Banking Terms and Concepts

Various Risks associated with Banking Business

There are various kinds of risks associated with the banking such as credit risk, interest rate risk, foreign exchange rate risk, liquidity risk, equity price risk, commodity price risk, legal risk, regulatory risk, reputation risk, operational risk etc. They can be broadly converged into three categories viz. Credit Risk, Market Risk and Operational Risk. They have been briefly discussed below:

Credit Risk

Credit risk is risk of loss arising from a borrower who does not make payments as promised. This event would be called “Default” and the person/ company/ entity would be called “Defaulter”. Due to this, credit risk is also known as “Default Risk”.

Market Risk

Market risk is the possible losses due to movement in the market prices. There are four standard market risk factors viz. stock prices, interest rates, foreign exchange rates, and commodity prices. Apart from there are associated market risks as follows:

  • Equity risk, the risk that stock prices and/or the implied volatility will change.
  • Interest rate risk, the risk that interest rates and/or the implied volatility will change.
  • Currency risk, the risk that foreign exchange rates and/or the implied volatility will change.
  • Commodity risk, the risk that commodity prices (e.g. corn, copper, crude oil) and/or implied volatility will change.

Operation Risk

Operational Risk refers to the risk of loss from inadequate or failed internal processes, people, systems or external events including

  • Incompetent management
  • Improper planning
  • Staff fraud
  • Noncompliance
  • Programming errors
  • System Failure
  • Increased competition
  • Deficiency in loan documentations.

What are different approaches for risk assets calculation?

Banks have several approaches for risks assets calculations. They have been summarized in the below table:

Internal rating and external rating approaches

Standardized Approach / External Rating Approach

Under this approach the banks are required to use ratings from External Credit Rating Agencies to quantify required capital for credit risk.  The Banks have to follow it without any discretion to modify. The Reserve Bank of India has identified 4 external domestic agencies for this approach. They are CRISIL, ICRA, Care and Fitch.

Apart from this, there are international agencies such as Moody’s, Fitch, Standard and Poor’s etc.

Internal rating based Approach

This is basically an alternative to standardized approach. The Banks do the internal assessment of the Counterparties and exposures. Banks need RBI’s nod to do this.

Different credit rating agencies in India

The Credit rating market taken a definite shape in India after the SEBI made it mandatory for any debenture that has maturity of more than 18 months maturity. There are four domestic credit ratings in India for standardized approach for credit risk calculation. They have been discussed below:


CRISIL is India’s first credit rating agency, incorporated in 1987 and was promoted by the erstwhile ICICI Ltd, along with UTI and other financial institutions.

It commenced operations from 1988 onwards. In 1995, in partnership will National Stock Exchange, CRISIL developed CRISIL500 Equity Index. In 1996, it made a strategic alliance with the Standard & Poor’s (S&P) Ratings Group and in the following year Standard & Poor’s (S&P) Ratings Group acquired 9.68% shares in it.

In services Industry, the CRISIL in 1998 set up the Indian Index Services Ltd as a joint venture with the NSE and in 1999, it developed a Risk Assessment Model (RAM) which became a banking industry standard. S&P acquired the majority stake in the company in 2005 and so today CRISIL is a S&P company.


India’s second credit rating agency is ICRA (Investment Information and Credit Rating Agency) which was set up in 1991. It was promoted by Industrial Finance Corporation of India (IFCI), other leading financial/investment institutions, commercial banks and financial services companies as an independent and professional Investment Information and Credit Rating Agency. Today, ICRA and its subsidiaries together form the ICRA Group of Companies (Group ICRA). ICRA Limited is a Public Limited Company, with its shares listed on the Bombay Stock Exchange and the National Stock Exchange.


The third Credit rating Agency in India was CARE, that started working in 1993. It was mainly promoted by the IDBI.


Later another Credit rating agency ONICRA was established which now Onicra Credit Rating Agency Of India Ltd. This is a private sector agency set up by Onida Finance. Today it has a niche market and provides assessment, grading and rating models for individuals & MSMES (micro, small and medium enterprises.

Prompt Corrective Action

Prompt Corrective Action is a system of RBI under which it can initiate a corrective action in case of a bank which is found to be having low capital adequacy or high Non-performing Assets. These are called Trigger Points. RBI takes such action when Capital Adequacy Ratio goes down to less than 9% and Non-Performing Assets go up to more than 10%. Further, if return on assets us below 0.25%; this also serves as a trigger point to Prompt Corrective Action.

