Quick Ratio
Banking Terms R
Posted on May 1, 2012 by admin in Banking. Range Bonds
Term
Bonds which cease the payments because the reference rate of the bond increases or decreases, as compared to predetermined rate on a given index. A percentage showing the amount of investment gain or loss against the initial investment. Rate sensitive pertains to deposit account or security investment. If any changes are made to the related interest rate that causes variations in its demand and supply. The Reserve Bank of India is the apex bank of the country, which was constituted under the RBI Act, 1934 to regulate the other banks, issue of bank notes and maintenance of reserves with a view to securing the monetary stability in India. Its the type of call report which deals with Balance Sheet. Its the type of call report which deals with loans and leases. Its the type of call report which deals with SBA Loans.
Meaning
Rate of Return Rate Sensitive
RBI
RC RC-C1 RC-C2
RC-L RC-M RC-N RDFI Real Estate Mortgages Real Estate Settlement Procedures Act
Its the type of call report which deals with Derivatives and Off-balance sheet items. It deals with Memoranda. Its the type of Call report which is used to capture details regarding Past due loans, nonaccrual loans, leases and other assets. I_ It is the abbreviation for receiving depository financial institution where the transaction is received and this mainly used in ACH (automated clearing house). These refer to loans given against security of house property and security is in the form of mortgage of the property. This is a Consumer Protection Act passed with dual purpose of making consumers better shoppers for different settlement services and to eliminate kickbacks which add to the costs of certain settlement services. The Act requires that borrowers receive disclosures at various stages associated with the settlement and it prohibits certain practices that increase the cost of settlement services.
Real Interest Rate The net interest rate over the inflation rate. The growth rate of purchasing power derived from an investment. Real Property It is another term for real estate. It includes land and things permanently attached to the land, such as trees, buildings, and stationary mobile homes. Anything that is not real property is termed personal property. A real estate broker or an associate having membership with the local real estates board which is affiliated with the national association. Rebate is the return of certain amount by the bank to the customer based on some procedures. Discount is deducted before paid the amount. Rebate is given back after paid the full amount. Settling two transactions. In banking terms, reconveyance is transfer of property to its real owner, once the loan or the mortgage is paid off. The term recovery means taking steps which lead to the borrower repaying the overdue installments either in one lump sum or as per a recovery program. Recovery is different from repayment and applies to a situation where regular repayment does not take place.
Realtor Rebate
Reconciliation Reconveyance Recovery
Recurring Deposits These are also called cumulative deposits and in recurring deposit accounts, a certain amounts of savings are required to be compulsorily deposited at specific intervals for a specified period.
Redemption Fee Reference Asset Reference Rate Refinance
A commission or fee paid, when an agent or an individual sells an investment, such as mutual funds or annuity. An asset such as debt instrument which has a credit derivative is called as a reference asset. The basis of floating rate security is called as the reference rate. The process in which one replaces the original mortgage loan with a new one to take advantage of lower interest rates or better terms or to get cash is known as Refinance. It can be considered as applying for a secured loan intended to replace an existing loan secured by the same assets. The most common consumer refinancing is for a home mortgage. This refers to a bank pooling together its loans and obtaining finance from another agency at a specific cost. Thus, a bank may refinance its mortgagebased loans through a mortgage refinancing company and raise fresh funds for further mortgage based loans. The banks mortgage based loans may have been given at an average rate of interest of say, 7% p.a. and may be refinanced at 6.5% p.a. On the original loans, the bank makes a margin of .05% and is again able to further finance Mortgage based loans at an appropriate rate of interest from the refinance received. It signifies general increase in the level of business activity in the economy. Reflation generally involves greater government expenditure and the easing of credit to encourage increased production. These came into being on October 2, 1975 when 5 regional rural banks were established under what became the Regional Rural Banks Act 1975. These were to bridge the gap in rural credit granting loans and advances to small and marginal farmers, artisans, small entrepreneurs and persons of small means engaged in trade, commerce, industry or other productive activities within their area of operation. It is a tax in which rate of taxation falls with an increase in income. In regressive taxation total tax rate is more on people having lower incomes than that of those having higher incomes. Regulation B is synonymous to Equal Credit Opportunity Act (ECOA). Regulation C is synonymous to Home Mortgage Disclosure Act (HMDA). Regulation Z is synonymous to Truth in Lending Act (TILA).
Refinance
Reflation
Regional Rural Banks
Regressive Tax
Regulation B Regulation C Regulation Z
Reinvestment Risk The risk that arises from the fact that dividends or any coupon payment may not be eligible for investment to earn the normal market rate of interest is called as the reinvestment risk. Relative Strength A stocks price that changes over a period of time relative to that of a market
Index (RSI) Repayment Repo rate Repossession Repricing Rescheduling of Payment Reserve Account Residual Value Restructuring
index such as the Standard & Poors 500, usually measured on a scale from 1 to 100, 1 being the worst and 100 being the best. Repayment is the returning back of the money borrowed by the borrower as per the terms and conditions of the loan agreement. the rate at which the RBI lends money to banks for short term Taking back of property by a seller or a lender from the buyer or the borrower due to default of payment. Repricing means a change in the rate of interest. Rearranging the repayment of a debt over a longer period than originally agreed upon due to financial difficulties of the borrower. An account which is maintained by depositing undistributed parts of profit for future needs is called as a reserve account. The anticipated value that a company calculates, to sell its asset at the end of its full life. Restructuring is the process in US. If customer is not able to pay the loan amount on time due to some reasons. Banks will restructure the loan process like to reduce the interest rate or will extend the time period. When the borrower is an individual and the purpose of borrowing is personal, such as purchase of a home or a car it is known as Retail Lending.
