Glossary of Financial and Banking Terms
A
Acceptances
Promise to pay, created when the drawee of a time draft, stamps or writes the word ‘accepted’ above his signature and a designated payment date.
Accounting Policies
The specific principles, bases, conventions, rules and practices adopted by an entity in preparing and presenting Financial Statements.
Accrual Basis
Recognizing the effects of transaction and other events when they occur without waiting for receipt or payment of cash or its equivalent.
Actuarial Gain/Loss
Gains or loss arising from the difference between estimates and actual experience in the entity’s pension plan.
Amortization
The systematic allocation of the depreciable amount of an intangible asset over its useful life.
Amortized Cost
The amount at which the financial asset or financial liability is measured at initial recognition minus principal prepayments, plus or minus the cumulative amortization using the effective interest rate method of any difference between that initial amount and the maturity amount and minus any reduction (directly or through the use of an allowance account) for impairment or uncollectability.
Amounts Due to Customers
Money deposited by accountholders. Such funds are recorded as liabilities.
Asset and Liability Committee (ALCO)
A Risk-Management Committee in a bank that generally comprises the senior management of the institution. The ALCO’s primary goal is to evaluate, monitor and approve practices relating to risk due to imbalances in the capital structure. Among the factors considered are liquidity risk, interest rate risk, operational risk and external events that may affect the Bank’s forecast and strategic Balance Sheet allocations.
Associate
An entity, including an unincorporated entity such as a partnership, over which the investor has significant influence and that is neither a subsidiary nor an interest in a joint venture.
Available-for-Sale Financial Assets
A debt or equity security that is purchased with the intent of selling before it reaches maturity, or selling prior to a lengthy time period in the event the security does not have a maturity.
Average Weighted Deposit Rate (AWDR)
AWDR is calculated by the Central Bank weekly, based on Commercial bank’s lending rates offered to their prime customers during the week.
B
Basel II
The capital adequacy framework issued by the Basel Committee on Banking Supervision in the form of the “international convergence of capital measurements and capital standards”.
Basel III
The Basel Committee on banking supervision’s details of strengthened global regulatory standards on Bank capital adequacy and liquidity.
Basis Point (BP)
One hundredth of a percentage point, i.e. 100bp equals 1%, used in quoting movements in interest rates, security yields, etc.
Bills for Collection
A bill of exchange drawn by an exporter usually at a term, on an importer overseas and brought by the exporter to his bank with a request to collect the proceeds.
C
Capital Adequacy Ratios
The relationship between capital and risk-weighted assets as defined in the framework developed by the Bank for International Settlements (BIS) and as modified by the Central Bank of Sri Lanka to suit local requirements.
Capital Gain (Capital Profit)
The gain on the disposal of an asset calculated by deducting the cost of the asset from the proceeds received on its disposal.
Capital Reserves
Capital reserves consist of revaluation reserves arising from revaluation of properties owned by the Bank and Reserve Fund set aside for specific purposes defined under the Banking Act No. 30 of 1988 and shall not be reduced or impaired without the approval of the Monetary Board.
Capitals
Refer to any stock of value such as customer base, staff strength, relationships with the community etc. that will increase, decrease or transform through the activities of an organization and that will help it generate earnings in future.
Cash Equivalents
Short-term highly liquid investments that are readily convertible to known amounts of cash and which are subject to an insignificant risk of changes in value.
Cash Generating Unit (CGU)
The smallest identifiable group of assets that generates cash inflows that are largely independent of the cash inflows from other assets or groups of assets.
Collectively Assessed Loan Impairment Provisions
Also known as portfolio impairment provisions. Impairment assessment on a collective basis for homogenous groups of loans that are not considered individually significant and to cover losses that has been incurred but has not yet been identified at the reporting date. Typically assets within the Retail Banking business (housing, personal, vehicle loans etc.) are assessed on a portfolio basis.
Commitments
Credit facilities approved but not yet utilized by the clients at the date of the Statement of Financial Position.
Consolidated Financial Statements
Consolidated Financial Statements are the Financial Statements of a group in which the assets, liabilities, equity, income, expenses and cash flows of the parent and its subsidiaries are presented as those of a single economic activity.