 Asset Liability Mismatch

Asset Liability Mismatch or ALM is considered to be a comprehensive and dynamical framework for measurement, monitoring and managing the market risk of the Banks. Asset Liability Mismatch arises in the following situation:

  • The Primary source of funds for the banks is deposits, and most deposts have a short- to medium-term maturities, thus need to be paid back to the investor in 3-5 years. In comparison, the banks usually provide loans for a longer period to borrowers. Out of them, the home loans and Infrastructure projects loans are of longest maturity. So when a bank provides the long term loans from much shorter maturity funds, the situation is called asset-liability mismatch.
  • ALM creates Risk and Risk has to be managed. This is calledAsset Liability Management.

What are Consequences of the Asset Liability Mismatch?

The Interest rate risks (due to fluctuation) and Liquidity Risk (due to long maturity of loans) are two typical consequences of Asset Liability Mismatch.

  • Interest Rate Risk:The banks would require to reprice the deposits faster than the loans and during this process if the bank has to pay a higher rate, the adjustment is difficult.
  • Liquidity Risk:The banks would have to repay the depositors when their funds mature. But when they repay, the cannot recall their loans. In this situation, bank would require the new deposits. This may create a acute situation if there are no deposits available. In some cases, the bank may also need to be paying higher interests on new deposits.

Asset Liability Management

Asset Liability Management is basically management of the structure of the balance sheet (which comprises the assets and liabilities) in such a way that interest gain is maximized and risk is minimized. Most of the banks have an elaborate institutional arrangement to manage the Asset liability Mismatch. They manage the above as follows:

  • Pricing large percentage of loans at variable (Floating Rate Regime) interest rates which actually move in tandem with the markets.
  • Pricing the fixed interest rate loans at ahuge markup, this is usually done so that borrower is enticed to go for floating rate regime.

The above two generally take care of the Asset liability mismatch situation.

Letter of Credit

A letter of credit (L/C) is a type of “documentary credit” or a “non-fund based credit”. It is a document issued by a bank or financial institution at the request of a buyer whereby the bank or financial institution gives assurance  of payment to a seller if the terms and conditions specified in the document are fulfilled. This means that Letter of Credit is a promise made by Bank to pay to exporter / seller on behalf of importer / buyer. The seller receives the payment only when all the requirements specified in the L/C are met including the documents, delivery dates, product specification, etc.

Thus, a Letter of Credit has three parties:

  • Buyer / Importer: Also known as Opener, as he opens the credit
  • Bank / Financial Institution: Also known as Issuer, as it opens the letter of credit
  • Seller / Exporter : Also known as beneficiary as credit is opened in favour of him.

Types of Letter of Credit

There are several types of Letter of Credit on the basis of various levels of security they grant to the beneficiary (seller/exporter).

Irrevocable Letter of Credit

An irrevocable Letter of Credit cannot be modified or cancelled without the agreement of all the three parties.

Revocable Letter of Credit

A revocable letter of credit may be modified or even cancelled by the issuing bank at any time and without notice to the beneficiary. Such L/Cs are rare now a days as they give maximum flexibility to the buyers but involve risk to the seller.

Confirmed Irrevocable Letter of Credit

In a confirmed Irrevocable L/C, another bank (called Confirming Bank) is yet more party which obliges itself to honour the L/C in same manner as issuing bank. Such L/C is used to back up the credit standing of the issuing bank and to mitigate the risk in foreign trade by replacing foreign bank risk by domestic bank risk.

Unconfirmed Irrevocable Letter of Credit

In Unconfirmed Irrevocable Letter of Credit, a seller’s domestic bank (called advisory bank)  acts as agent of the issuing bank but without assuming any responsibility towards the beneficiary. The role of advisory bank here is limited to taking care of the authenticity of the issuing bank and documentary credit.

Revolving Letter of Credit

A revolving Letter of Credit is used in the case of regular business transactions between the buyer and the seller. The L/C is issued only once but remains valid for a stated period of time for a number of transactions without issuing another L/C. The Revolving L/C can be either revocable or irrevocable.

A Letter of Credit ensures the seller that his payment will be made as long as the services are performed (dispatch of goods in case of foreign trade). Thus, Letter of Credit serves as a guarantee to the seller that he or she will be paid as agreed. Letter of Credit is an instrument of trade financing.

Glossary of Terms

American Depository Receipts (ADR)

American Depository Receipt is a certificate issued in the United States declaring ownership of shares of a foreign company. The original securities are lodged in Bank/ Custodian abroad, and the American Depository Receipts (ADRs) are traded in the US for all intents and purposes as if they were a domestic stock. An ADR dividend is paid in US dollars, so it provides a way for American investors to buy foreign securities without having to go abroad, and without having to switch in and out of foreign currencies.

Appreciation and depreciation of currency

Appreciation refers to rise in the value of one currency in terms of another, while depreciation is reverse.  For example, when value of 1 Dollar changes from Rs. 60 to Rs. 64; it will be appreciation of dollar while depreciation of Rupee.


