CHAPTER: 2 BANKING TERMINOLOGY

ACCRUAL (Accumulation) BASIS

 Accounting system in which revenues and expenses are
recognized in the period in which they arise, regardless
of when the cash for the revenue or the expenditure
actually occurs.
 Accrual accounting is the only basis of accounting
approved under generally accepted accounting
principles, and is used by public companies and most
privately owned companies.
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ACCRUED INTEREST
 Interest earned, though not credited or otherwise paid.
 Interest earned by a deposit account may be added to the
account balance or paid by check.
 Bonds pay interest every six months, but interest is
earned (accrued) every month.
 An investor buying a bond midway between interest
payment dates must pay the seller any interest accrued
from the last payment date up to, but not including, the
settlement date.
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CASH BASIS
 Cash basis accounting system in which revenues are
recognized when cash is received and expenses when
they actually are paid.

BILLS PAYABLE
 Obligations of a firm

 A bank's indebtedness to other banks

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REPURCHASE AGREEMENT
 Contract to sell and subsequently repurchase securities at a
specified date and price.
 Central Banks engage in repurchase agreements when it buys
government securities from dealers, who agree to repurchase them
by a specified date and at a specified price.
 Buying Treasury securities through repos adds reserves to the
banking system
BANKING TERMINOLOGY
NEPAL CLEARING HOUSE LTD. (NCHL)
 Public limited company established on 23rd December 2008 (9th
Mangsir 2065) under the leadership and guidance of NRB
 Equity participation from NRB, commercial banks, development banks,
finance companies and Smart Choice Technologies (SCT).
 NCHL-ECC System provides means to electronically transfer cheque
images through a secure medium thus completely replacing the
traditional physical routine of moving paper-cheques among the banks
and clearing house, which has resulted in significant reduction of tedious
and time consuming manual process of cheque clearing, both for the
banks and for the customers.
 Individual banks and financial institutions are enrolled within NCHL as
participating members and are responsible for their clearing operations
through the NCHL-ECC System.
BANKING TERMINOLOGY
BILLS COLLECTION
 Presentment of Instruments (cheque, drafts, and other negotiable
instruments to the point of origin, and receiving payment from the
paying bank.

BILLS PURCHASE
 Instruments (cheque, drafts and other negotiable instruments) purchased
by the B&FIs in order to provide funded or non-funded facility to the
client on the basis of bills purchase.

BILLS PURCHASE DISCOUNTED

 Instruments (cheque, drafts and other negotiable instruments) purchased
by the B&FIs in discounted order to provide funded or non-funded
facility to the client on the basis of bills purchase.
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OFF-BALANCE SHEET ITEMS
 Obligations that are contingent liabilities of a bank, and thus do
not appear on its balance sheet.

CONTINGENT LIABILITY
 Financial obligation of a bank that is dependent on future events
or actions of another party.
 It includes bank guarantees, letters of credit, financial derivative
instruments like options, futures, swaps and forward contracts.
 These are reported as off-balance sheet liabilities in a bank's
report.
BANKING TERMINOLOGY
LEAD BANK
 Bank arranging a loan syndication, in which several banks buy
participations.
 The lead bank collects a management fee for assembling the
syndicate and arranging the financing terms.

MARGIN CALL
 Call demanded by a lender to a borrower for additional funds or
collateral to offset position losses in a margin account.
 If a bank loan has been secured by securities, the lender may make
margin call if the value of the securities goes down below the
specified benchmark.
 When the margin call is made, the customer is asked to post more
BANKING TERMINOLOGY
BRIDGE LOAN
 Short-term loan to cover a home buyer's financing costs when
selling one house and purchasing another.
 The loan provides funds to buy a new house before proceeds are
available from sale of the old house.
 In corporate finance, interim (temporary) financing covering the
time lag between redemption of a bond or commercial paper
issue, and replacement by a new one.
 Bridge loans, commonly replacing short-term debt with longer
term financing, are an integral part of corporate restructuring,
mergers, and leveraged buy-outs.
 Banks and insurance companies supply funds to pay off old debts
before proceeds are raised from new debt or issuance of stock.
 Also known as gap financing or swing loan.
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TRUST RECEIPT (TR Loan)
 Written agreement used extensively in letter of credit financing,
often extended to importer of goods.
 The buyer promises to hold the property received in the name of
the bank arranging the financing, although the bank retains title to
the goods.
 Trust receipts allow an importer to take possession of the goods
for resale before paying the issuing bank.
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COLLATERAL
 Asset pledged as security to ensure payment or performance of an
obligation.
 In bank lending, it is generally something of value owned by the
borrower.
 If the borrower defaults, the asset pledged may be taken and sold
by the lender to fulfill completion of the original contract.
 Collaterals are broadly classified into movable and immovable.

