De-Jargonize

Base rate:

Base Rate is the minimum rate at which a bank can lend to its customer with added cost.

Bank rate:

The rate at which the banks borrow money from the RBI without selling its securities. It is generally for a long period of time. The bank has to pay an interest on it.

CRR Rate:

Cash reserve Ratio (CRR) is the amount of funds that the banks have to keep with RBI. If RBI decides to increase the percent of this, the available amount with the banks comes down. RBI is using this method (increase of CRR rate), to drain out the excessive money from the banks(Current 6%).

SLR:

 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 un-encumbered approved securities. The ratio of liquid assets to demand and time liabilities is known as Statutory Liquidity Ratio (SLR).  RBI is empowered to increase this ratio up to 40%.  An increase in SLR  also restrict the bank’s leverage position to pump more money into the economy(Current 24%).

Repo rate:

 Is the rate at which a bank borrows money from the RBI for a short period of time by selling its securities (financial assets) with an agreement to repurchase it at a later date at a predetermined price.(Current 8.25%)

Reverse Repo rate:

The rate at which RBI takes a loan from the other banks. Over a short duration of time.(Current 7.25%)

Syndicated loans:

 It is a loan offered by a group of lenders (called as a syndicate) who work together to provide funds to the single borrower. The borrower can be a corporation, a large project or a government. This is done to spread the risk of borrower default across the multiple lenders or institutional investors

Letter Of Credit:

 A binding document that a buyer can request from his bank in order to guarantee that the payment for goods will be transferred to the seller. Basically, a letter of credit gives the seller reassurance that he will receive the payment for the goods. In order for the payment to occur, the seller has to present the bank with the necessary shipping documents confirming the shipment of goods within a given time frame. It is often used in international trade to eliminate risks such as unfamiliarity with the foreign country, customs, or political instability.

Zero coupon bonds:

Is a bond that (1) pays no interest but instead is sold at a deep discount on its par-value, or (2) an interest paying bond that has been stripped of its coupon which is sold separately as a security in its own right. Bondholder’s income is determined by the difference between the bond’s redemption on maturity and its purchase price. Also called non-interest bearing Bond, zero interest bonds, or zero rated bond. See also deep discount bond.

Non coupon bond:

There is no interest on these bonds. You only get the money when you sell the bond and their price keeps on fluctuating. They are available at a highly discounted rate. They are for a specific period. Also called as deep discount bond, non interest bearing bond, zero interest bond.

Capital reserve:

It is the reserve that is created to deal general and unspecified contingencies such as inflation and is not distributed as dividend to share holder

General reserve:

It is created by transferring certain amount of undistributed profit for funding expansion, acquisitions, paying of dividends, discharging of liabilities, redemption of securities .

Money at call and short notice:

Money at call is a loan that is repayable on demand.  Money at short notice is repayable within 14 days of serving a notice.

Concepts in the India Case

Disinvestment

A process where the government reduces its holding in business and moves out of doing so. It encourages private participation and divests its stake in business.

Deregulation

Price decontrols – moving from controlled and administered prices to a market driven, competitive price scenario.

Liberalization

A process of opening up the economy, freeing its market and allowing the competitive processes to function.

Economic Reforms

The process of transforming from a close, controlled economy to a market driven, competitive state. Reforms are in all sectors – goods and financial markets.

By, Dr. Archana Pillai, Shivam Bashin, Lakhan Thakkar