Banking Awareness Guide

G 

Gearing - It is the ratio of debt to equity

Goodwill - Intangible assets that defines firm's reputation in monetary terms.

Gross profit = Net sales - Net purchases - Direct expenses

GDP - Gross domestic product is the aggregate value of goods and services produced by every person of a nation.

GST - Goods and services tax is the same tax system for everything. It is proposed that GST will replace the multi tax system in India by 2015.

H

Hedging - Hedging is a technique used by investors to protect themselves from adverse price movements. Derivatives are used for hedging in which hedgers takes the risk of price fluctuations.

Hedge funds - Mutual funds which invests in derivatives

I

Index - It is statistical measure used to find price variations in market. In stock markets most dominating stocks are grouped to make an index. For example - Sensex.

Income statement A statement that represents both income and expenditure of a business during a specific period of time.

IPO - Initial public offer is issue of stocks for the first time in the market.

Intangible assets – Assets which can’t be seen but have value for business. For example – Goodwill.

Indemnity – A legal contract under which one party promises to pay another for any loses incurred to them by their acts.

Interest rate risk – Risk that value of financial assets will deteriorate because of fall in interest rate. For example value of bonds decreases with decrease in interest rate.

Irredeemable stocks – Stocks which can’t be exchanged for cash in future.

Indirect Costs - Indirect cost is a cost incurred on product that is not directly related to its production.

FINANCIAL REGULATORS IN INDIA

RBI, SEBI, FMCI (Forward Market Commission of India), IRDA etc

ASBA: Application Supported by Blocked Amount. It is a process developed by the SEBI for applying to IPO. In ASBA, an IPO applicant’s account doesn’t get debited until shares are allotted to him.

DEPB Scheme: Duty Entitlement Pass Book. It is a scheme which is offered by the Indian government to encourage exports from the country. DEPB means Duty Entitlement Pass Book to neutralise the incidence of basic and special customs duty on import content of export product.

LLP: Limited Liability Partnership, is a partnership in which some or all partners (depending on the jurisdiction) have limited liability.

Balance sheet: A financial statement that summarises a company’s assets, liabilities and shareholders’ equity at a specific point in time.

TAN: Tax Account Number, is a unique 10-digit alphanumeric code allotted by the Income Tax Department to all those persons who are required to deduct tax at the source of income.

PAN: Permanent Account Number, as per section 139A of the Act obtaining PAN is a must for the following persons:-

1. Any person whose total income or the total income of any other person in respect of which he is assessable under the Act exceeds the maximum amount which is not chargeable to tax.

2. Any person who is carrying on any business or profession whose total sales, turnover or gross receipts are or are likely to exceed Rs. 5 lakh in any previous year.

3. Any person who is required to furnish a return of income under section 139(4) of the Act.

JLG: Joint Liability Group, when two or more persons are both responsible for a debt, claim or judgment.

REER: Real Effective Exchange Rate.

NEER: Nominal Effective Exchange Rate.

Contingent Liability: A liability that a company may have to pay, but only if a certain future event occurs.

IRR: Internal Rate of Return, is a rate of return used in capital budgeting to measure and compare the profitability of investments.

MICR: Magnetic Ink Character Recognition. A 9-digit code which actually shows whether the cheque is real or fake.

UTR Number: Unique Transaction Reference number. A unique number which is generated for every transaction in RTGS system. UTR is a 16-digit alphanumeric code. The first 4 digits are a bank code in alphabets, the 5th one is the message code, the 6th and 7th mention the year, the 8th to 10th mentions the date and the last 6 digits mention the day’s serial number of the message.

RRBs: Regional Rural Banks. As its name signifies, RRBs are specially meant for rural areas, capital share being 50% by the central government, 15% by the state government and 35% by the scheduled bank.

IMPORTANT BANKING TERMS

MAT: Minimum Alternate Tax is the minimum tax to be paid by a company even though the company is not making any profit.

Future trading: It’s a future contract/agreement between the buyers and sellers to buy and sell the underlying assets in the future at a predetermined price.

Reverse mortgage: It’s a scheme for senior citizens.

Basel 2nd norms: BCBS has kept some restrictions on bank for the maintenance of minimum capital with them to ensure level playing field. Basel II has got three pillars:

Pillar 1- Minimum capital requirement based on the risk profile of bank.

Pillar 2- Supervisory review of banks by RBI if they go for internal ranking.