Contingencies
A condition or situation existing at the date of the Statement of Financial Position where the outcome will be confirmed only by occurrence or non-occurrence of one or more future events.
Contractual Maturity
Contractual maturity refers to the final payment date of a loan or other financial instrument, at which point all the remaining outstanding principal will be repaid and interest is due to be paid.
Control
Control is the power over an investee, exposure or rights, to variable returns from its involvement with the investee, and the ability to use its powers over the investee to affect the amount of the investor’s returns.
Corporate Governance
The process by which corporate entities are governed. It is concerned with the way in which power is exercised over the management and direction of entity, the supervision of executive actions and accountability to owners and others.
Correspondent Bank
A bank in a foreign country that offers banking facilities to the customers of a bank in another country.
Cost Method
A method of accounting whereby the investment is recorded at cost. The Statement of Profit or Loss reflects income from the investment only to the extent that the investor receives distributions from accumulated net profits of the investee arising subsequent to the date of acquisition.
Cost to Income Ratio
Operating expenses excluding impairment for loans and receivables and other losses as a percentage of total operating income.
Country Risk
The risk that a foreign government will not fulfil its obligations or obstructs the remittance of funds by debtors, either for financial reasons (transfer risk) or for other reasons (political risk).
Credit Ratings
An evaluation of a corporate’s ability to repay its obligations or the likelihood of not defaulting, carried out by an independent rating agency.
Credit Risk Mitigation
A technique to reduce the credit risk associated with an exposure by application of credit risk mitigates such as collateral, guarantee and credit protection.
Credit Risk
Credit risk or default risk is most simply defined as the potential that a borrower or counterparty will fail to meet its obligations in accordance with agreed terms and conditions.
Currency Swaps
The simultaneous purchase of an amount of currency for spot settlement and the sale of the same amount of the same currency for forward settlement.
Customers Deposits
Money deposited by account holders. Such funds are recorded as liabilities.
D
Debt Restructuring/ Rescheduling
This is when the terms and provisions of outstanding debt agreements are changed. This is often done in order to improve cash flow and the ability of the borrower to repay the debt. It can involve altering the repayment schedules as well as debt or interest charge reduction.
Deferred Taxation
Sum set aside for tax in the Financial Statements that may become payable/receivable in a financial year other than the current financial year.
Delinquency
A debt or other financial obligation is considered to be in a state of delinquency when payments are overdue. Loans and receivables are considered to be delinquent when consecutive payments are missed. Also known as ‘Arrears’.
Depreciation
The systematic allocation of the depreciable amount of an asset over its useful life.
Derecognition
Removal of a previously recognized financial asset or financial liability from an entity’s Statement of Financial Position.
Derivatives
A derivative is a financial instrument or other contract, the value of which changes in response to some underlying variable (e.g., an interest rate).
Discount Rate
A rate used to place a current value on future cash flows. It is needed to reflect the fact that money has a time value.
Dividend Cover
Profit after tax divided by gross dividends. This ratio measures the number of times dividend is covered by current year’s distributable profits.
Dividend Yield
Dividend earned per share as a percentage of its market value.
Documentary Credits
Commercial letters of credit provided for payment by a bank to the named beneficiary usually the seller of merchandise, against delivery of documents specified in the credit.
E
Earnings per Ordinary Share (EPS)
Profit attributable to ordinary shareholders divided by the weighted average number of ordinary shares in issue.
Economic Value Added (EVA)
A measure of productivity which takes into consideration cost of total invested equity.
Effective Interest Rate (EIR)
Rate that exactly discounts estimated future cash payments or receipts through the expected life of the financial instruments or when appropriate a shorter period to the net carrying amount of the financial asset or financial liability.
Effective Tax Rate
Provision for taxation including deferred tax divided by the profit before taxation.
Embedded Derivatives
An embedded derivative is a component of a hybrid (combined) instrument that also includes a non-derivative host contract with the effect that some of the cash flows of the combined instrument vary in a way similar to a stand-alone derivative.
Employee Share Ownership Plan (ESOP)
A method of giving employees shares in the business for which they work.