Retail Lending
Return on Capital A measure which determines how a company will optimize its funds. Return On Equity (ROE) This is the most popular indicator of financial performance. It is a measure of a corporations profitability that reveals how much profit a company generates with the money shareholders have invested.
Reverse repo rate Reverse Repo rate is the rate at which the RBI borrows money from commercial banks Revolver Revolving Credit Right of Set-Off The arrangement between bank and the customer in which credit limit is renegotiated. Its the arrangement between customers and banks. Customer can withdraw, repaid the amount at any time by any procedure till the arrangement expires. When a banker combines two accounts in the name of the same customer and adjusts the debit balance in one account with the credit balance in other account, it is called right of set-off. An offer by way of rights to current holders of securities that allows them to subscribe for securities in proportion to their existing holdings.
Rights Issue
Risk
This term may be defined as uncertainty of outcome, which may result in a loss for the bank. Thus, Credit Risk is uncertainty of repayment by the borrower and refers to the probable monetary loss the bank may suffer due to borrowers default. Many risks can be covered by obtaining insurance cover, thus risk of loss of human life resulting in loss of future income is covered by life insurance which requires the individual to pay regular premium to the insurance company for covering insurance on life. The risk of loss of income and loss of capital, which the bank is exposed to when it lends, is covered by the bank by adding a certain percent to the interest rate calculation while offering a loan product to the borrower. The bank may add to the prime rate an additional percentage towards risk premium and quote the interest rate to the borrower. The risk premium is added to all types of interest rates quoted above; however, the prime lending rate is an exception to this. Banks will weight their risk based on Assets. It is also called as routing number. It is a nine digit bank code used in US seen below cheques. This code is mainly used in ACH.
Risk Premium
Risk Weight Routing transit number
Banking Terms S
Posted on May 1, 2012 by admin in Banking. Safe Custody
Term
When valuable articles are given to a bank for safe keeping in its safe vault, it is called safe custody.. Bank charges a fee from its clients for such safe custody. It is sometime called as Safety deposit box. Its a locker kind inside bank where the valuable things such as gold, jewels and all is kept having the locker in the customers name and keys for the same is given to the customer. A sale contract refers to a written agreement between the buyer and the seller of an asset (usually real estate), with details regarding the terms and conditions of the sale. This banking term refers to the funds or money balances, which can be transferred or withdrawn on the same day of presenting and collection. Accumulating amount in a particular account in bank of any other means. Savings accounts are accounts maintained by commercial banks, savings and loan associations, credit unions, and mutual savings banks that pay interest but cannot be used directly as money (by, for example, writing a cheque). These accounts let customers set aside a portion of their liquid
Meaning
Safe deposit box
Sale Contract
Same Day Funds Saving Savings Account
assets that could be used to make purchases while earning a monetary return. Savings and Loan Savings Bank Account Using the savings account few banks provide loan for the customers. All banks in India are having the facility of opening savings bank account with a nominal balance. This account is used for personal purposes and not for business purpose and there are certain restrictions on withdrawals from this type of account. Account holder gets nominal interest in this account. SBA is Small Business Administration. It is the Agency in US Government which will provide loans for small business through Government Banks. Scheduled Commercial Banks This is the process of verification of originality and completeness of documents submitted by the borrower customer. It is that unemployment which is caused by seasonal variation in demand for labour by various industries, such as agriculture, construction and tourism. The SEC is a federal agency that regulates the US financial markets. The SEC oversees the securities industry and promotes full disclosure in order to protect investors and promote honest trading. A mortgage that is in a second position behind (or subordinate to) the original first mortgage are known as second mortgage. A second mortgage is a good alternative to refinancing when one has an original first mortgage loan with a low interest rate. It typically refers to a secured loan (or mortgage) that is subordinate to another loan against the same property. In real estate; a property can have multiple loans or liens against it. The loan which is registered with county or city registry first is called the first mortgage or first position trust deed. The lien registered second is called the second mortgage. A property can have a third or even fourth mortgage, but those are rarer. In most cases, a second mortgage takes the form of a home equity loan and the two are synonymous, from a financial standpoint. The difference in terminology is that a mortgage traditionally refers to the legal lien instrument, rather than the debt itself.
SBA SCBs Scrutiny of Documents Seasonal Unemployment SEC (Securities Exchange Commission) Second Mortgage
Secondary Market Secondary market is where normal buy-sell transactions or trading are taken place after the company gets listed on the stock exchanges. It acts as a medium between the sellers and buyers to facilitate the trading process. Secondary Offering The subsequent trading of the securities traded during primary offering is called Secondary Offering. The proceeds of the sale go to the holder and
