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IMPORTANT TERMS IN BANKING AND FINANCE

RELEVANT FOR ENTRANCE EXAMINATIONS & INTERVIEWS.

Financial system

The financial system is the system that allows the transfer of money between savers and

borrowers. It comprises a set of complex and closely interconnected financial institutions,markets, instruments, services, practices, and transactions.

Financial systems are crucial to the allocation of resources in a modern economy. They channelhousehold savings to the corporate sector and allocate investment funds among firms; they allow

intertemporal smoothing of consumption by households and expenditures by firms; and they

enable households and firms to share risks. These functions are common to the financial systems

of most developed economies.

Accounting Records (or Accounts Receivable and Payable):

Establish a process that records every financial transaction by maintaining paper files, an

electronic database, and copying all records in a virtual library. Your organization needs to beable to demonstrate what funds were received and how funds were spent. Accounting records

should be consistent. Choose a method and regular schedule for tracking income and expenses

that works for your organization. This is important in case the organization is audited or if afunder requests information for a specific item or transaction. A system should also be developed

to track donations from individuals to keep donors updated of the organization’s progress or to

solicit annual and repeat contributions. A separate accounting system should be developed for

funding from foundations with the original proposal and budget, dates of receipt of funds, notes

on allowable expenditures, and reporting requirements so that you can respond to funders’requests for financial records or in case of audits.

Financial Planning:

Financial planning converts your organization’s objectives into a budget. The budget serves as acritical planning guide for your staff and governing board. It is a public record for funders of

how you intend to spend the funds received. Financial planning allows you to review your

organization, examining successes and challenges in the past. Planning also enables you to make projections and set targets, informing strategies for future success.

Financial Monitoring and Reporting:

Drawing from the information in the accounting records, your organization can create internal

reports that help monitor progress by comparing budgets to actual expenses. Frequent reviewsand monitoring allows the governing board and staff to measure your organization’s progress

and helps inform decision-making about the organization’s or a project’s future. Internal reports,

sometimes called management reports allow you to be forward thinking as you assess thefinancial status of the organization and what will be needed to realize your goals. Accounting



records are also the source for creating external financial reports that demonstrate to funders and

other stakeholders how funds have been spent. Funders may require financial reports at the

completion of the project or periodically during the project’s implementation.

Governing Board:

A governing board, whether comprised by a board of directors or leadership from the

community, serves as stewards of an organization’s resources. Governing boards should

participate in approving budgets, financial monitoring and reviews, and agree upon and ensurethat internal controls are implemented. The board treasurer who has skills in accounting should

be the lead person in working with the staff in ensuring financial accountability.

Internal Controls:

Controls are organizational practices that help safeguard your assets and ensure that money is being handled properly. Controls help detect errors in accounting, prevent fraud or theft, and

help support the people responsible for handling your organization’s finances.

Roles and Functions of the Central Banking Authority:

The Central Banking Authority (RBI) has two distinct roles: Monetary control including

Controlling inflation

Bank Supervision

All major central banks other countries too look after these two functions and carry thecharge of ensuring that the overall financial health of banks is not impaired.

This is ensured through off-site and on-site surveillance of banks.

Monetary control is exercised through Cash Reserve Ratio and Statutory Liquidity Ratiomechanism and Bank and Repo rates – main instruments available to Central Banks to

Control Prime rates of leading banks. Central Banks do act as lenders of last resort to banking system and responsible for ensuring

an efficient payment and settlement system.

Commercial Banks:

Commercial banks include public sector banks, foreign banks, and private sector banks.

Acceptance of deposits from the public for the purpose of lending or investment is the main areaof activity.

Non Banking Financial Companies:

NBFCs are allowed to raise monies as deposits from the public and lend monies through various

instruments including leasing, hire purchase and bill discounting etc. These are licensed and



supervised by the Central Banking Authority. Central Bank prescribes that no NBFC can operate

without a valid license from the Central Banking Authority.

Primary Dealers (PDs):

Primary dealers also known as PDs, deal in government securities and deal in both the primary

and secondary markets. Their basic responsibility is to provide markets for government securities

and strengthen the government securities market.

Financial Institutions:

Financial Institutions are development financial institutions which provide long-term funds for

industry and agriculture. All these institutions are under off-site and on-site surveillance of the

Central Banking Authority. FIs raise their resources through long-term bonds from the financial

system and borrowings from international financial institutions.

