Friday, July 30, 2010

Banking and finance terms

A contract in which the seller of securities, such as Treasury Bills, agrees to buy them back at a specified time and price. It is also called repurchase agreement or buyback.

Reverse Repo:
It is a purchase of securities with an agreement to resell them at a higher price at a specific future date. This is essentially just a loan of the security at a specific rate. It is also called reverse repurchase agreement.

Open Repo:
Repo which can be terminated by either party at any time, and which has an unspecified repurchase date.

Overnight Repo:  
A repo with a term of one day.

Repo Rate:
Under Repo transaction the borrower places with the lender certain acceptable securities against funds received and agree to reverse this transaction on a predetermined future date at agreed interest cost. Repo rate is also called (repurchase agreement or repurchase option).

Reverse Repo Rate:
 It is the interest rate earned by the bank for lending money to the RBI in exchange of govt. securities or "lender buys securities with agreement to sell them back at a predetermined rate".

Repo (Repurchase) rate is the rate at which the RBI lends shot-term money to the banks. When the Repo Rate increases borrowing from RBI becomes more expensive. If RBI wants to make it more expensive for the banks to borrow money, it increases the Repo Rate. If it wants to make it cheaper for banks to borrow money, it reduces the Repo Rate.

Repo Rate signifies the rate at which liquidity is injected in the banking system by RBI.

Reverse repo rate signifies the rate at which the central bank absorbs liquidity from the banks.

Cash Reserve Ratio:
It specifies the percentage of their total deposits the commercial bank must keep with central bank or RBI. The higher the CRR the lower will be the capacity of bank to create credit.

It is known as Statutorily Liquidity Ratio. Each bank is required statutorily maintain a prescribed minimum proportion of its demand and time liabilities in the form of designated liquid asset.
"Every bank has to maintain a percentage of its demand and time liabilities by way of cash, gold etc".

Bank Rate:
It is the rate of interest which is charged by RBI on its advances to commercial banks. When reserve bank desires to restrict expansion of credit it raises the bank rate there by making the credit costlier to commercial bank.

It is the loan facility on customer current account at a bank permitting him to overdraw up to a certain agreed limit for a agreed period ,interest is payable only on the amount of loan taken up.

Prime Lending Rate:
It is the rate at which commercial banks give loan to its prime customers.

Open Market Operations (OMO):
It is the buying and selling of government securities in the open market in order to expand or contract the amount of money in the banking system by RBI. Open market operations are the principal tools of monetary policy.

Micro Credit:
It is a term used to extend small loans to very poor people for self-employment projects that generate income, allowing them to care for themselves and their families.

Liquidity Adjustment Facility:
It is a tool used in monetary policy that allows banks to borrow money through repurchase agreements. This arrangement allows banks to respond to liquidity pressures and is used by governments to assure basic stability in the financial markets.

RTGS System:
RTGS means Real Time Gross Settlement. RTGS system is a funds transfer mechanism where transfer of money takes place from one bank to another on a real time and on gross basis. This is the fastest possible money transfer system through the banking channel. Settlement in real time means payment transaction is not subjected to any waiting period. The transactions are settled as soon as they are processed. Gross settlement means the transaction is settled on one to one basis without bunching with any other transaction.

 Bank Assurance:
The term used to describe the partnership or relationship between a bank and an insurance company whereby the insurance company uses the bank sales channel in order to sell insurance products.

Wholesale Price Index (WPI):
The Wholesale Price Index (WPI) is the index used to measure the changes in the average price level of goods traded in wholesale market. It is available on a weekly basis. It is generally taken as an indicator of the inflation rate in the Indian economy.

Consumer price Index (CPI):
It is a measure estimating the average price of consumer goods and services purchased by households.

Venture Capital:
Venture capital is money provided by an outside investor to finance a new, growing, or troubled business. The venture capitalist provides the funding knowing that there is a significant risk associated with the company’s future profits and cash flow. Capital is invested in exchange for an equity stake in the business rather than given as a loan, and the investor hopes the investment will yield a better-than-average return.

Treasury Bills:
Treasury Bills (T-Bills) are short term, Rupee denominated obligations issued by the Reserve Bank of India (RBI) on behalf of the Government of India. They are thus useful in managing short-term liquidity.

Banking Ombudsmen Scheme:
The Banking Ombudsman Scheme enables an expeditious and inexpensive forum to bank customers for resolution of complaints relating to certain services rendered by banks.
The Banking Ombudsman is a senior official appointed by the Reserve Bank of India to redress customer complaints against deficiency in certain banking services.

A subsidy is a form of financial assistance paid to a business or economic sector.  Most subsidies are made by the government to producers or distributors in an industry to prevent the decline of that industry or an increase in the prices of its products or to encourage it to hire more labour.

A debenture is an unsecured loan to a corporation. It is a type of debt instrument that is not secured by physical asset. Debentures are backed only by the general creditworthiness and reputation of the issuer.

Types of Debenture:
(a) Convertible Debenture:

Debenture that can be converted into some other security or into stock.

(b) Non-Convertibility Debenture (NCB):

Non Convertible Debentures are those that cannot be converted into equity shares of the issuing company, as opposed to Convertible debentures. Non-convertible debentures normally earn a higher interest rate.

Hedge fund:
Hedge means to reduce financial risk.
A hedge fund is an investment fund open to a limited range of investors and requires a very large initial minimum investment. It is important to note that hedging is actually the practice of attempting to reduce risk, but the goal of most hedge funds is to maximize return on investment.

A Foreign Currency Convertible Bond (FCCB) is a type of convertible bond issued in a currency different than the issuer’s domestic currency. A company may issue an FCCB if it intends to make a large investment in a country using that foreign currency.

Capital Account Convertibility (CAC):
It is the freedom to convert local financial assets into foreign financial assets and vice versa at market determined rates of exchange. Capital account convertibility allows anyone to freely move from local currency into foreign currency and back.

Current Account Convertibility:
It defines at one can import and export goods or receive or make payments for services rendered. However, investments and borrowings are restricted.

It is the opportunity to buy an asset at a low price and then immediately selling it on a different market for a higher price.