not the company. This trading is done in the years following a Primary Offering. Owners of closely held company sell their shares to loosen their position. This is done gradually so that the share price does not fall as it generally happens when stocks are sold in large volumes. The total number of shares does not change and it does not dilute the owners holdings. Secured Loan A secured loan is a loan in which the borrower pledges some asset (e.g. a car or property) as collateral for the loan, which then becomes a secured debt owed to the creditor who gives the loan. The debt is thus secured against the collateral in the event that the borrower defaults, the creditor takes possession of the asset used as collateral and may sell it to satisfy the debt by regaining the amount originally lent to the borrower. From the creditors perspective this is a category of debt in which a lender has been granted a portion of the bundle of rights to specified property. A secured loan is one where the lender has a physical security to fall back on in case the borrower defaults in repayment persistently. Thus, a car loan is secured by the specific car financed by the lender and a home loan is secured by creating mortgage over the house property financed by the lender. A security is a fungible, negotiable instrument representing financial value. Securities are broadly categorized into debt securities, such as bonds and debentures, and equity securities, e.g. common stocks. They are the Paper certificates (definitive securities) or electronic records (book-entry securities) evidencing ownership of equity (stocks) or debt obligations (bonds). This is a body which supervises the capital market players as well as stock exchanges in USA. The Stock Exchanges are registered with the Commission as per the Securities Exchange Act of 1934, as amended from time to time. Securitization is a process of transformation of a bank loan into tradable securities Security refers to a share, bond or government stock that can be bought and sold, usually on the stock exchange or on a secondary market, and carries a right to some form of income, either in the form of a fixed rate of interest or dividends. Control of credit flow to borrowers dealing in some essential commodities to discourage hoarding and black-marketing A form of financing, wherein the seller of a property finances the buyer, who finds it difficult to procure a loan or falls short of the amount needed to buy the property. In short, it is a part of the purchase amount, which
Secured Loans
Securities
Securities and Exchange Commission Securitization Security
Selective Credit Control (SCC) Seller Carryback
the seller offers to finance. This term is also known as carryback loan or sellers second. Sellers Market Senior Bond Service charge Settlement A market, which has more buyers, as compared to the number of sellers. This condition leads to a rise in the prices, which is favorable for sellers. A bond that has priority over other bonds in claiming assets and dividends. The amount which the bank charges for the customer for handling the account Settlement is the last process in the Life Cycle of a Trade. In settlement all the counterparties exchange securities and money as per their obligations. The Settlement date is the date by which an executed securities transaction must be settled, by paying for a purchase or by delivering a sold asset; usually three business days after the trade was executed (T+3); or one day for listed options and government securities. This refers to the securities that are with the regulatory body for their approval for issuance but the no actual date has been set for issuance. This lists the securities that are waiting for permission to be issued. It is an imputed value for a good based on the opportunity costs of the resources used to produce it such values are of particular significance in resolving problems of resource allocating with respect to the effect on welfare. It is the amount of money raised by a company by issuing shares. The authorized share capital is the amount that a company is allowed to issue as laid down in its Articles of Association. The issued share capital is the amount actually issued i.e., the number of issued shares multiplied by their par value. Fully paid share capital is the amount raised by payment of the full par value of the issued shares. A share is a unit of account for various financial instruments including stocks, mutual funds, limited partnerships, and REITs. A share is one of a finite number of equal portions in the capital of a company, entitling the owner to a proportion of distributed, non-reinvested profits known as dividends and to a portion of the value of the company in case of liquidation. Shares can be voting or non-voting, meaning they either do or do not carry the right to vote on the board of directors and corporate policy. A transaction that protects the value of an asset held by taking a short position in a futures contract.
Settlement Date
Shadow Calendar
Shadow Price
Share Capital
Shares
Short Hedge
Short Position Short Selling Short term loan
Investors sell securities in the hope that they will decrease in value and can be bought at a later date for profit. The sale of borrowed securities, their eventual repurchase by the short seller at a lower price and their return to the lender. Loan less than a year usually for operating needs used in business
Short-term Interest Interest rates on loan contractor debt instruments such as Treasury bills, Rates bank certificates of deposit or commercial paper having maturities of less than one year are known as short term interest rates. They are often called money market rates. Sight draft Simple interest Skip-tracing SLR A draft which is payable on presentation. Its a kind of interest which is paid for the principal amount alone. Techniques used to trace a debtor whose address is unknown. SLR stands for Statutory Liquidity Ratio. This term is used by bankers and indicates the minimum percentage of deposits that the bank has to maintain in form of gold, cash or other approved securities. Thus, we can say that it is ratio of cash and some other approved to liabilities (deposits). It regulates the credit growth in India. Unlike debit and credit cards (with magnetic stripes), smart cards possess a computer chip, which is used for data storage, processing and identification. A currency with limited convertibility into gold and other currencies, either because it is depreciating due to balance of payments difficulties or because controls have been placed on it to prevent the exchange rate falling. It is a reserve asset created within the framework of the International Monetary Fund in an attempt to increase international liquidity, and now forming a part of Indias total forex reserves along with gold, reserve positions in the IMF and convertible foreign currencies.