Arbitrage consists of purchasing a commodity or security in one market for immediate sale in another market to make profit.


An alternative dispute resolution mechanism for resolving disputes.

Asset based securitization

This refers to the process in which the securities are collaterised by assets mortgaged against loans, assets leased out, trade receivables, or assets sold on hire purchase basis or installment contracts on personal property.

Authorized Capital

The amount of capital that a company has been authorized to raise by way of equity and preference shares, as mentioned in the Articles of Association / Memorandum of Association of the company.

Baby Bond

This term is used in United States. It refers to a bond with a face value of less than $1000 usually in $100 denominations.


Badla is a term is used in stock markets. It refers to carrying forward of transactions from one settlement period to another without effective delivery. This is permitted only in specified securities and is done at the making up price which is usually the closing price of the last day of settlement.


It’s a phenomenon whereby a bank sells insurance product via cross selling.

Bankers acceptance

A short-term credit investment created by a non-financial firm and guaranteed by a bank to make payment. Acceptances are traded at discounts from face value in the secondary market.

Basis Point

Basis point in banking / finance refers to one hundredth of a percentage point. This term is frequently used in terms of interest rates and monetary policy rates of RBI. For example, when RBI reduces a rate such as Bank Rate from a rate such as 5.25% to 5.33% the change would be eight basis points.

Bear & Bull

In terms of share markets, a Bear is an investor / broker or any other market player who expects the market price of shares to decline. The term also refers to the one who has sold shares which he does not possess, in the hope of buying them back at a lower price, when the market price of the shares come down in the near future.

  • A Bear Market is a weak or falling market characterized by the abundance of sellers.
  • If there is a false signal in the markets that the rising prices of a stock would reverse and sink, but actually it does not happen; then it is called a Bear Trap.

On the other hand, a market player who believes prices will rise and would, therefore, purchase a financial instrument with a view to selling it at a higher price is called Bull. A Bull Market refers to a rising market with abundance of buyers and relatively few sellers.

Bid Price and Ask Price

In auctions markets, a bid price is an offer to buy; while ask price is an offer to sale. The difference between the bid price and the ask price is called Bid-Ask spread.

Blue Chip

Blue chip companies refer to the companies which have best rated shares with the highest status as investment based on return, yield, safety, marketability and liquidity.

Bonus Shares

Profit making companies may desire to convert their profit into share capital. This can be done by issue of bonus shares. Issue of Bonus shares is also called as conversion of profit into share capital or capitalization of profits. Bonus can be of two types:

  • Making partly paid shares into fully paid by declaring bonus without requiring shareholders to pay for the same.
  • Issue of fully paid equity shares as bonus shares to the existing equity shareholders

Rights Share

A company can issue additional shares at any time by passing an ordinary resolution at its General Meeting. However such additional shares must be first offered to the existing equity shareholders in the proportion of the shares already held by them. Such additional shares are called “Rights Shares”. Rights shares should be within the limits of the authorized capital. If not so, then the authorized capital must be increased first suitably. The issue of Rights Shares is to be made after two years from the formation of the company or after one year from the first allotment of shares.

Book building process

In share Markets, the Book Building is basically a process used in IPOs for efficient price discovery. It is a mechanism where, during the period for which the IPO is open, bids are collected from investors at various prices, which are above or equal to the floor price. The offer price is determined after the bid closing date.

In India, the Price discovery through book building process is more popular than a normal issue. In the case of Price discovery through book building process, the price at which securities will be allotted is not known, while in case of offer of shares through normal public issue, price is known in advance to investor. Under Book Building, investors bid for shares at the floor price or above and after the closure of the book building process the price is determined for allotment of shares.

Market Boom

A condition of the market denoting increased activity with rising prices and higher volume of business resulting from greater demand of securities. It is a state where enlarged business, both investment and speculative, has been taking place for a sufficiently reasonable period of time.


A speculative sharp rise in share prices which like the bubble is expected to suddenly burst.

Bulldog Bond

This term is used in UK. It refers to a bond denominated in sterling but issued by a non British borrower.


Buoyancy refers to the rising trend in prices.

Butterfly spread

An option strategy involving the simultaneous sale of an at the money straddle and purchase of an out of the money strangle. Potential gains will be seen if the underlying remains stable while the risk is limited should the underlying move dramatically. It’s also the simultaneous buying and selling of call options at different exercise prices or at different expiry dates.

Call option and Put option

An option agreement that gives an investor the right, but not the obligation, to buy an instrument at a known price by a specified date. For this privilege, the investor pays a premium, usually a fraction of the price of the underlying security.

In put option, the investor the right, but not the obligation, to sell an instrument at a known price by a specified date.

