SAMURAI BONDS: Samurai Bonds are offered in the Japanese domestic
market by a non-Japanese entity. Lower incidence of withholding tax is a
major attraction for raising funds in the Japanese markets. Although
there is only a small quantum of savings between the interest charges of
a straight Libor-linked borrowing and Yen-borrowing linked to a Dollar
swap, the withholding tax factor is what makes a significant difference.
LIQUIDITY ADJUSTMENT FACILITY: Liquidity Adjustment Facility is a
monetary tool used by the RBI to modulate the very short term liquidity
(daily) in the system. It does so through repo(repurchase agreement) and
reverse repo transactions. The RBI uses repo operations in the LAF window
to inject liquidity in the system by buying government securities from
banks. RBI uses the reverse repo to sell out liquidity from the system by
selling government securities to banks. LAF has emerged as the primary
tool for monetary control, interest rate signalling and sterilisation
operations, among others. DEMUTUALISATION: Demutualisation is
a process that changes a mutual or a cooperative association in to a
public company by converting the interests of the members into
shareholdings. These holdings can then be traded like the shares of a
company. The objective of such an exercise is to change the structure of
exchanges that were originally formed as trusts. Demutualisation allows
such associations to conduct commercial business, to make profits like
any other corporate entity. These days demutualisation is being talked of
in the context of the stock exchanges in the country. They have been
asked to demutualise. Demutualisation would allow the exchanges to
appoint a board of directors to look after the day to day operations of
the exchange and ensure that governance and trading interests are in
different hands. INTEREST RATE RISK: Interest rate risk is that
where changes in market interest rates might adversely affect the bank's
net interest income. Generally the risk is more pronounced in those
assets and liabilities which are likely to mature within the current
balance sheet year. In order to evaluate the likely income variability,
the gap report should be generated by grouping the interest rate-
sensitive liabilities, assets and off-balance sheet positions into time
buckets, as per the residual maturity or the next re-pricing period,
whichever is earlier. HOW DID FUTURES TRADING IN FINANCIAL
SECURITIES/ASSETS BEGIN ? Futures trading, which originally emanated
for commodities like agricultural goods later got extended to natural
resources such as metals and further on to foreign currencies. It was
only in the mid-1970s that the futures contracts were applied to other
financial securities like equity stocks. INTERNAL RATE OF RETURN:
Internal Rate of Return (IRR) is the discount rate at which, net present
value of cash inflows and cash outflows is zero. In case of debt
instruments, it is the rate at which the instrument's future cash flows,
discounted back to today, equals its price in a project evaluation, IRR
should be equal to the cost of capital or threshold rate of return
ASSET LIABILITY MANAGEMENT SYSTEM: Asset Liability Management System
or ALM is a system to manage the assets and liabilities of a bank. It
aims at achieving maximum returns while maintaining adequate liquidity at
all times. ALM involves assessment of various types of risks and altering
the asset-liability mix/portfolio in a dynamic way in order to manage
risks REAL EFFECTIVE EXCHANGE RATE: The effective exchange rate
is an indicator to grasp a country's international competitiveness in
terms of its foreign exchange rate, as this cannot be known by examining
individual exchange rates between the domestic and other currencies. Real
Effective Exchange Rate is the product of nominal bilateral exchange rate
between countries and their relative price differentials. It is a trade-
weighted index which gives an indication of a country's export
competitiveness vis-Ã -vis the rest of the world taking into account the
effect of its exchange rate as well as price differentials vis-Ã -vis its
trading partners. In India, the RBI calculates two REER indices, one a 36
country based and the other till recently was a 5 country based REER. In
the current review of the Monetary Policy the RBI has replaced its five-
country indices of REER with new six-currency indices it is also revising
its thirty six-country indices. The new six-currency indices will include
USA, Euro Zone, UK, Japan, China and Hong Kong SAR. The new indices will
also have two new currencies, both Asian - the Chinese Yuan and the Hong
Kong dollar. BANK RATE: Bank Rate (or refinance rate) is the rate
at which RBI allows finance to commercial banks. Bank Rate is a tool used
by RBI for short term purposes. Any revision in Bank Rate is a signal to
banks to revise deposit rates as well as Prime Lending Rate. CAPITAL
TIER - II: Tier II capital, also known as supplementary capital, is
comprised of Property Revaluation Reserve, Undisclosed Reserves, Hybrid
Capital, Subordinated Term Debt and General Provisions. INTERMEDIARY
AGENCIES: The category comprises of state sponsored organisations'
lending to weaker sections. RBI also considers the distributors of
agricultural inputs and implements and agencies involved in assisting the
decentralised sector as intermediary agencies. INTEREST RATE AND
BPLR: Banks are free to determine the interest rate regardless of
the loan size for purchase of consumer durables, against shares and
debentures and other non-priority sector personal loans without needing
to refer to BPLR. STATUTORY LIQUIDITY RATIO: Under Section
24(b) of the Banking Regulation Act, 1949, every bank is required to
maintain at the close of business every day, a minimum proportion of
their Net Demand and Time Liabilities as liquid assets in the form of
cash, gold and unencumbered approved securities. The ratio of liquid
assets to demand and time liabilities is known as Statutory Liquidity
Ratio (SLR), Present SLR is 125%. The RBI is empowered to increase the
SLR upto 40%. IMMUNISATION: The construction of an asset and
liability that are subject of offsetting changes in value.
INDENTURE: A formal agreement establishing the terms of a Bond
Issue. INDEXED BOND: Bond whose payments are linked to an index
such as a consumer price index INDEX FUND: Investment fund
designed to match the returns on a stock market index. ASSET
STRIPPING: The practice of taking over a company in financial
difficulties and selling each of its assets separately at a profit
without regard for the company's future. Such an opportunity arises when
a company is trading at a loss or making poor profits although its asset
value is high. In the process of disinvestment, there is often a fear
that the party to whom the shares are being sold might strip the company
of its assets thereby adversely affecting its shareholders. To prevent
this, often a shareholders' agreement is drawn up to prevent asset-
stripping post-divestment. For e.g. in India, when Jessop and Company was
being disinvested in 2000, an agreement was drawn up to prevent any
private sector party from stripping Jessop and Company of its assets.
Submitted by A. Gauri Sankar, a retired banker from a nationalized bank
in India, he had served as a director in a Rural Self Employment Training
Institute. Has a postgraduate degree - MBA, apart from BSc, CAIIB, PGDMM,
PGDFM, PGDOM, PGDHRM. He is a writer for articles on banking, self
improvement and education. His articles are available at
gaurisankars@blogspot.com. He is a trainer for banking subjects and he is
also a trainer for soft skills. He can be contacted at:
gausan51@gmail.com. He is presently living at Chennai in India
Related Articles -
SAMURAI BONDS, LAF; DEMUTUALISATION, IRR; ALM,
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