Smart Cards
Soft Currency
Special Drawing Rights (SDRs)
Specific Regulations A regulation may be specific to the industry such as the Securities Exchange Act, which is specific to the financial services industry like broking. The latest specific act aimed at the capital market which was introduced in the US as late as in July 2010 is the Dodd Frank Wall Street Reform and Consumer Protection Act. Spread Stagflation This refers to the difference between total cost of deposits and interest earned by the bank by way of loans. It is a state of the economy in which economic activity is slowing down,
but wages and prices continue to rise. The term is a blend of the words stagnation and inflation. Standby Letter of Credit Standing order A guarantee issued by a bank, on behalf of a buyer that protects the seller against non-payment for goods shipped to the buyer It is the order given by the customer to the bank to pay some amount at regular intervals to another account. This instruction is also called as bankers order. Stock is a share in the ownership of a company. Stock represents a claim on the companys assets and earnings. Stock dividends are dividends paid in shares of the issuing corporations stock instead of cash. It is the dividend paid as additional shares of stock rather than as cash. If dividends paid are in the form of cash, those dividends are taxable. When a company issues a stock dividend, rather than cash, there usually are not tax consequences until the shares are sold. Stock Exchange Indices provide an overall picture of the trend in prices of stocks covered by the index during a particular period. Stock Split is when the face value of existing shares is split into smaller lots so that the number of shares goes up. The Stock capital of a corporation or a joint-stock company is the capital raised through the issuance, sale and distribution of shares. A person or organization that holds at least a partial share of stock is called a shareholder.In the United Kingdom, South Africa, and Australia, the terms stock and share(s) are used the same way, but stock can also refer to completely different financial instruments such as government bonds or, less commonly, to all kinds of marketable securities.In the plural, stocks are often used as a synonym for shares especially in the United States. The depositor gives the order for the bank to stop the payment for the particular cheque. This is opposite of prime which refers to a standard rate of interest against which all interest rates for loans are computed by the bank. The term prime rate refers to interest rate quoted for the best borrowers who carry practically no risk of default. Sub-prime means an interest rate which is higher than this rate of interest. The person who gives a legally binding assurance to the Lender on behalf of the borrower that if the later fails tope, the former [surety] shall repay the amount defaulted by the borrower. This assurance is legally binding.
Stock Stock Dividends
Stock Exchange Indices Stock Split Stocks
Stop Payment Sub-prime Rate
Surety
Surety bond
A bond or a guarantee signed by a person who satisfies the policy of the company, binds to pay instead of Obligor the person who takes up, usually loan, absconds from repaying. It is the difference between the amount paid to a factor and the revenue earned by selling the output it produced. A survey is a measurement of land that shows its location and dimensions. It also shows the location and dimensions of any buildings on that land. In financial term, Swap is a special type of derivative through which one party can swap some financial benefit with other party in exchange of others financial benefit so that both the parties can gain the maximum out of the deal. The financial benefit of the swap transaction depends on the type of financial investment or instrument they are using. A bank account automatically transfers the excess amount exceeds the certain limit into the money market funds. A very large loan extended by a group of small banks to a single borrower, especially corporate borrowers. In most cases of syndicated loans, there will be a lead bank, which provides a part of the loan and syndicates the balance amount to other banks. Many banks involves in one loan with transparency to the customer. The members who participated in the syndication. Systemic risk describes the likelihood of the collapse of a financial system such as a general stock market crash or a joint breakdown of the banking system. As such, it is a type of aggregate risk as opposed to idiosyncratic risk, which is specific to individual stocks or banks.
Surplus Value Survey
Swap
Sweep Account Syndicated Loan
Syndication Syndication Members Systematic Risk
Banking Terms T
Posted on May 1, 2012 by admin in Banking. Tax Liens
Term
This refers to any claim by taxation authorities such as IRS on the income or other funds of the Borrower.
Meaning
Technical Analysis A method of evaluating securities by relying on the assumption that market data, such as charts of price, volume, and open interest, can help predict future (usually short-term) market trends. Contrasted with fundamental analysis which involves the study of financial accounts and other information
about the company. Teller Term Insurance Teller is a staff member of a bank who accepts deposits, cashes cheques and performs other banking services for the public. It is the insurance for a certain time period which provides for no defrayal to the insured individual, excluding losses during the period, and that becomes null upon its expiration. A loan which has specific repayment schedule and floating interest rate.
Term Loan
Term Structure of This phrase relates to the relationship between interest rates on bonds of Interest Rates different due dates, generally described in the form of a chart, often known as a yield curve. Terms Terms of Credit The agreement between the creditor and the debtor. It refers to various factors such as interest rate, amount and repayment program etc. for a loan.
