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Banking Terms

Banking Terminology

Banking terms commonly used to introduce new words and meaning related to banks and banking operations mostly used now a days. These terms are very important for banking knowledge and study.

A

Acceptable-These borrowers are not as strong as GOOD Grade borrowers, but still demonstrate consistent earnings, cash flow and have a good track record.
Assets-Assets are the resources owned and controlled by a business entity

B

Bad/Loss– Credit of this grade has long outstanding with no progress in obtaining repayment.
Balance Sheet (B/S)- B/S is a statement of assets, liabilities, and owners’ equity.
Benefit cost ratio -This index is defined as the present value of the future cash flows divided by the initial investment.
Bid Bond– One kind of bank guarantee on behalf of banks’ clients (mostly contractor) to enable them to submit their bid in a tender.
Break-Even Point (BEP)-Break-even point of a firm is a point where total revenue equals total expense.
Business/Industry Risk- Risk that adverse industry situation or unfavorable business condition  will impact borrowers’ capacity to meet obligation.

C

Capacity-Capacity refers to the legal capacity to enter into contract.
Capital- Capital is the owners’ contribution to the business.
Cash Credit- Cash credit is a mode of credit given to traders, industrialists, agriculturalists etc. for meeting their working capital requirement.
Cash Credit Hypothecation: It is a kind of cash credit provided against hypothecation of goods in which both ownership and possession remain with the borrower.
Cash Credit Pledge- It is a kind of cash credit provided against pledge of goods which remain under the possession of the bank.
Cash Flow Statement- Cash flow statement shows the inflows and outflows of cash of a business during a particular period of time
Cash Flow- Cash flow means Cash inflows and outflows.
Character-Character refers to some borrower-specific behavioral qualities, such as commitment, honesty and integrity.
Charges-Charge is the legal right to assets securing the repayment of money.
Charging-Charging a security means making it available as a cover for an advance.
Collateral security –Collateral security refers to the additional
Condition: Condition refers to the overall economic condition (borrower’s industry and the economy) that could affect the borrower’s ability to repay the loan.
Contribution Margin-Contribution Margin is the amount of revenue available to cover the fixed expenses and to contribute to profit.

Cost of goods sold (COGS)-COGS refers to the cost of the goods that are sold.
Cost Structure-Cost Structure refers to the relative proportion of fixed and variable costs.                                                                                                                                                                              Credit Credit Risk Grading (CRG)-  Credit Risk Grading is a process of determining the risk grade of a borrower.
Credit-Credit is confidence of the lender on the ability and willingness of the borrower to repay
Current Assets-Current assets are cash and other resources that are reasonably expected to be longer.
Current Liabilities: Current Liabilities are the obligations that are reasonably expected to be paid.

Credit Administration-Credit administration function is basically a back office activity that supports and controls extension and maintenance of credit.

D

Documentation-Documentation is the process of execution of documents in right form and lawful manner
Document-Document means any written record which serves as an evidence in respect of a transaction.
Doubtful- Full repayment of principal and interest is unlikely and the possibility of loss is extremely high.
Drawing power- Drawing power of a limit is the amount up to which the borrower can draw.

Degree of Operating Leverage (DOL)-Degree of operating leverage is a measure, at a given realized in cash within one year of the balance sheet date or within an operating cycle whichever is within one year of the balance sheet date.
Discounted Payback Period-Discounted payback period is the length of time until the sum of discounted cash flows is equal to the initial investment.

E

Early Warning Signals-Early Warning Signals (EWS) indicate risks or potential weaknesses of an exposure requiring monitoring, supervision, or close attention by management.
Expenses-Expenses are outflows or using up of assets or incurrence of liabilities from purchasing of goods or receiving services.

F

Financial Risk- Risk that counterparties will fail to meet obligation due to financial distress.
Free Cash Flow- Free cash flow is a part of the surplus operating cash flow which is available for financing further expansion of operating capacity, to reduce debt and to repurchase stocks.
Funded credit-Credit in which immediate deployment of fund is necessary.

G

General and Administrative Expense-These expenses are incurred to run the organization
Good Grade– Credit facilities in which borrower has strong repayment capacity having excellent liquidity and low leverage.
Gross Working Capital-Gross Working Capital refers to the total current assets of an entity.

H

Horizontal Analysis-Horizontal analysis is a technique for evaluating a series of financial statement data over a period of time.
Hypothecation-Hypothecation is a method of creating charge on movable goods in which possession of goods remain with the borrower.

I

Intangible Assets-Intangible assets are requires that do not have physical substance Inuit have economic value.

Internal Rate of Return– IRR is the discount rate that equates the present value of the investment undelays to the present value of the future cash inflows.

Income Statement (I/S)-U/S is a statement of revenues and expenses. It is prepared to know net income (or loss) of a business during a period of time.

J

Judicial Stamp- Judicial stamp are the stamps that are used mainly for judicial purpose of filling suits and for payment of add value rum Court fee.

L

Liabilities -Liabilities are the obligations of an organization. In other words, it is the outsider’s claim on the resources of the business is the right of one person to retain goods and securities in his possession belonging to
another until certain debt due. Lien does not give power of sale but only to retain the property
Long-term Investments-Long-term Investments are the resources that are not expected to converted into cash within one year.
Long-term Liabilities-Long-term Liabilities are the obligations that are expected to be paid beyond one year of the balance sheet date.