Cooperative Banks:

These are allowed to raise deposits and give advances from and to the public. Urban Cooperative

Banks are controlled by State governments and RBI, while other cooperative banks are

controlled by National Bank for Agriculture and Rural Development (NABARD) and State

Government. Except for certain exemptions in paying a higher interest on deposits, the Urban

Cooperatives Banks regulatory framework is similar to the other banks.

Payment and Settlement System:

An efficient and effective Payment and Settlement is a necessary condition for a well running

Financial System. Maintenances of clearing houses at various centres, creation of currency

holding chests in different geographical areas and creation of the mechanism for electronic

transfer of funds are vial activities undertaken by the central Banks.

Management of Government Debt:

Most of the Central Banks manage the issue and servicing of government debt. This involves

price discovery, volumes to be raised, tenure of debt and matching it with the overall cash

management of the debt.

Cash Reserve Ratio (CRR):

Cash Reserve Ratio is the mandatory deposit to be held by Banks with requisite monetary

authority. It is a percentage of their Demand and Time liabilities. The increase or decrease can be

affected by the Central Bank to pump in or soak liquidity in the banking system.



Statutory Liquidity Ratio (SLR):

Statutory Liquidity Ratio (SLR) is the prescribed percentage of Demand and Time liabilities of a

bank to be held in prescribed securities, mostly government securities. The increase or decrease

in the CRR & SLR contracts and enhances credit creation.

Stock Exchanges:

A stock exchange is dully approved by the regulators to provide sale and purchase of securities

on behalf of investors. The stock exchange provides clearing house facilities for netting of

payments and securities delivery. Clearing houses guarantee all payments and deliveries.

Securities include equities, debt and derivatives.

Equity and Debt Raisers:

Companies wishing to raise equity or debt through stock exchange have to approach to capital

market regulator with the prescribed applications and a proforma prospectus for permission toraise equity and debt and to get them listed on a stock exchange.

Investment Bankers:

Merchant banks undertake a number of activities such as undertaking the issue of stocks, fund

raising and management. They also provide advisory services and counsel on mergers and

acquisitions etc. They are licensed by the capital market regulators.

Foreign Institutional Investors:

FIIs are foreign-based funds authorised by the Capital Market Regulator to invest in the Indianequity and debt market through stock exchanges.

Depositories:

Depositories hold securities in demat form (as opposed to physical form), maintain accounts of

depository participants who, in turn, maintain sub-accounts of their customers. On instructions of

the buyers to sellers accounts in electronic from the buyer s to sellers accounts in electronic

form.

Mutual Funds:

A mutual fund is a form of collective Investment that pools money from investors and invests in

stocks, Debt and other Securities. It is a less risky investment option for an individual investor.

Mutual funds require the regulators’ approval to start an asset management company (the fund)

and each scheme has to be approved by the regulator before it is launched.



Registrars:

Registrars maintain a register of share and debenture holders and process share and debenture

allocation, when issues are subscribed. Registrars too need regulators approval to do business.

IRDA: Insurance Regulatory and Development Authority (IRDA)

Regulator for Insurance business, both general and life assurance. Regulates all aspects of

insurance business, including licensing of insurance companies, framing regulating about the

conduct of business and supervising all insurance activities in the country etc.

Assessment Year:

The period of 12 months commencing on 1st

day of April every year is known as the assessment

year. It is also a financial year but it immediately succeeds the relevant previous year.

Break Even Point:

The activity level that yields Zero profit. It is the level at which there is neither profit. It is the

level at which there is neither profit nor loss. Here the total revenue equals the total costs.

Accounting Rate of Return:

The rate of return on an investment defined as profit after tax divided by book value of

investment. It is also referred to as the average rate of return.

Accrual Basis of Accounting:

The basis of accounting that assumes that revenue is realized at the time of the sale of goods or services at the time of the sale of goods or services regardless of when the cash is received. In

this method of accounting, expenses are recognized at the time the services are received and

utilized or an asset is consumed in the production of revenue, regardless of when payment for

these services of assets is made.

Activity-based Costing:

Cost attribution to cost units on the basis of benefits received from indirect activities, i.e.

ordering, setting-up, assuring quality, etc. Activity-based costing (also called activity accounting)

emphasizes links between performance of particular activities and the demands that thoseactivities make on the organization’s resources.