The Cash and Carry This is the easiest form of arbitrage, where the investor has to buy the Arbitrage commodity in the spot market and sell it in the futures market. This is largely successful in gold and silver and is also popular among various agricultural commodities. Thrift Thrift Institution Tier 1 Capital Prudence in spending the money. It is the general term for savings banks, savings and loan associations, and credit unions. 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 Comprises Property Revaluation Reserves, Undisclosed Reserves, Hybrid Capital, Subordinated Term Debt and General Provisions. This is Supplementary Capital. A Time Deposit is a money deposit at a banking institution that cannot be withdrawn for a certain term or period of time. When the term is over it can be withdrawn or it can be held for another term. Generally speaking, the longer the term the better the yield on the money. A certificate of deposit is a time-deposit product A draft which can be paid in a future date. A time note is a financial instrument, like a note of hand, which stipulates dates or a date of defrayal.
Tier 2 Capital
Time Deposit
Time draft Time Note
Time Value Title Title Deeds
This is the sum of money that an options premium surpasses its intrinsic worth, and is also called as time premium. A legal document establishing evidence of ownership. This refers to the various documents such as purchase agreement and document of title to property, which enables the lender to check upon the ownership of property offered as security by the borrower. Insurance that protects the lender against any claims that arise from arguments about ownership of the property; also available for homebuyers. Every lender in any state will require title insurance. Generally the company issuing the title insurance policy researches legal records to make sure that the home loan borrower receives a clear title, or ownership, to the property. The process of examining all relevant records to confirm that the seller is the legal owner of a property and that there are no liens or other claims outstanding. The change in the value of an investment over a given period, assuming reinvestment of dividends and including capital gains, whether realized or not. It is the return on an investment, including income from dividends and interest, as well as appreciation or depreciation in the price of the security, over a given time period, usually a year. This term relates to the analysis of the real rate of return that is earned over a certain evaluation time period.
Title Insurance Title Insurance Policy Title Search
Total Return
Total Return Analysis
Total Return Swap It is a kind of switch wherein an entity pays another entity according to the fixed rate in return for defrayals based on the return of a given asset. Trade Credit Trade Gap Transfer It is the credit which a company gives to another organization for the purpose of buying products or services. It signifies the size of the deficit (or surplus) in the balance of trade i.e., the difference in value between visible imports and exports. Customers changing the ownership.
Transfer Payment It is a payment made by public authority other than one made in exchange for goods or services produced. Transfer payments are not the part of National Income. Examples include unemployment benefit and child benefits. Travelers check Allowing a person to make unconditional payment.
Treasury Bill (T-bill)A short-term debt obligation backed by the U.S. government with a maturity of less than one year. T-bills are sold in denominations of $1,000 up to a maximum purchase of $5 million and commonly have maturities of one
month (four weeks), three months (13 weeks) or six months (26 weeks).Tbills are issued through a competitive bidding process at a discount from par, which means that rather than paying fixed interest payments like conventional bonds, the appreciation of the bond provides the return to the holder. Treasury Bond Treasury bonds (T-Bonds, or the long bond) are the debt security of the US government with a maturity of ten years or more.. They have coupon payment every six months and are commonly issued with maturity of thirty years. The secondary market is highly liquid, so the yield on the most recent T-Bond offering was commonly used as a proxy for long-term interest rates in general. A formal document that creates a trust. It states the purpose and terms of the name of the trustees and beneficiaries. The Truth in Lending Act is to ensure that credit terms are communicated to consumers in a meaningful way. All creditors must use the same credit terminology and expressions of rates.
Trust Deed Truth in Lending Act
Banking Terms U
Posted on May 1, 2012 by admin in Banking. UCF
Term
UCF stands for uncollected funds. Check, money orders, drafts or other financial instruments that is not released by the issuing bank. If the deposited check belongs to the same bank then the clearing period is less whereas if the deposited check belongs to other bank then the clearing period is more. When the deposited check belongs to the same bank then the uncollected funds is deposited to the deposit account and the payers account is debited immediately. In case of deposit check belonging to other bank the clearing period is longer. An umbrella fund sometimes known as a fund of funds is an investment fund that invests in other funds rather than in direct investments. It an investment term used to describe a collective investment scheme which is a single legal entity but has several distinct sub-funds which in effect are traded as individual investment funds. A line of credit which is sanctioned by the bank but not revealed to the borrower till the time of some particular occasion. This is a legal word that is utilized as an adjective to depict stocks, bonds, miscellaneous investments and deposit certificates, which are held in immaterial form as electronic computer records.
Meaning
Umbrella Fund
Unadvised Line Uncertificated
Underlying Security Underwriter Underwriting
The security subject to being purchased or sold upon exercise of the option contract. Any investment or commercial financial firm or a securities house that works with an issuing entity for the purpose of selling a new issue. It is an agreement by the underwriter to buy on a fixed date and at a fixed rate, the unsubscribed portion of shares or debentures or other issues. Underwriter gets commission for this agreement. It is a contract between the issuer of securities and an Underwriter, who is a company or any other entity that administers the issuance and distribution of the securities of the company to the general public. The underwriter decides the offering price of the securities then buys them from issuer and then sells them to investors. Based on the total amount of risk the undertaker is ready to take, the undertaking contract is mainly of 3 types Firm Commitment Contract, Best Efforts Contract, All-or-none Contract. When the Bankruptcy Court does not release the debtor for certain debts, those are known as undischarged debts.