Circular trading

Circular trading is a fraudulent trading scheme where sell or buy orders are entered by a person who knows that the same number of shares at the same time and for the same price either have been or will be entered. These trades do not represent a real change in the beneficial ownership of the security. These trades are entered with the intention of raising or depressing the prices of securities.

Circuit Breaker

A system to curb excessive speculation in the stock market, applied by the Stock Exchange authorities, when the index spurts or plunges by more than a specified per cent. Trading is then suspended for some time to let the market cool down.

Common stock

Common stock refers to the units of ownership of a public company or bank. Holders of common stock typically have voting rights and receive dividends, but there is no guarantee of dividend payment.


Correction refers to temporary reversal of trend in share or commodity prices. This could be a reaction (a decrease following a consistent rise in prices) or a rally (an increase following a consistent fall in prices).

Coupon Rate

Coupon rate refers to the interest rate stated on the face of a money market instrument or bond.  The interest paid on a bond expressed as a percentage of the face value. If the instrument  carries a fixed coupon, the interest is paid on an annual or semi-annual basis.

Cumulative Convertible Preference Shares
A type of preference shares where the dividend payable on the same accumulates, if not paid. After a specified date, these shares will be converted into equity capital of the company.

Cumulative Preference Shares

A type of preference shares on which dividend accumulates if not paid. All arrears of preference dividend have to be paid out before paying dividend on equity shares.

Current Ratio

Current ratio measures a company’s current assets relative to its current liabilities. This gives an indication of its abilities to meet short-term liabilities; the higher the ratio, the more liquid the company.


Debt instruments bearing a fixed rate of interest usually payable half yearly on specific dates and principal amount repayable on a particular date on redemption of the debentures.


A depository is like a bank wherein the deposits are securities (viz. shares, debentures, bonds, government securities, units etc.) in electronic form. A Depository can be compared with a bank, which holds the funds for depositors. There are many similarities in Banks and Depositories.

  • While the Bank holds funds in an account, depositories hold securities in an account.
  • While Bank transfers funds between accounts on the instruction of the account holder, Depository transfers securities between accounts on the instruction of the account holder.
  • While the bank facilitates transfers without having to handle money, Depository facilitates transfers of ownership without having to handle securities. Banks keep safe money, depositories keep safe securities.

In India, we have two depositories viz. National Securities Depository Limited (NSDL) and Central Depository Services (India) Limited (CDSL).

Depository Participant

After depository, we have another entity called Depository Participant. Depository provides its services to investors through its agents called depository participants (DPs). These agents are appointed by the depository with the approval of SEBI. According to SEBI regulations, amongst others, three categories of entities, i.e. Banks, Financial Institutions and SEBI registered trading members can become DPs. Please note that accounts are always no frills at Depositories. This means an investor can have an account with depository without any balance.


Process of transition from “mutually-owned” association to a company “owned by shareholders”. In other words, transformation of the legal structure from a mutual form to a business corporation form and privatisation of the corporations so constituted, is referred to as demutualization.

Depository participant (DP)

An agent of the depository through which it interfaces with the investor. A DP can offer depository services only after it gets proper registration from SEBI.

Derivative Market

Markets such as futures and option markets that are developed to satisfy specific needs arising in traditional markets. These markets provide the same basic functions as forward markets, but trading usually takes place on standardized contracts.


Dividend is the share in the company’s profit after tax, paid to the shareholders, usually once or twice a year. Dividend payments do not distribute the entire net profit of a company, a part or substantial part of which is held back as reserves for the company’s expansion. Dividend is declared on the face value or par value of a share, and not on its market price.

Dutch Auction

Dutch auction refers to an auction in which the auctioneer’s prices fall rather than rise. In such an auction, the first person to bid wins whatever it is that the auctioneer is selling. The system is used in the Dutch flower markets and also, occasionally, as a method of selling securities.

Employee Stock Option

“Employee stock option” means the option given to the whole-time directors, officers or employees of a company which gives such directors, officers or employees, the benefit or right to purchase or subscribe at a future date, the securities offered by the company at a predetermined price.

Electronic fund transfer (EFT)

EFT refers to a system which utilizes computer and electronic components in order to transfer money or financial assets. EFT is information based and intangible.

Employee Stock Purchase Scheme (ESPS)

“Employee stock purchase scheme (ESPS)” means a scheme under which the company offers shares to employees as part of a public issue or otherwise.


Equity refers to the ownership interest in a company of holders of its common and preferred stock.

Exchange Rate Risk

The risk that adverse movements in exchange rates lead to capital losses in assets or revaluation of liabilities.

Exchange-traded derivative

A derivative which is listed and traded at an organized market-place. Derivatives exchanges generally provide standardised contracts and central clearing facilities for participants.

