Table of Contents

BADLA OR CARRY FORWARD ............................................................................................ 3

DERIVATIVES .................................................................................................................... 3
FORWARDS ...................................................................................................................... 3
FUTURES .......................................................................................................................... 3
OPTIONS .......................................................................................................................... 4
SWAPS ............................................................................................................................. 4
EXCHANGE TRADED FUND (ETF) ........................................................................................ 4
CREDIT RATING................................................................................................................. 4
ASSET SECURITISATION ..................................................................................................... 5
TAKEOUT FINANCING ....................................................................................................... 5
FACTORING ...................................................................................................................... 5
MERCHANT BANKING ....................................................................................................... 5
PARTICIPATORY NOTES (P-NOTES) .................................................................................... 5
FORENSIC AUDIT............................................................................................................... 6
CASH RESERVE RATIO (CRR) .............................................................................................. 6
STATUTORY LIQUIDITY RATIO (SLR)................................................................................... 6
SELECTIVE CREDIT CONTROL ............................................................................................. 6
NON-PERFORMING ASSET (NPA) ....................................................................................... 7
WILFUL LOAN DEFAULTERS ............................................................................................... 7
SARFAESI .......................................................................................................................... 7

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 BADLA OR CARRY FORWARD
Badla was a system of carry forward in Indian stock market which was banned.
Under this system, an investor was able to take a position in a scrip without actually
taking delivery of the stock.
Badla provided the facility for carrying forward the transaction from one settlement
to another. Badla was the charge, which the investor paid for carrying forward his
position.
It facilitated share financing, share lending and carry forward simultaneously.
It helped in moderating extreme movement in stock prices and was also used as a
hedging tool.

DERIVATIVES
It is a financial security or contract between two parties whose value is derived from
an underlying asset or a group of assets.
The underlying asset can be stocks, bonds, index, commodities, currencies, interest
rates, etc.
Derivatives are traded over-the counter (OTC) as well as on exchanges. So,
derivatives which are traded on an exchange are called exchange-traded derivatives.
Broadly, there are 4 types of derivative contracts: forwards, futures, options and
swaps.

FORWARDS
A forward contract is an agreement between parties to buy or sell an underlying
asset on a specified date for a specified price.
Future contracts are customized contracts. So, details like delivery date, price and
quantity are negotiated bilaterally by the parties to the contract.
Also, these contracts are traded over-the-counter (OTC) and not on an exchange.

FUTURES
They are similar to forward contracts. A future contract is an agreement between
two parties to buy or sell an asset at a certain time in the future at a certain price.
But unlike forward contracts, future contracts are standardized and are traded on an
exchange.

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 OPTIONS
Options contracts are a type of derivative which derive their value from underlying
security. An options contract gives the buyer an opportunity (or option) to buy or sell
the underlying asset at a pre-specified price within a timeframe.
The two main categories of options contracts are call and put options.

SWAPS
It is a derivative contract which allows exchange of cash flows between two parties.
It usually involves exchange of a fixed cash flow for a floating cash flow.
They are traded over-the-counter (OTC) and not on an exchange.
Examples are currency swaps, interest rate swaps, commodity swaps, etc.

EXCHANGE TRADED FUND (ETF)

ETFs are like mutual funds but they are listed and traded on stock exchange like
shares. It is a basket of securities that trade on an exchange.
They are essentially like Index Funds.
ETFs are passive funds that generally track an index.

CREDIT RATING
It is an indication of the current opinion regarding the relative capability of a
corporate entity to service its debt obligations in time.
Rating can be given to a financial security (e.g. bond), a company or even to a
country.
As per SEBI, credit rating is an opinion regarding securities of an issuer, expressed in
the form of standard symbols or in any other standardised manner, assigned by a
credit rating agency.

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 ASSET SECURITISATION
As the name suggests, it is the process of converting receivables or cash flows from
an asset or a group of assets into financial securities (or asset-backed securities)
through financial engineering. The securities so formed are backed by the respective
assets.
Example: Mortgage-backed security (MBS)
Various financial institutions convert their loans into marketable securities with the
help of Special Purpose Vehicle (SPV).

TAKEOUT FINANCING
Take out financing scheme aims to purchase infrastructure loans given by the
commercial banks from their book by specially created infrastructure lending
institutions. Hence, the commercial banks need not hold such loans as they have
long gestation periods. This protects the bank from facing problem of asset-liability
mismatch.
E.g. Takeout financing by IIFCL

FACTORING
It is a form of financing where a business sells its accounts receivables to a third party called
factor (e.g. a bank) at a discount. This is usually used when a company is in immediate need
of cash.

MERCHANT BANKING
The services provide by a merchant banker such as fundraising activities (e.g. IPO, FPO),
underwriting, financial advising, market making, portfolio management, etc come under the
domain of merchant banking.

PARTICIPATORY NOTES (P-NOTES)

It is an instrument issued by a Foreign Institutional Investor (FII) to an overseas
investor who wishes to invest in Indian stock market without having to register with
SEBI.
They are also called Offshore Derivative Instruments (ODIs).

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 FORENSIC AUDIT
It refers to an examination of a corporation
derive evidence of any illegal financial activity which can be used against the
company in a legal proceeding or a court of law.
The reasons for conducting such an audit can be corruption, asset misappropriation,
financial statement fraud, etc.

CASH RESERVE RATIO (CRR)

It is a fraction of the total Net Demand and Time Liabilities (NDTL) of a Scheduled
Commercial Bank (SCB), that it has to maintain as cash deposit with RBI.
Presently, banks are not paid any interest on behalf of the RBI for parking the
required cash.

STATUTORY LIQUIDITY RATIO (SLR)

It is a fraction of the total Net Demand and Time Liabilities (NDTL) of a Scheduled
commercial bank which it has to keep in liquid assets such as cash, gold and un-
encumbered securities such as T-Bills, dated securities, etc.
In contrast to the CRR, under which banks have to maintain cash with the RBI, the
SLR requires holding of assets in one of the above three categories by the bank
itself.
It is also used as a tool to control liquidity in the market.

SELECTIVE CREDIT CONTROL

It is a qualitative method of credit control used by a central bank.

Under this, the central bank encourages flow of credit only to certain types of
industries and discourages the use of bank credit for certain other purposes.

The Banking Regulation Act, 1949 has given extensive power to the RBI to apply
selective credit control.

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 NON-PERFORMING ASSET (NPA)
An asset becomes non-performing when it ceases to generate income for the bank.
NPA can be defined as a credit facility in respect of which the interest and/ or
(90
days in India).

WILFUL LOAN DEFAULTERS

A wilful defaulter is an entity or a person that has not paid the loan despite having
the capability to pay pack the loan.
As per RBI regulations, wilful default includes:
o Deliberate non-payment of dues despite adequate cash flow and good
networth
o siphoning off of funds to the detriment of the defaulting unit
o assets and proceeds being misutilised
o misrepresentation or falsification of records
o disposal/removal of securities without bank s knowledge
o fraudulent transactions by the borrower

SARFAESI
It stands for Securitisation and Reconstruction of Financial Assets and Enforcement
of Securities Interest Act, 2002.
The act allows the banks as well as other financial institutions of India auction
commercial or residential properties for the purpose of loan recovery.
The act was made to identify and rectify the problem of Non-Performing Assets
(NPAs) through multiple mechanisms.
ARC, the first asset reconstruction company, was established under this act.

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