Underwriting contract
Undischarged Debts
Uniform This is comprehensive codification and modernization of commercial law Commercial Code offered to various states with the objective of achieving greater uniformity in commercial laws. Universal Banking When Banks and Financial Institutions are allowed to undertake all types of activities related to banking is called Universal Banking. Universal Life Insurance Unsecured debt A type of life insurance which blends term insurance protection with a savings element. A credit source which is not guaranteed with collateral.
Unsecured Loans These are loans, which are not backed by any physical security. E.g. student loans disbursed to enable students to meet course fees and other related expenses.
Banking Terms V
Posted on May 1, 2012 by admin in Banking. VA Loan
Term
A loan guaranteed against default by the borrower by the U. S. Department of Veteran Affairs. VA loans require no down payment and are offered exclusively to United States military personnel who are active, discharged or retired. The sum or portion of the value that is at stake of subject to loss from a
Meaning
Value At Risk (VAR)
variation in prevalent interest rates. Value Based It is a structured approach to evaluate the performance of the companys unit Management (VBM) managers or goods and services, in terms of the aggregate gains they render to stockholders. Variable Life Insurance Variable Rate This type of insurance is very similar to whole life insurance, wherein the cash worth is invested in equity or debt sureties. Any interest rate or dividend that changes on a periodic basis is known as variable rate. Variable rates are often used for convertibles, mortgages, and certain other kinds of loans. The change is usually tied to movement of an outside indicator, such as the prime interest rate. Movement above or below certain levels is often prevented by a predetermined floor and ceiling for a given rate. It is also called adjustable rate. This is just another term used for Adjustable Rate Mortgage (ARM). This relates to an OTC fiscal derivative which enables a person to speculate on or hedging jeopardies connected with unpredictability of some underlying product, such as an exchange rate, interest rate or stock index. VAT seeks to tax the value added at every stage of manufacturing and sale, with a provision of refunding the amount of VAT already paid at the earlier stages to avoid double taxation. Venture capital is a particular type of private equity capital designed for new businesses (business start-ups). Generally made as cash in exchange for shares in the investee company, venture capital investments are usually high risk, but offer the potential for above-average returns. A federal government agency that, among other things, aids veterans of the U. S. armed forces in obtaining housing. VA loans offer a guarantee to the lending institution as to repayment of the loans and result in veteran home buyers being able to obtain mortgage loans with a lower down payment. Virtual banking is also called internet banking, through which financial and banking services are accessed via internets world wide web. It is called virtual banking because an internet bank has no boundaries of brick and mortar and it exists only on the internet.
Variable Rate Mortgage Variance Swap
VAT (Value Added Tax) Venture Capital
Veterans Administration
Virtual Banking
Banking Terms W
Posted on May 1, 2012 by admin in Banking. Term Meaning
W2 Statements
A wage and tax statement used by the income tax system of United States to report wages paid to employees and the taxes withheld from them. Relevant amounts on Form W-2 are reported by the Social Security Administration to the Internal Revenue Service. Employers generally complete a Form W-2 for each employee to whom they pay a salary, wage, or other compensation. In banking terms, a waiver is relinquishing the rights. Sometimes also considered to be the exemption or settlement of a part of debt.
Waiver
Warehouse Lines Warehouse line of credit is a facility provided to the borrower to get a warehouse of Credit mortgage portfolio for future security. Warrant An option for a longer period of time giving the buyer the right to buy a number of shares of common stock in company at a specified price for a specified period of time.
When-Issued (WI) When issued or WI is a conditional transaction made due to its authorized security or debt obligation. Whole Life Insurance A whole life insurance is a contract between the insurer and the policy owner, that the insurer will pay the sum of money on the occurrence of the event mentioned in the policy to the insured. Its a concept wherein the insurer mitigates the loss caused to the insured on the basis of certain principles.
Wholesale Banking Wholesale banking is a term used for banks which offer services to other corporate entities, large institutions and other financial institutions. Wholesale Price Index Wire house Wire Transfer Wholesale Price Index is that index which is calculated on the basis of wholesale prices. It is calculated in a similar way to the Retail Price Index. A Particular company and its branches are connected to a communication system to share their financial information. E.g. Bank Wire transfer is types of payment methodologies through the transactions are made. It is a method of transferring money from one person to another person or bank or between banks electronically. In case of bank to bank transfer there is no cash transaction. At the EOD of the day Netting occurs between the banks. It is a very secure way of transfer. The payment is identified by the unique identification of the account holder. While transferring funds from savings account to checking account, ATM card transaction, Transaction made by swiping credit or debit card, wire transfer transaction is initiated between the customers account and retail banks account. A removal of funds from a savings or checking account by the accounts owner is known as withdrawal. A charge imposed upon an account holder for the early removal of funds from a certificate account, usually an amount equal to interest earned during a pre-
Withdrawal Withdrawal Penalty
specified period. Working Capital Wraparound Mortgage In banking terms, working capital is defined as the difference between current assets and current liabilities. An arrangement, wherein existing mortgage is refinanced with more money, with a rate of interest ranging between the old rates and current market rates.
Banking Terms X, Y & Z