Equity Method
This is a method of accounting whereby the investment is initially recognized at cost and adjusted thereafter for the post-acquisition changes in the investor’s share of net assets of the investee. The profit or loss of the investor includes the investor’s share of the profit or loss of the investee.
Equity risk
The risk arising from positions, either long or short, in equities or equity-based instruments, which create exposure to a change in the market price of the equities or equity instruments.
Events after the Reporting Period
Events after the reporting period are those events, favourable and unfavourable, that occur between the end of the reporting period and the date when the Financial Statements are authorized for issue.
Ex-Dividend Date
A classification of trading shares when a declared dividend belongs to the seller rather than the buyer. A stock will be give ex-dividend status if a person has been confirmed by the Company to receive the dividend payment. The date on or after which a security is traded without a previously declared dividend or distribution.
Expected Loss (EL)
A regulatory calculation of the amount expected to be lost on an exposure using a 12-month time horizon and downturn loss estimates. EL is calculated by multiplying the Probability of Default (a percentage) by the Exposure as Default (an amount) and Loss Given Default (a percentage).
Exposure
A claim, contingent or position which carries a risk of financial loss.
F
Fair Value
The amount for which an asset could be exchanged or a liability settled, between knowledgeable, willing parties in an arm’s length transaction.
Fair Value Adjustment
An adjustment to the fair value of a financial instrument which is determined using a valuation technique (Level 2 and Level 3) to include additional factors that would be considered by a market participant that are not incorporated within the valuation model.
Fair Value Through Profit or Loss
A financial asset/liability: Acquired/ incurred principally for the purpose of selling or repurchasing it in the near term, part of a portfolio of identified financial instruments that are managed together and for which there is evidence of a recent actual pattern of a short-term profit-taking, or a derivative (except for a derivative that is a financial guarantee contract).
Finance Lease
A contract whereby a lessor conveys to the lessee the right to use an asset for rent over an agreed period of time which is sufficient to amortize the capital outlay of the lessor. The lessor retains ownership of the asset but transfers substantially all the risks and rewards of ownership to the lessee.
Financial Assets
Any assets that is cash, equity instrument of another entity, a contractual right to receive cash or contractual right to receive another financial asset from another entity.
Financial Instruments
A financial instrument is any contract that gives rise to both a financial asset in one entity and a financial liability or equity instrument in another entity.
Financial Liabilities
A contractual obligation to deliver cash or another financial asset to another entity or to exchange financial assets or financial liabilities with another entity under conditions that are potentially unfavourable to the entity.
Financial Risk
The risk of a possible future change in one or more of a specified interest rate, financial instrument price, commodity price, foreign exchange rate, index of prices or rates or credit rating or credit index or other variable that the variable is not specific to the party to the contract.
Foreign Exchange Income
The realized gain recorded when assets or liabilities denominated in foreign currencies are translated into Sri Lankan rates which differ from those rates in force at inception or on the previous reporting date. Foreign exchange income also arises from trading in foreign currencies.
Foreign Exchange Profit
Profit earned on foreign currency transactions arising from the difference in foreign exchange rates between the transaction/last date of the Statement of Financial Position and the settlement/date of the Statement of Financial Position. Also arises from trading in foreign currencies.
Forward Exchange Contract
Agreement between two parties to exchange one currency for another at a future date at a rate agreed upon today.
G
Gain/Loss
Gain or loss arising from the difference between estimates and actual experience in a company’s pension plans and gratuity funds.
Global Reporting Initiative (GRI)
GRI is a leading organization in the sustainability field. GRI promotes the use of sustainability reporting as a way for organizations to become more sustainable and contribute to sustainable development.
Going Concern
The Financial Statements are normally prepared on the assumption that an entity is a going concern and will continue in operation for the foreseeable future. Hence, it is assumed that the entity has neither the intention nor the need to liquidate or curtail materially the scale of its operations.
Goodwill
An asset representing the future economic benefits arising from other assets acquired in a business combination that are not individually identified and separately recognized.
Gross Dividend
The portion of profits distributed to the shareholders including the tax withheld.
Group
A Group is a parent and all its subsidiaries and associates.