External Commercial Borrowings

In India External Commercial Borrowings are defined to include commercial bank loans, buyers’ credit, suppliers’ credit, securitized instruments such as Floating Rate Notes and Fixed Rate Bonds, etc., credit from official export credit agencies and commercial borrowings from the private sector window of Multilateral Financial Institutions such as International Finance Corporation (Washington), ADB, AFIC, CDC etc. ECBs are being permitted by the Government as a source of Finance for Indian corporates for expansion of existing capacity as well as for fresh investment.

Face Value

Face Value is the nominal or stated amount (in Rs.) assigned to a security by the issuer. For shares, it is the original cost of the stock shown on the certificate; for bonds, it is the amount paid to the holder at maturity. Face Value is also known as the par value or simply par. For an equity share, the face value is usually a very small amount (Rs. 5, Rs. 10) and does not have much bearing on the price of the share, which may quote higher in the market, at Rs. 100 or Rs. 1000 or any other price. For a debt security, face value is the amount repaid to the investor when the bond matures (usually, Government securities and corporate bonds have a face value of Rs. 100). The price at which the security trades depends on the fluctuations in the interest rates in the economy.

Premium and Discount

Securities are generally issued in denominations of 5, 10 or 100. This is known as the Face Value or Par Value of the security as discussed earlier. When a security is sold above its face value, it is said to be issued at a Premium and if it is sold at less than its face value, then it is said to be issued at a Discount.

Forward Contract

An agreement for the future delivery of the underlying commodity or security at a specified price at the end of a designated period of time. Unlike a future contract, a forward contract is traded over the counter and its terms are negotiated individually. There is no clearing house for forward contracts, and the secondary market may be non-existent or thin.

Fortune 500

Since 1958, Fortune Magazine has published a list of five hundred largest American Industrial Corporations, ranked according to size of sales. These are called Fortune 500 companies.

Gilt fund

Fund that invests exclusively in government securities.

Gilt Edged

A term used to describe a bond, generally issued by the Government or issued with a Government Guarantee so much so that there are no doubts about the ability of the issuer to pay regular interest and the principal amount to the bond holders.

Global Depository Receipts

Any instrument in the form of a depository receipt or certificate created by the Overseas Depository Bank outside India and issued to non-resident investors against the issue of ordinary shares or Foreign Currency Convertible Bonds of issuing company.

Green shoe option

Green Shoe option means an option of allocating shares in excess of the shares included in the public issue and operating a post- listing price stabilizing mechanism in accordance with the specific provisions in DIP Guidelines, which is granted to a company to be exercised through a stabilising Agent.


Hedging refers to a simultaneous sale and purchase to avoid loss.


Hypothecation refers to pledging assets against a loan. The ownership of the asset or the income from the asset is not transferred, except that in default of repayment of loan the asset may be sold to realize its value. Brokers will accept shares as collateral for loans to finance purchase of shares or to cover short sales.
Indian Depository Receipt

A receipt, evidencing an underlying foreign security, issued in India by a foreign company which has entered into an agreement with the issuer and depository, custodian and depository or underwriters and depository, in accordance with the terms of prospectus or letter of offer, as may be prescribed.

Insider trading

Practice of corporate agents buying or selling their corporation’s securities without disclosing to the public significant information which is known to them but which has not yet affected the price.


The gradual domination of financial markets by institutional investors, as opposed to individual investors. This process has occurred throughout the industrialized world.

Interest Rate Risk

The risk that movements in the interest rates may lead to a change in expected return.

Liquid Assets

Liquid assets refer to cash or easily encashable assets to meet any request for redemption.

Market capitalization

The market value of a quoted company, which is calculated by multiplying its current share price ( market price) by the number of shares in issue, is called as market capitalization. For example, if a company A has 150 million shares in issue and current market price is Rs. 100. The market capitalization of company A is Rs. 15000 million.

Maturity  Date

The date on which a loan, bond, or debenture becomes due for payment. The amount an investor receives when a security is redeemed at maturity is called Maturity value.

Merchant Banks

A bank who is engaged in the business of issue management either by making arrangement regarding selling, buying or subscribing to securities or acting as manager, consultant, adviser or rendering corporate advisory service in relation to such issue management. In other words, merchant bank provides capital to companies in the form of share ownership instead of loans.

Further, the banks which deal in converting and trading foreign exchange to facilitate international trade and development are also known as Merchant banks. These banks finance trade between companies which are based in different countries. They ease the way of doing business in other countries.


Mumbai Interbank Bid and Offer rates. Calculated by the average of the interbank offer rates based on quotations at nearly 30 major banks.

Money Market Mutual Funds

MMMF are instruments of money markets.

Mortgage Trust

Mortgage is a unit trust which invests in mortgage loans. Effectively the unit trust invests money in real estate and receives an interest return with security over the property which has been purchased. The interest which is charged on mortgage trust loans is normally higher than that other sources of finance like banks so that the investor usually receives a very competitive rate or return.