Yield Curve
Term
A yield curve (also called the term structure of interest rates) represents a snapshot in time of the yields offered by bonds of the same type and, in particular, of the same credit quality but of different maturities. The yield curve is actually the relation between the interest rate (or cost of borrowing) and the time to maturity of the debt for a given borrower in a given currency. For example, the current U.S. dollar interest rates paid on U.S. Treasury securities for various maturities are closely watched by many traders, and are commonly plotted on a graph which is informally called the yield curve. Yield curve risk is the huge risk involved in a fixed income instrument, due to major fluctuations in the market rates of interest. The yield on a bond calculated on the supposition that the issuer will redeem the amount at the first call as stated on the bonds prospectus is called as yield to call.
Meaning
Yield Curve Risk Yield to Call (YTC)
Yield to The Yield to maturity (YTM) of a bond denotes the internal rate of return the maturity (YTM) bond provides to the investor if the investor holds the bond until maturity and all the coupon payments and principal payment at the end are paid properly as per the schedule. Yield to maturity varies with the current market interest rate and the current market value is affected by the change in the yield to maturity value. Z score Z score is a measure, used in the banking field, to determine the difference between a single data point and a normal data point.
Zero Balance A checking account in which balance is always maintained as Zero in order to Account have control over disbursements. The zero balance account will be credited by the exact amount of the check from the master account when the actual transaction takes place. Once the account is debited the balance is retained to Zero. These accounts are used by corporate which wants to have
centralized cash control. Zero Cost Collar Zero Coupon Bond A type of arrangement, wherein, the borrower buys a cap from the bank and sells the floor. In this arrangement, the cost of the cap is recovered by sale proceeds of the floor or vice versa. A bond with no coupon that is sold at a deep discount from par value.
Zero Coupon Zero coupon yield curve is also called as spot yield curve, and is used to Yield Curve determine discount factors. Zero-DownPayment Mortgage Zero-down-payment mortgage is a type of mortgage given to a buyer who does not make any down payments while borrowing. The mortgage buyer borrows the amount at the entire purchase price.