Cost Accounting:

The process of determining the cost of some product or activity.



Cost Audit:

The verification of cost records and accounts and a check on adherence to the cost accounting

procedures and their continuing relevance. The professional who conducts the audit is known as

the as the Cost Auditor.

Cost of Acquisition of an Asset:

It is the value for which the asset was acquired by the assesses. Expenses of capital nature for

completing or acquiring the title to the property are to be included in the cost of acquisition.

Cost of Debt:

The rate that has to be received from an investment in order to achieve the required rate of return

for the creditors.

75 Percent Book-building:

An option of book- building process whereby 75 percent of the securities is offered an a ‘firm

basis’ and where a minimum of 25 percent is offered to the public.

100 Percent Book-building:

An option of book- building process whereby 100 percent of the securities is offered on a ‘firm

basis’ or reserved to promoter, permanent employees of the issuer company or offered to

shareholders on a competitive basis or on a firm allotment basis and where the required

minimum issue of capital is Rs.25crores.

Zero-Interest FCDs:

Debentures on which no interest will be paid by the issuer during the lock-in period.

Zero Coupon Yield Curve:

Technique that helps in valuation of sovereign securities across all maturities irrespective of its

liquidity, aimed at creating uniform valuation standards in the market and keeping in mind the

requirements of the banking industry, financial institutions, mutual funds, insurance companies,

etc that have substantial investment in sovereign papers.

Zero Coupon Convertible Note:

Debenture that can be converted into shares and on its conversion the investor forgoes all

accrued and unpaid interest.



Zero Coupon Bonds:

Bonds issued at a discount and redeemed at par, no interest payment being made payable on such

bonds at periodic intervals before maturity.

Yield to Maturity:

Method of measuring the bond yield, expressed as a percentage rate of return earned on a bond,

note or other fixed-income security, if the instrument is bought and held till maturity date.

Yield on TBs:

Yield calculated on the basis of rate of discount, issue price, redemption value, maturity period,

etc.

Yield on CDs:

Effective rate of interest calculated on the basis of quoted discount and maturity period.

Working Capital Funding:

Facility provided to clearing members is association with the clearing banks to meet their

working capital requirements.

Without Recourse Factoring:

Arrangement whereby the factor has no recourse to the client firm in the event of non-

recoverability of book debts.

Withdrawal Account:

A mutual fund holder’s account whereby an individual investor can withdraw the amount of

funds on a regular basis.

Wholesale Debt Market:

Component of the secondary debt market that comprises of institutions and agencies such as

banks, financial institutions, RBI, Primary dealers, insurance companies, provident funds, mutual

funds, corporate entities and foreign institutional investors.

Whole Life Policy:

Life insurance policy that runs throughout the life of the assured, the sum assured being payable

only on the death of the assured.



Vostro Account:

Rupee-accounts opened by foreign banks with banks in India.

Venture Capital:

A high-risk and high-return capital fund for a high technology ventures, usually in the form of

equity financing.

Venture Capital Fund:

Fund created by venture capitalists to support entrepreneurs with high-risk capital funds.

Usance Bills:

Time – based bills and are recognized by custom or usage for the purpose of payment.

Unorganized Money Market:

Constituent of Indian money market that consists of indigenous bankers and moneylenders.

Underwriting:

A financial service whereby an underwriting agency undertakes to take up the securities, either

in whole or in part, not subscribed by the public.

Underwriting Agreement:

Contract between an underwriter and an issuer that sets out the terms and conditions of the

underwriting arrangements.

Telegraphic Transfer:

Rate applied where the transaction does not involve any delay in realization of the foreign

exchange by the bank.

Treasury Bills:

It is also called T-bills, are short-term debt instruments used by the government to obtain funds.

Treasury Bills Rate Discount:

Treasury Bills Rate Discount rate at which RBI sells TBs.

Translation Exposure:

Kind of exchange risk represented by the net book-value of assets and liabilities denominated in

a foreign currency arising out of changes in exchange rates.



Transfer Deed:

Deed executed for the transfer of securities at an OTC.

TDS Advantage:

The advantage enshrined in the provisions of the Companies Act, whereby an incomes receivable

is tax.

TDICI:

An associate of the ICICI that renders assistance for technical advancement in industry.

Tax Havens:

Nationals with a moderate level of taxation and with liberal tax incentives for undertaking

specific activities such as exporting, etc.