Mortgage backed securities

Securities backed by mortgage loans, including pass-through securities, modified pass-through securities, mortgage-backed bonds, and mortgage pay-through securities.

Moral Hazard

In terms of banking and finance, moral hazard is the risk arising from morally incorrect actions of a party. For example, risk arising when party does not enter into a contract in good faith and possibly provided misleading information about its assets, liabilities or credit capacity.


NASDAQ refers to National Association of Security Dealers Automated Quotations. This is a United States organization that provides a computerized information network through which brokers, banks and other investment professionals can obtain up to the minute price quotations on securities traded over the counter.

Negotiated Dealing System (NDS)

Electronic platform for facilitating dealing in Government Securities and Money Market Instruments, introduced by RBI.

Net Liquid Assets

Net Liquid Assets is Cash and readily marketable securities minus current liabilities of a company. This figure gives information about a company’s ability to meet its current debt obligations.

Net Asset Value (NAV)

Net Asset Value refers to the current market worth of a mutual fund’s share. A fund’s net asset value is calculated by taking the fund’s total assets, securities, cash and any accrued earnings, deducting liabilities, and dividing the remainder by the number of units outstanding.

In context with investment, the NAV of an investment scheme is a number which represents the value in rupees per fund unit as on a particular date of the assets of the fund less liability and outstanding expenses.

Thus, if the NAV in more than the face value, it means our money has appreciated and vice-versa.

NAV is only the value that a fund’s assets would realise, less liabilities, in case the fund was liquidated as on the particular date to which NAV relates. But there is no uniformity in accounting policies of the various funds and hence one cannot compare one fund with another.

Non deliverable swap

Similar to a non deliverable forward, the only difference being that settlement for both parties is done through a major currency.

Offer For Sale (OFS)

OFS refers to an offer of securities by existing shareholder(s) of a company to the public for subscription, through an offer document.

OTC (Over the Counter)

A financial transaction that is not made on an organized exchange. Generally the parties must negotiate all the details of each transaction or agree to use simplifying market conventions.

Penny Stocks

This term is used in United States. It refers to very low priced stocks– sometimes selling at a few pennies per share sometimes for a dollar or two- in speculative companies.

Price Earnings Ratio

The ratio of the market price of the share to earnings per share. This measure is used by investment experts to compare the relative merits of a number of securities.

Price rigging

When persons acting in concert with each other collude to artificially increase or decrease the prices of a security, the process is called price rigging.

Samurai Bonds

Foreign bonds offered in the Japanese Bond Market.


The combination of sluggish economic growth, high unemployment and high inflation.


An agreement with or without conditions to subscribe to the securities of a body corporate when the existing shareholders of such body corporate or the public do not subscribe to the securities offered to them.


One who does underwriting. A financial organization that handles sales of new securities which a company or municipality wishes to sell in order to raise money. Typically the underwriters will guarantee subscription to securities say, an issue of equity from the company at a stated price, and are under an obligation to purchase securities upto the amount they have underwritten, should the public not subscribe for the issue.

Venture Capital

Professional moneys co-invested with the entrepreneur usually to fund an early stage, more risky venture. Offsetting the high risk is the promise of higher return that the investor takes. A venture capitalist not only brings in moneys as “ equity capital” (i.e. without security/charge on assets) but also brings on to the table extremely valuable domain knowledge ,business contacts, brand equity, strategic advice, etc. He is a fixed interval investor, whom the entrepreneurs approach without the risk of “takeover”.

Window Dressing

A manoeuvre often engaged in by companies, banks, mutual funds etc., at the end of the accounting period in order to impress stock holders who will be receiving the report showing that funds are better managed and invested than what might have been drawn up.

Yankee Bond

A bond offering in the U.S. domestic market by a non-U.S. entity registered with the SEC.

Joint Venture

Association of two or more entities (whether corporate, government, individual or otherwise) combining property and expertise to carry out a single business enterprise and having a joint proprietary interest, a joint right to control and a sharing of profits and losses.

Regardless of the scope of the undertaking, the nature of the JV must:

  • be a separately identifiable entity
  • have an ownership interest in such entity by each joint venture partner (“JVP”); and
  • have an active management involvement or deliberate rejection of the right to such involvement by each JVP.

JVs are common and successful in several industries. For example, in the land development and construction industries, JVs are often used to obtain sufficient financing to acquire large land tracts or to undertake major building projects.  JVs are also common in the manufacturing, mining, and service industries.

Credit Authorization Scheme

The Credit Authorization Scheme (CAS) was launched in 1965 and was withdrawn in 1989. Under this scheme, all commercial banks had to obtain prior approval / authorization of the RBI before granting a loan of Rs. 1 crore or more to a single borrower.