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Banking Related Contents

Classification of Banking Systems

Central Bank Commercial Banks

Services Offered by Banks

Payment Services Financial Intermediary Financial services Ancillary Services

New services offered by banks

Commercial Banks Savings and Loan Associations Credit Unions

Types of Deposit Accounts

Demand Deposit Accounts Term Deposit Accounts

Demand Deposit Accounts

Money Market Account

Term Deposit Accounts

Fund based income Non-Fund based income Fee based income

All the services are explained in subsequent posts.

Fund Based Income Services

Short Term Loan Long Term Loan

Standby Credits Guarantees for the exporters

Services offered related to Export

How does Factoring works

Factoring Process Flow

Revocable Irrevocable Revolving Confirmed Standby Back-to-back Deferred Payment

Lockbox Processing by the Bank

Lockbox Processing by the Company

Cash Flow Collateral Capital Character and Conditions

Collateral Character Conditions Credit Capacity Currency Country

Types of Repayment Options

Equal Periodic Installments

Stepped Up Installments Bullet Repayment Deferred Repayment

Know Your Customer (KYC)

Customer Delight Corporate Social responsibility Carbon Footprints Reduction

Corporate Social Responsibility

Carbon Footprints Reduction

Why banks go for this business model?

Types of Bancasssurance models followed by banks Only Distribution:

Advantages to Insurance Companies

Commercial Paper (CP)

Detail Process of Issuing Commercial paper in India

Certificate of Deposit (CD)

Interest rate for CD

Key Advantages of Microfinance

Key Disadvantages/ Limitations of Microfinance

Different Bank Terms

Bank Rate vs Repo Rate

Reverse Repo Rate

Cash Reserve Requirement (CRR)

Statutory Liquidity Ratio (SLR)

Process related risk factors are

System related risk factors are

Legal or compliance error

Risk Avoidance Strategy Risk Mitigation Strategy Risk Transfer Strategy

Risk Avoidance Strategy

Risk Mitigation Strategy

Risk Transfer Strategy

Risk Management through Compliance

Know Your Customer

Sarbanes Oxley Act (SOX)

Investment Banking and its Functions

Investment Banking Functions

In general, Investment banks

Acts as intermediary between issuers and investors

Investment Banking Units

Front Office Middle office Back Office

It carries out all the administration/management related activities