M

Margin- Margin is the amount invested in the unit by the borrower himself and is asked for providing protection to bankers against s possible decline in value.
Margin of Safety –It is the excess amount of sales of an organization Over it’s BEP sales. It indicates how safe the organization is towards achieving its goal.
Marginal/Watch list- This grade warrants greater attention due to conditions affecting the borrower, the industry or the economic environment
Modified Internal Rate of Return -MIRR is the discount rate at which the present value of a project cost is equal to the sum of the present value of it’s future cash inflows are reinvested at the firm’s cost of capital. So MIRR is more accurate measure for calculating the firms return.
Mortgage-Mortgage is the transfer of an interest in specific immovable property for the purpose of securing the payment of money advance or to be advanced by the way of loan.

Management Risk- Risk that counter parties may default as a result of poor managerial ability.

N

Net Present Value– Net present value is the difference between the present value of cash inflows and present value of cash outflows.
Net Working Capital-Net Working Capital is the difference between total current assets and current liabilities of an entity.
Non-funded credit- Credit in which immediate deployment of fund is
not necessary
Non-Judicial Stamp– Non judicial stamps used for preparation of contract deed or sale deed.
Non-operating Expense and Loss-These expenses are incurred for reasons other than business operations.
Non-operating Revenue and Gains- Revenues earned from non-operating sources. For earning these revenues, concerned organization do not require any effort.

O

Operating Expense-These expenses are incurred to run the organization and to generate revenue for the organization.
Operating Leverage-Operating leverage is a measure of how sensitive the net income is to percentage change in sales.

Operating Revenue-These revenues are earned form the operation of the business.
Overdraft: The overdraft is a kind of credit allowed on a current account operated upon by cheques.
Owner’s Equity-It is the owner’s claim on the resources of the business. It can be found by deducting total liabilities from total assets.

Operating Cycle-Operating cycle is the length of time between the entering into stock by procuring materials, labor, cash sale.

P

Payback Period-Payback period is defined as the length of time or expected member of years required to recover the original investment.
Performance Bond- A bond or guarantee issued by a bank on behalf of the client guaranteeing that that the client will perform as per the contract or the bank will compensate the loss that might incur because of the non-performance of the client.
Pledge-Pledge is a method of creating charge on movable goods in which possessions of goods are transferred to the bank to secure a loan.
Primary security- Primary security refers to the securities or assets, which are created with the help of finance of the bank.
Property, Plant, and Equipment-Property, Plant, and Equipment are tangible resources of permanent nature. These assets are purchased for using in the business operations and not for resale.

R

Ratio Analysis-Ratio Analysis is the most widely used tool of financial statement analysis.
Relationship Risk- These risk areas cover evaluation of limits utilisation, account performance, covenants compliance by the borrower and deposit relationship.
Rescheduling-Rescheduling is a process of re-fixing loan convents of the original loan contract to adjust with the actual business condition of the borrower.
Revenues-Revenues are inflows or other enhancement of assets of an organisation from delivering goods or services or from the major business operation to the organisation.

S

Second Mortgage: Once a free holder has already mortgaged his property and wishes later to borrow more on the same property, he can do so by a second mortgage if, of course, there is enough margin in the value of property.
Security Risk- Risk that the bank might be exposed due to poor quality or strength of the security in case of loan default.
Security-Security is something deposited as a guarantee of an undertaking or loan.

Selling and Distribution Expenses-These expenses are incurred to generate sales and distribute goods sold.
Set off-The right of set-off enables a banker to adjust wholly or partially, as circumstances permit a debit balance in a customer’s account with any balance lying at his credit.

Special Mention- This grade has potential weaknesses that deserve management’s close attention. If left un corrected, these weaknesses may result in a deterioration of the repayment prospects of the borrower. Severe management problems exist.
Statement of Changes in Equity-A statement prepared for a period of time to determine the owner’s claim on the resources of a business entity It also reports how owner’s claim changes over a period of time.
Sub-Mortgage: If a lender himself wishes to borrow money on the security of a montgagor’s promise to repay him, he can produce to his banker the mortgage deed. If the banker is satisfied the advance may be made on the security of the mortgage deed.
Substandard-Financial condition is weak and capacity or inclination to repay is in doubt. These weaknesses jeopardize the full settlement of loans.
Superior Grade-Credit facilities, which are fully secured ie. fully cash covered or fully covered by government guarantee or by the guarantee of a top tier international Bank.

T

Time Value of Money-Time value of money refers to the fact that money received soon is worth more than money expected in the distant future, because the sooner money is received, the sooner it can be invested to earn a positive return.
Token Mortgage: Token mortgage is a registered montgage where only a token amount is registered by a deed securing covering the token amount of loan and the rest loan amount is covered by submitting simply an agreement to create further charge.

V

Vertical Analysis-Vertical analysis is a technique for evaluating financial statement data that expresses each item in a financial statement in terms of a percent of a base amount.

W

Working Capital –Working capital is that part of the capital which is required to complete the whole operating cycle of an entity by maintaining certain level of inventories (such as raw materials, work-in-process, finished goods, stores and spares etc.), trade receivables and cash balance for its day-to-day operations
Write-Off- Write-Off is a process of cleaning balance sheet in which bad or loss category loans are kept out of the balance sheet.

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