Anchor Tenant

Planned shopping mall concept was developed by Victor Gruen in 1950s. It was then only realised that the success of the mall will depend on the number and kind of large stores which will set-up their business in there. Such stores will ultimately define the financial stability of the mall as it acts as the major crowd pullers.

An Anchor Tenant, anchor store, draw tenant or key tenant is the major departmental store in the mall which becomes the reason for people to visit the mall. As the anchor store pulls the maximum traffic it is also called as the magnet store. The concept of malls caught up in Indian markets in the last decade. India now has over 300 malls, but it is only a few of them which are running successfully. As per a report by CBRE South Asia Private Limited, the rate of success is more dependent on the anchor tenant mix than the location or size. The anchor tenants usually have their rents discounted and may also be offered cash benefits by the mall to remain in the mall or may also be offered a share in profits. Also, within a mall such stores are widely spaced to make other stores visible by getting suitable exposure as the shoppers move from one anchor to another. Mostly it is the presence of an anchor store in the vicinity that drives the traffic for satellite stores. Thus, anchor tenants are given the right to dictate the choice of satellite stores around it. This is done to not let any satellite store to open shop whose core philosophy is juxtaposed with that of the anchor.

The International Council for Shopping Centers has outlined the presence of  anchors as the main characters for two kinds of malls classified on the basis of their area-regional center mall and superregional center mall. The former has only 2 or more anchors while the latter have 3 or more.

Another popular term is Shadow Anchor which means a small shopping complex gains from the presence of a magnet store in close vicinity or just next door.

Primary Credit Societies

Primary Cooperative Credit Societies are formed at village or town level. A primary credit society refers to any cooperative society other than a primary agricultural credit society. It is basically an association of members residing in a particular locality. The members can be borrowers or non-borrowers. The funds of this society are derived from the share capital of the deposits and also the loans from central cooperative banks.

According to the norms, the  paid-up share capital and reserves of a Primary Credit Society should be less than Rs 1 lakh. Such as society can do banking business without being required to take a licence from the RBI. However, the Banking Laws (Amendment) Act, 2012 has permitted RBI to assume additional regulatory powers over co-operative banks. It also gives the regulator the power to withdraw freedom given to primary co-operative credit societies to operate as banks without a licence from RBI.

In the Primary Cooperative Credit Society, the borrowing powers of the members as well as of the society are fixed. It generally gives small credit for farm inputs, fodder, fertilizers, pesticides etc.

Initial Public Offering (IPO)

When an unlisted company makes either a fresh issue of securities or an offer for sale of its existing securities or both for the first time to the public, it is called Initial Public Offering or IPO. An IPO paves way for listing and trading of the issuer’s securities.

Pricing of IPO

When a company makes an IPO, the prior requirement would be to decide a price of the Issue / share. The question is -who will decide what should be the price? In India, there is a system of free pricing since 1992. However, there are guidelines that the company (Issuer) will decide the price in consultation with Merchant Banker. Still there is no formula for deciding the price of an IPO. Please note that SEBI does not play any role on pricing of shares, but the company and merchant banker are required to give full disclosures of the parameters which they had considered while deciding the issue price.  While deciding the prices, there are two possibilities,

  • Where company and Lead Merchant Banker fix a price. This is called Fixed Price.
  • Where the company and the Lead Manager (LM) stipulate a floor price or a price band and leave it to market forces to determine the final price. This is called the Price discovery through book building process.

Listing & Delisting of Securities

Listing means admission of securities of an issuer to trading privileges (dealings) on a stock exchange through a formal agreement. The prime objective of admission to dealings on the exchange is to provide liquidity and marketability to securities, as also to provide a mechanism for effective control and supervision of trading. The term ‘ Delisting of securities’ means permanent removal of securities of a listed company from a stock exchange. As a consequence of delisting, the securities of that company would no longer be traded at that stock exchange.

Bid Price

The ‘ Bid’ is the buyer’s price. It is this price that you need to know when you have to sell a stock. Bid is the rate/price at which there is a ready buyer for the stock, which you intend to sell. The ‘Ask’ (or offer) is what you need to know when you’re buying i.e. this is the rate/ price at which there is seller ready to sell his stock. The seller will sell his stock if he gets the quoted “Ask’ price.

Debt Instruments

A shareholder, whatever might be the quantity of the shares, is a part owner of the company and entitled to all the benefits of ownership, including dividend (company’s profit distributed to owners). Over the years if the company performs well, other investors would like to become owners of this performing company by buying its shares. This increase in demand for shares leads to increase in its share prices. When the prices of the share increase, the investors have option of selling their shares at a higher price than at which they purchased it. Thus investor can increase their wealth, provided they make the right choice, as the reverse is also true.