 When bank assets converted into marketable securities in the

secondary are securitized, or market, the principal and interest
payments serve as collateral for the securities offered for sale to
investors.
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PLEDGE
 Transfer or assignment of assets to secure payment of an obligation.

 If the borrower offers stocks, bonds, or other securities as collateral, the

lender generally takes possession or is assigned ownership of the
collateral until the loan is paid.

HYPOTHECATION
 If the borrower turns over the property (collateral) to the lender, who
holds it in safekeeping, the action is referred to as a pledge
 On the other hand, if the borrower retains possession, but gives the
lender the right to sell the property in event of default, it is a true
hypothecation.
BANKING TERMINOLOGY
INSOLVENCY
 Inability to pay debts as they mature, or as obligations become due
and payable.
 A person may still have an excess of assets over liabilities, but be
insolvent if unable to convert assets into cash to meet financial
obligations.
 A financial institution, such as a bank, generally is considered to
be insolvent if its ratio of capital to assets is at, or close to, zero, or
if its capital assets, including common stock, are of such poor
quality that its continued existence is uncertain.
BANKING TERMINOLOGY
FORECLOSURE
 Legal proceeding initiated by a creditor to take possession of
collateral securing a defaulted loan.
 Some countries allow lenders to reclaim property by simply
declaring the borrower has defaulted, a process known as strict
foreclosure.
 Most countries require lenders to file a foreclosure suit and obtain
a judgment before seizing and auctioning off a borrower's
property.
 Proceeds from a foreclosure sale are applied first to pay off the
mortgage debt and foreclosure expenses, with the remainder, if
any, going to the borrower.
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Non Banking Assets (NBA)
 In the process of doing business, banks provide various
loans and advances.
 In order to secure such loans, banks normally will take
collaterals.
 In case of default by borrowers to pay the loan, banks
will try to recoup their loans by auctioning such
collaterals.
 However such auctions sometimes may not be successful
due to either no bidding or inappropriate bid price being
offered.
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 In that case banks normally will transfer such collaterals
into their own name.
 Banks can own such collaterals in two different ways: as
normal assets or as non banking assets.
 If banks decide to retain it as normal assets, they will not
be required to dispose it, however, they will have to
make provisions of depreciation from their profit.
 In case banks decide to keep the collateral as non
banking assets, no such depreciations will be required,
but the banks will have to dispose such non banking
assets within 5 years.
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WRITE OFF
 Accounting process whereby a loan determined to be a worthless
asset is removed from the books as an earning asset and charged to
the LOAN LOSS RESERVES account.
 Process of removing a BAD DEBT or uncollectible loan from the
balance sheet.
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Write back
 In case of default by the borrower of the loan, banks will have to
make provisions of loan loss.
 However, in the case of subsequent recovery of such loans and
advances, then the banks will reverse such loan loss provisions.
 This is known as write back in the banking terminology.
 Because, the initial fund for loan loss provisions will go from the
bank profit, the subsequent such write back also naturally will go
into the profit of the bank.
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Letter of Credit
 A letter of credit (LC), also known as a documentary credit,
bankers commercial credit, is a payment mechanism used in
international trade to perform the same economic function as a
guarantee, by allocating risk undertaken by contracting parties.
 A letter of credit primarily achieves this by creating a written
commitment from a bank on behalf of one party that payment be
made to a third-party, provided that the terms and conditions stated
therein have been met. Any documents tendered which are outlined
in the letter of credit, the third party will be paid by the bank.[1][2] A
letter of credit is extremely common within international trade and
goods delivery, where the reliability of contracting parties cannot be