Take-out Financing:

Type of infrastructure financing designed to enable banks to avoid asset-liability maturity

mismatches that may arise out of extending long-term loans to infrastructure projects.

Take Out:

Process of selling the investment by a venture capitalist to another professional investor, another

venture capitalist by way of private placement with a major institutional investor such as an

insurance company or a pension fund manager or a management holding company.

Syndicated Euro-currency Loans:

Loans in Euro-currency, arranged by a syndicate of banks in the international financial market,

the syndicate of banks granting credit to needy borrowers out of the Euro-currency funds in the

form of loans, lines of credits or other forms of medium or long-term credit.

Syndicated Underwriting:

Underwriting by a syndicate of underwriters for the purpose of reducing the potential risks.

SWIFT:

Mode of trading in a foreign exchange market through the international bank communications

network that links electronically all brokers and traders in foreign exchange.



Swaps:

Financial transactions in which two counter parties agree to exchange streams of payments over

time, such as currency, interest rate swaps etc.

Swaps Transaction:

Foreign exchange transaction whereby simultaneous purchase and sale of a given amount of

foreign exchange for different value dates takes place.

Swap Spread:

Profit arising from a swap transaction.

Swap Market:

Constituent of inter-bank market where transactions relating to swapping of currencies takes

place.

Swap Leasing:

Lease arrangement that allows for the temporary exchange of the leased asset.

Surveillance:

Monitoring mechanism put in place to ensure efficiency and integrity of stock exchanges made

possible through automation.

Supply Bills:

Bills that are drawn by a supplier or contractor on the government or semi-government

departments for the supplies made to such departments.

Structured Finance:

A financial instrumental that is structured to suit the risk-return and maturity needs of the

investor.

STRIPS:

Separately Traded Registered Interest and Principal of Securities’, whereby coupon interest and

the principal are separated and traded independently.

Strike Price:

Price at which the underlying is traded.



Straight-line Method:

Method of determining the annual amount of interest on the basis of an equated annual financial

charge.

Straight-debt Eurobonds:

That carry a fixed rate of interest.

Stock-Index futures:

Type of a futures contract that is based on a value line, whereby the underlying variable is a

stock index (such as BSE sensex, S&P CNX, Nifty, etc).

Stock Holding Corporation of India Limited (SHCIL):

Agency set up to serve as a central securities depository in respect of transactions on stock

exchanges.

STCI:

Securities Trading Corporation of India set up by the RBI to take part in the trading of call funds.

Squaring Off:

Carrying the Stock Index Futures contract till maturity.

Spot-against-forward swaps:

Type of swap transaction whereby the dealer buys a currency in the spot market and

simultaneously sells the same amount back to the same bank in the forward market.

Spot Transaction:

Foreign exchange transaction whereby the purchase of foreign exchange, delivery and payment

for the same take place between banks usually on the second following business day.

Spot Market:

Constituent of inter-bank market where currencies are traded for immediate delivery for a period

not exceeding two business days after the completion of the transaction .

Spot Exchange rate:

Rate quoted by ‘Authorized Dealers’ to the interested buyers where currencies are traded

(exchanged) for immediate delivery.



Spot Delivery Contract:

Contract whereby the payment and delivery of securities takes place on the spot, on the same day

or on the next day.

Speculator:

Person who attempts to make a profit merely out of an anticipated change in price, an important

prerequisite for this being realization of such anticipations.

Speculative Advantage:

Advantage afforded by the derivates market, whereby by a minimum level of speculative activity

is allowed to take place.

Special Purpose Vehicle:

A mechanism created for a project whereby the risks are spread among the like-mindedinvestors.

Sovereign Credit Research:

Moody’s service designed to meet the information and analysis needs of credit professionals

charged with evaluating the credit worthiness of governments and supranational around the

world.

Smart Card:

A Plastic card, as different from a magnetic stripe card, which is embedded with a computer microchip, designed to carry a far greater amount of intelligence and memory capacity.

Short-term Capital Notes:

Bond that is designed to help borrowers raise funds through bank credit on a floating rate basis

for medium to long-term maturities at a lower cost of borrowing.

SFCs:

Development finance institutions at the level providing assistance to medium and small-scale

industrial concerns.

Settlement Risk:

Risk arising from settlement of a contract whereby one party suffers a loss if price movement is

favorable and the counter

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