Apart from the shares, there are many other financial instruments (securities) used for raising capital. Debentures or bonds are debt instruments which pay interest over their life time and are used by companies to raise medium or long term debt capital. If an investor prefers fixed income, he / she may invest in these instruments which may give him / her higher rate of interest than bank fixed deposit.

In the Indian securities markets, the term ‘ bond’ is used for debt instruments issued by the Central and State governments and public sector organizations and the term ‘debenture’ is used for instruments issued by private corporate sector.

The Debt Instruments may be Corporate Debt or Government Debt. Corporate debt instruments are generally called Debentures while Government debt instruments are generally called Bonds, but Bonds can be issued by companies and local governance bodies too.

Joint stock company

Business partnership done by separate contributions individually from a group of stakeholders. The stockholders get certificate of ownership which they can freely transfer or sell to others. Company is managed and run by an appointed Board of Directors. Shareholders can attend AGMs, get copy of annual report and also vote on account audits.


It is an obligation where property is held by one person or persons for the benefit of the owner. The owner thus transfers his property to the trustees. It is run under a contract which defines the terms on which the trust is run. It generally has the following participants: Appointer, beneficiary, protector and settler.

Executors and administrators

They are the ones to whom the property of a dead person gets attached. Their role becomes prominent if the deceased person has left a will If person dies without making a will, an administrator will be appointed by the court. The power of an administrator is drawn from the Probate Act while the powers of the executor are statutory. He can also be given some additional powers as per the terms of the will.

Local authorities

They are government administrative offices which are smaller in scale than a state or a province. They are like municipal corporations, zila parishads, taluka panchayats etc. They execute plans for local and economic development of local area. They have right to impose various kind so taxes and duties at a local level.


It stands for the Society for Worldwide Interbank Financial Telecommunication. It is a mode of exchange of messages between banks in a secure and reliable way. Under the SWIFTNet network, it also markets softwares and services to other institutions dealing in finance. SWIFTNet is an international platform which connects 8,000 financial institutions in 205 countries.

SWIFT does not accommodate funds transfer and needs a corresponding banking relationship for financial exchanges. SWIFT is a cooperative society, which works under Belgian Law and has its HQs at La Hulpe.  It provides revolutionary solutions for members to allow connectivity to SWIFTNet and CBTs (computer-based terminals) which members use to manage their messages. SWIFT services fall under three key areas: securities, treasury and derivatives, trade services and payments and finally cash management. It also comes equipped with a person to person messaging service called SWIFTNet Mail.

Automated Trading System

Automated trading stands for trading financial instruments completely on computers with zero human intervention. These are the new face of investment banks as human hands are not able to cope up with volume and speed required for these systems. Banks and other financial vendors are now switching to newer programmatic trading opportunities as their e-commerce options galore. It is enabled on all kinds or primary financial instruments and derivatives.

Electronic funds transfer (EFT)

It is a way to transfer money from one place to another via electronic means. It is one of the fastest and easiest method to transfer money and is widely in use today. The money thus transferred is instantly available on the other end. Many security and safety procedures are applied like encryption, verification and passwords etc. PayPal is the biggest EFT tool available.  A variety of different transactions can be performed: sale, refund, withdrawal, deposit, cashback, inter-account transfer, payment, inquiry etc.

 Digital Payment System.

Digital payments deal in electronic cash, electronic currency, digital money, digital cash etc. which are exchanged only by electronic means. This involves use of digital stored value systems. It deals with a system of debts and credits which exchanges value with other system or itself. It can at times be backed by gold to increase security and authenticity. Banks too have started to offer many services wherein a person can transfer funds, purchase stocks, etc.  However, there are many incidences of fraud, technical snags etc. reported


E-banking is the electronic management of information retrieval, storage and management. In addition, customer service is highly facilitated by e-banking as bankers can give instant information about account statements, balance or other enquiries. It also reduces the cost of doing business. Banks use IT effectively to create products and sell them.  It also comprises many banking services like: email, research and development, provision of services, minimises physical interaction.

Loan to Value Ratio

LTV Ratio is a lending risk assessment ratio that financial institutions and others lenders examine before approving a mortgage. Assessments with high LTV ratios are generally seen as higher risk and, therefore, if the mortgage is accepted, the loan will generally cost the borrower more to borrow or he or she will need to purchase mortgage insurance.

Mezzanine Financing

This refers to a hybrid of debt and equity financing that is typically used to finance the expansion of existing companies. Mezzanine financing is basically debt capital that gives the lender the rights to convert to an ownership or equity interest in the company if the loan is not paid back in time and in full. It is generally subordinated to debt provided by senior lenders such as banks and venture capital companies.

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