Glossary of Terms J-S

Market Liability Ratio

 Inter-bank and money market deposit liabilities to Average Total Assets

Net Interest Income ( NII)

 The NII is the difference between the interest income and the interest expenses.

Net Interest Margin

Net interest margin is the net interest income divided by average interest earning assets.

Net Non-Interest Income

 The differential (surplus or deficit) between non-interest income and non-interest expenses as a percentage to average total assets.

Net operating profit 

 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. 

Operational Risk 

The revised BASEL II framework offers the following three approaches for estimating capital charges for operational risk:
1) The Basic Indicator Approach (BIA): This approach sets a charge for operational risk as a fixed percentage (“alpha factor”) of a single indicator, which serves as a proxy for the bank’s risk exposure.
2) The Standardised Approach (SA): This approach requires that the institution separate its operations into eight standard business lines, and the capital charge for each business line is calculated by multiplying gross income of that business line by a factor (denoted beta) assigned to that business line.
3) Advanced Measurement Approach (AMA): Under this approach, the regulatory capital requirement will equal the risk measure generated by the banks’ internal operational risk measurement system. In India, the banks have been advised to adopt the BIA to estimate the capital charge for operational risk and 15% of average gross income of last three years is taken for calculating capital charge 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)

Retained earnings

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)

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. 

Restructuring

 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

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
The notional amount of the asset is multiplied by the risk weight assigned to the asset to arrive at the risk weighted asset number. Risk weight for different assets vary e.g. 0% on a Government Dated Security and 20% on a AAA rated foreign bank etc

Scenario Analysis

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.

Securitization

 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.  

Slippage Ratio
(Fresh accretion of NPAs during the year/Total standard assets at the beginning of the year)*100 

SLR

 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

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.

Substandard Assets

 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)
Supervisory review process envisages the establishment of suitable risk management systems in banks and their review by the supervisory authority. The objective of the SRP is to ensure that the banks have adequate capital to support all the risks in their business as also to encourage them to develop and use better risk management techniques for monitoring and managing their risks.