Guarantees
Three party agreement involving a promise by one party (the guarantor) to fulfil the obligations of a person owing a debt if that person fails to perform.
H
Hedging
A strategy under which transactions are effected with the aim of providing cover against the risk of unfavourable price movements (Interest rate, Prices and Commodities, etc.).
Held-for-Trading
Debt and equity investments that are purchased with the intent of selling them within a short period of time (usually less than one year).
Held-to-Maturity
Investments and debt securities that a company has the ability and intent to hold until maturity.
High Quality Liquid Assets (HQLA)
HQLA are assets that can be easily and immediately converted into cash at little or no loss of value that can be readily sold or used as collateral to obtain funds in a range of stress scenarios and are unencumbered, i.e. without legal, regulatory or operational impediments.
Historical Cost
Historical cost is the original nominal value of an economic item.
I
Impaired Loans
Loans where identified impairment provisions have been raised and also include loans which are collateralized or where indebtedness has already been written down to the expected realizable value. The impaired loan category may include loans, which, while impaired, are still performing.
Impairment charges for Loan Losses
Amounts set aside against possible losses on loans, receivables and other credit facilities as a result of such facilities becoming partly or wholly uncollectible.
Impairment
This occurs when recoverable amount of an asset is less than its carrying amount.
Individually Significant Loans
Exposures which are above a certain threshold decided by the Bank’s management which should be assessed for objective evidence, measurement and recognition of impairment on an individual basis.
Intangible Asset
An intangible asset is an identifiable non-monetary asset without physical substance.
Integrated Reporting
A methodology of reporting an organization's strategy, governance, financial performance and prospects in relation to the creation of value over the short, medium and long term in its economic, social and environmental context.
Interest Cover
A ratio showing the number of times interest charges is covered by earnings before interest and tax.
Interest Margin
Net interest income expressed as a percentage of average interest earning assets.
Interest Rate Risk
The risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in market interest rates.
Interest Rate SWAP
An agreement between two parties where one stream of future interest payments is exchanged for another stream of future interest payments based on a specified principal amount.
Interest Spread
This represents the difference between the average interest rate earned and the average interest rate paid on funds.
Investment banking
A specific division of banking related to the creation of capital for other companies. Investment banks underwrite new debt and equity securities for all types of corporations. Investment banks also provide guidance to issuers regarding the issue and placement of stock.
Investment Property
A real estate property that has been purchased with the intention of earning a return on the investment (purchase), either through rent (income), the future resale of the property or both.
J
Joint Control
Joint control is the contractually agreed sharing of the control over an economic activity, and exists only when the strategic financial and operating decisions relating to the activity require the unanimous consent of the parties sharing control.
Joint Venture
A joint venture is a contractual arrangement whereby two or more parties undertake an economic activity that is subject to joint control.
K
Key Management Personnel
Key management personnel are those persons having authority and responsibility for planning, directing and controlling the activities of the entity, directly or indirectly, including any Director (whether Executive or otherwise) of that entity and key employees who are holding directorships in subsidiary companies and other key employees who meet the criteria mentioned above.
L
LCR Definition
With the introduction of Basel III rules on Liquidity Risk Management LCR has been identified as a key policy measure to further strengthen the liquidity risk management to promote a more resiliant banking sector. LCR is expected to improve the banking sector’s ability to absorb shocks arising from financial and economic stress, thus, reducing the risk of spillover from the financial sector to the real economy. LCR represents the Ratio of Stock of high quality liquid assets available to total net cash outflows over next 30 calendar days.
Letter of Credit (L/C)
Written undertakings by a Bank on behalf of its customers (typically an importer), authorizing a third party (e.g. an exporter) to draw drafts on the Bank up to a stipulated amount under specific terms and conditions. Such undertakings are established for the purpose of facilitating international trade.
Liquid Assets
Assets that are held in cash or in a form that can be converted to cash readily, such as deposits with other banks, Bills of Exchange, Treasury Bills and Bonds.
Liquidity Coverage Ratio
Ratio of stock of high quality liquid assets available to total net cash outflows over next 30 calendar days. LCR is expected to improve the banking sector’s ability to absorb shocks arising from financial and economic stress, thus, reducing the risk of spillover from the financial sector to the real economy.