Pillar 3- Market discipline.

Microfinance institutions: Those institutions that provide financial services to low income clients. Microfinance is a broad category of services, which includes microcredit. Microcredit is provision of credit services to poor clients.

NPCI: National Payments Corporation of India.

DWBIS: Data Warehousing and Business Intelligence System, a type of system which is launched by SEBI. The primary objective of DWBIS is to enhance the capability of the investigation and surveillance functions of SEBI.

TRIPS: Trade Related Intellectual Property Rights is an international agreement administered by the World Trade Organisation (WTO) that sets down minimum standards for many forms of intellectual property (IP) regulation as applied to nationals of other WTO Members.

TRIMs: Trade Related Investment Measures. A type of agreement in WTO.

Repo Rate

Repo Rate (Repurchased Option): When RBI provides loan to the bank for 1 to 90 days, RBI takes some interest i.e. called Repo Rate.

Reverse Repo Rate: When bank deposit his excess money in RBI then RBI provides some interest to that bank. This interest is known as Reverse Repo Rate.

Right issue share: Issues on discount, but only for existing share holder.

Share Market

 Long term market or above 1 year market

 Governing body of share market is SEBI (securities and exchange Board of India)

 SEBI was established in 1988 with its head office at Mumbai. Its chairman is Sh. U. K. Sinha.

SLR –(Statutory Liquidity Ratio) : Bank have to maintain some part of their deposits in itself in the form of cash/foreign exchange, mutual fund.

But in India Government security is the popular form of SLR.

 SLR maximum can be 40%

 No minimum limit of SLR

Sweat equity Share: Issued on discount, but only for employees.

T-Bill : Treasury Bill. T-Bill is issued by RBI on behalf of Govt.

Convertible Debenture

Such type of debenture can be converted into shares, but only in equity shares.

Debenture: Debenture holder is the creditor of company, when company borrows money from public.

Equity Shares

 Equity share holder is the real owner of the company.

 Equity share holder has voting rights.

Future Market

 Commodity market

 In this market dealing is for future.

 Commodities & metals are traded in this market

 This market is regulated by Forward Market Commission under the Forward Contract Regulation Act (FCRA).

Gilt Edge market

 This is the government security market where government securities are traded.

 This is low profit market but low risk market.

 This market is not open for public but on the recommendation of government or RBI opened for public for some time.

For example:

Before some time, the RBI issued the Inflation Index Board (IIB) in this market. This bond had a maturity period of 3 years.

IPO (Initial Public Offer)

 When a company issues its share for the first time, it is known as IPO.

 This is a part of primary market.

 IPO can be the cheapest share of the company.

 IPO can be more beneficial than any other shares.

 IPO can be issued by unlisted company.

FPO (Follow on Public Offer)

When a company launch the share after IPO, it is known as FPO.

MSF – (Marginal Standing Facility) : The facility in which RBI provide loan to the bank only for one day

 MSF interest Rate is always equal to Bank Rate

 By using MSF facility bank can borrow:

 Maximum 2% of their total deposit in RBI and 1 crore

NFO (New Fund Offer)

 When a group of companies launch the share or when a company launch the share for a different scheme than its original one, it is known as NFO.

 For example, Closed ended funds: these are traded for a specific period of time.

P- Note (Participatory Note):

 P-note is issued by FII (Foreign Institutional Investor) on the recommendation of SEBI in India.

 Without P- Notes, any foreign cannot investor cannot invest.

IMPORTANT BANKING TERMS

Amortization – Adjusting expenses for intangible assets over a long span of time is

amortization.

Balloon Payment - as a balloon looks very little before filling air and seems bigger after filling with air. same way the payment will be very little at initial stage and later it will big enough.

Bank Rate - When RBI provides loan to the bank for long term (90 to 365 days).On that amount of loan RBI takes some interest i.e. called Bank Rate.

According to modern banking definition of BR (Bank Rate): Bank Rate is used by RBI to provide discount on his securities. So, Bank Rate is known as Discount or Exchange Rate.

Base Rate - This is the minimum lending rate, below this rate bank cannot provide loan to anyone.

Call Money - When one bank borrow money from another bank.

a. Valid for only one day

b. It is used to full fill the one day need of bank

CAMEL : CAMEL is the international model of rating the banks

 C – Capital Adequacy

 A – Assets

 M – Management

 E – Earning Profit

 L – Liquidity