readily and easily determined. Its economic effect is to introduce a
bank as underwriting the credit risk of the buyer paying the
seller for goods.
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Guarantee
 Guarantee is a most commonly designates a private transaction by
means of which one person, to obtain some trust, confidence or credit
for another, engages to be answerable for him. It may also designate a
treaty through which claims, rights or possessions are secured.
Types of Guarantee:
 Bid Bond Guarantee- Used for bidding purposes where the bidder
provides the guarantee issued by the bank to the seller of the assets.
 Performance Bond Guarantee- Used for performance of a contract
where the contractor provides the guarantee issued by the bank to the
owner of the contract for the fulfillment of a project/contact.
 Advance Payment Guarantee-Used against the security of advance
payment received by contractor in order to safeguard the contract
provider.
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Funded Facility: The client is provided credit facility in which financial
transactions are conducted on cash basis.
Non-funded Facility: The client is provided credit facility in which
financial transactions are conducted on non-cash basis, banks deals with
documents only like Letter of Credit, Guarantee, Forward Contracts ,
Dervicates etc.
Cost of Fund: Average cost of Deposit & Borrowings in LCY & FCY.
Interest Yield: Average interest income from the loan & investment.
Base Rate: Actual Cost to the bank (Cost of Fund, Cost of maintaining
CRR, Cost of maintaining Statutory Liquidity Reserve, Operation Cost,
Return of Assets (Flat: 0.75%)
Cash Reserve Ratio (CRR): Every B&FIs should maintain cash reserve of
4% of total deposit in NRB for the liquidity in zero percent interest and
the same shall be used if the bank is in liquidity crisis.
Statutory Liquidity Ratio (SLR): Every B&FIs should maintain SLR of
10% of total LCY deposit in order to maintain the liquidity in the bank
i.e. investment in bonds, development bonds, Treasury Bills, issued by
Nepal Government, CRR, Cash at Vault, investment in international
financial institutions bonds issued in NPR are considered under SLR.
BANKING TERMINOLOGY
Single Obligor Limit (SOL): B&FIs can provide loans (funded and non-funded)
of maximum limit of 25% of Core Capital to single borrower, group, firm,
company or inter-related parties, 30% to productive sectors and 50% to
National Prioritize Sectors like Hydropower Electricity, Transmission Line &
Cable Cars.
Inter-related Parties:
1. If a company has investment of 25% or more than 25% in another company, then
both company falls under same group.
2. If a individual is living under joint family, then all the family members are
considered a single group or divided/separated husband or wife, son, daughter,
adopted son or daughter, father, mother, step-mother and dependent brother,
sister.
3. If an individual or company has ownership has 25% or more than 25% stake in
another company.
4. If an individual is working as Chairman, CEO, MD in the company even he has
less than 25% ownership in the company.
5. Company classified under single group. (Chaudhary Group, Golchha Group,
Khetan Group etc.)
6. If an individual/institutions has provided personal guarantee to other
individual/institutions.
7. Loan taken from a single collateral.
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Multiple Banking: If an individual/institution is availing credit facilities
(funded or not funded) in more than one financial institution licensed by
NRB.
Pari-passu: It is a legal agreement between loan taker (creditor) and B&FIs to
have equal rights on the security pledged, if the creditor defaults the loan then
the banks will have proportionate charge over security (pledge, hypothecated
or assignment of bills and receivables) against their respective credit
exposures.
Revolving Credit Facility: It is the type of credit facility especially provided to
finance working capital in which maximum maturity of 1 year is provided in
which the client has been given the rights to withdraw or deposit cash under
prescribed limit. Under this facility the client does not have to repay principal
in fixed period time. For Example: Overdraft Facility.
Non-Revolving Credit Facility: It is the type of credit facility especially
provided to finance capital expenditure (generation of capital good items) in
which maximum tenure of 10 year is provided on terminating basis in which
the client will repay the loan in EMI & EQI. For Example: Term Loan, Home
Loan, Auto Loan etc.