|Insurance Terms Information Tech A – I J-S|
|Financial Professional Corner – Glossary of Terms|
|Liquid Assets Liquid assets consists of: cash, balances with RBI, balances in current accounts with banks, money at call and short notice, inter-bank placements due within 30 days and securities under “held for trading” and “available for sale” categories excluding securities that do not have ready market.
Market Liability Ratio
Inter-bank and money market deposit liabilities to Average Total Assets
The NII is the difference between the interest income and the interest expenses.
Net interest margin is the net interest income divided by average interest earning assets.
The differential (surplus or deficit) between non-interest income and non-interest expenses as a percentage to average total assets.
Operating profit before provision minus provision for loan losses, depreciation in investments, write off and other provisions.
Off Balance Sheet Exposure
Off-Balance Sheet exposures refer to the business activities of a bank that generally do not involve booking assets (loans) and taking deposits. Off-balance sheet activities normally generate fees, but produce liabilities or assets that are deferred or contingent and thus, do not appear on the institution’s balance sheet until and unless they become actual assets or liabilities.
Operating profit before provisions
Net of total income and total operating expenses.
The revised BASEL II framework offers the following three approaches for estimating capital charges for operational risk:
Profit after tax (PAT)
Profit before tax – provision for tax.
Profit before tax (PBT)
(Net operating profit +/- realized gains/losses on sale of assets)
Profit after tax – dividend paid/proposed.
Return on Asset (ROA)- After Tax
Return on Assets (ROA) is a profitability ratio which indicates the net profit (net income) generated on total assets. It is computed by dividing net income by average total assets. Formula- (Profit after tax/Av. Total assets)*100
Return on equity (ROE)- After Tax
Return on Equity (ROE) is a ratio relating net profit (net income) to shareholders’ equity. Here the equity refers to share capital reserves and surplus of the bank. Formula- Profit after tax/(Total equity + Total equity at the end of previous year)/2}*100
Return on Investment (ROI)
An estimate of the financial benefit (the return) on money spent (the investment) on a particular initiative.
What Does Return On Investment – ROI Mean?
A performance measure used to evaluate the efficiency of an investment or to compare the efficiency of a number of different investments. To calculate ROI, the benefit (return) of an investment is divided by the cost of the investment; the result is expressed as a percentage or a ratio.
The return on investment formula:
ROI = (Gain from Investment – Cost of Investment) / Cost of Investment
In the above formula “gains from investment”, refers to the proceeds obtained from selling the investment of interest. Return on investment is a very popular metric because of its versatility and simplicity. That is, if an investment does not have a positive ROI, or if there are other opportunities with a higher ROI, then the investment should be not be undertaken.
Keep in mind that the calculation for return on investment and, therefore the definition, can be modified to suit the situation -it all depends on what you include as returns and costs. The definition of the term in the broadest sense just attempts to measure the profitability of an investment and, as such, there is no one “right” calculation.
For example, a marketer may compare two different products by dividing the gross profit that each product has generated by its respective marketing expenses. A financial analyst, however, may compare the same two products using an entirely different ROI calculation, perhaps by dividing the net income of an investment by the total value of all resources that have been employed to make and sell the product.
This flexibility has a downside, as ROI calculations can be easily manipulated to suit the user’s purposes, and the result can be expressed in many different ways. When using this metric, make sure you understand what inputs are being used.
A restructured account is one where the bank, grants to the borrower concessions that the bank would not otherwise consider. Restructuring would normally involve modification of terms of the advances/securities, which would generally include, among others, alteration of repayment period/ repayable amount/ the amount of installments and rate of interest. It is a mechanism to nurture an otherwise viable unit, which has been adversely impacted, back to health.
Revaluation reserves are a part of Tier-II capital. These reserves arise from revaluation of assets that are undervalued on the bank’s books, typically bank premises and marketable securities. The extent to which the revaluation reserves can be relied upon as a cushion for unexpected losses depends mainly upon the level of certainty that can be placed on estimates of the market values of the relevant assets and the subsequent deterioration in values under difficult market conditions or in a forced sale.
Risk Weighted Asset
A method in which the earnings or value impact is computed for different interest rate scenario.
Second loss facility
Credit enhancement providing the second or subsequent tier of protection to an SPV against potential losses.
A process by which a single asset or a pool of assets are transferred from the balance sheet of the originator (bank) to a bankruptcy remote SPV (trust) in return for an immediate cash payment.
Statutory liquidity ratio is in the form of cash (book value), gold (current market value) and balances in unencumbered approved securities.
Special Purpose Vehicle (SPV)
An entity which may be a trust, company or other entity constituted or established by a ‘Deed’ or ‘Agreement’ for a specific purpose
Stress testing is used to evaluate a bank’s potential vulnerability to certain unlikely but plausible events or movements in financial variables. The vulnerability is usually measured with reference to the bank’s profitability and /or capital adequacy.
A substandard asset would be one, which has remained NPA for a period less than or equal to 12 months. Such an asset will have well defined credit weaknesses that jeopardize the liquidation of the debt and are characterised by the distinct possibility that the banks will sustain some loss, if deficiencies are not corrected
Supervisory Review Process (SRP)