Liquidity Risk
The risk that an entity will encounter difficulty in meeting obligations associated with financial liabilities.
Loans and Receivable
Conventional loan assets that are unquoted (originated or acquired).
Loan-to-Value Ratio
The loan-to-value (LTV) ratio is a financial term used by lenders to express the ratio of a loan to the value of an asset purchased. The term is commonly used to represent the ratio of the first mortgage lien as a percentage of the total appraised value of real property.
Loss Given Default (LGD)
The estimated ratio (percentage) of the loss on an exposure to the amount outstanding at default (EAD) upon default of counterparty.
M
Market Capitalization
Number of ordinary shares in issue multiplied by the market value of a share as at a date.
Market Risk
This refers to the possibility of loss arising from changes in the value of a financial instrument as a result of changes in market variables such as interest rates, exchange rates, credit spreads and other asset prices.
Materiality
The relative significance of a transaction or an event, the omission or misstatement of which could influence the economic decisions of users of Financial Statements.
Minority Interest
The interest of individual shareholders, in a company more than 50% of which is owned by a holding company.
N
Net Assets Value per Ordinary Share
Shareholders’ funds excluding preference shares, if any, divided by the number of ordinary shares in issue.
Net Interest Income (NII)
The difference between the amounts a bank earns on assets such as loans and securities and the amount it pays on liabilities such as deposits, refinance funds and inter-bank borrowings.
Net Interest Margins (NIM)
Net interest income expressed as a percentage of average interest earning assets.
Net Stable Funding Ratio (NSFR)
The ratio of available stable funding to required stable funding over a one year time horizon, assuming a stressed scenario. Available stable funding would include items such as equity capital, preferred stock with a maturity of over one year and liabilities with an assessed maturity of over one year. The Basel III rules require this ratio to be over 100% with effect from 2018. The NSFR is still subject to an observation period and review to address any unintended consequences.
Non-Controlling Interest
Equity in a subsidiary not attributable, directly or indirectly, to a Parent.
Non-Performing Loans (NPLs)
A loan or a receivable placed on cash basis (i.e. Interest income is only recognized when cash is received) because, in the opinion of management, there is reasonable doubt regarding the collectability of principal or interest.
Non-Performing Loans Cover (NPL Cover)
Cumulative loan provision as a percentage of total non-performing loans (net of interest in suspense).
Nostro Account
A bank account held in a foreign country by a domestic bank, denominated in the currency of that country. Nostro accounts are used to facilitate the settlement of foreign exchange trade transactions.
NPL Ratio
Total non-performing loans and receivables (net of interest in suspense) divided by total loans and receivables portfolio (net of interest in suspense).
O
Open Credit Exposure Ratio
Total net non-performing loans and advances expressed as a percentage of shareholders' fund.
Operational Risk
This refers to the risk of loss resulting from inadequate or failed internal processes, people and systems or from external events.
P
Parent
A parent is an entity that has one or more subsidiaries.
Past Due
A financial asset is past due when a counterparty has failed to make a payment when contractually due.
Power
The power is the existing rights that give the current ability to direct the relevant activities.
Price Earnings Ratio (P/E Ratio)
Market price of a share divided by earnings per share.
Probability of Default (PD)
The probability that an obligor will default on an obligation within a given period of time.
Provision Cover
Total provisions for loan losses expressed as a percentage of net non-performing loans and receivables before discounting for provisions on non-performing loans and receivables.
Prudence
Inclusion of a degree of caution in the exercise of judgment needed in making the estimates required under conditions of uncertainty, such that assets or income are not overstated and liabilities or expenses are not understated.
R
Related Parties
Parties where one party has the ability to control the other party or exercise significant influence over the other party in making financial and operating decisions, directly or indirectly.
Related Party Transactions (RTP)
RPT is a transfer of resources, services or obligations between a reporting entity and a related party, regardless whether a price is charged.
Remittances
A remittance is a transfer of money by a foreign worker to an individual in his or her home country.
Repurchase Agreement
Contract to sell and subsequently repurchase securities at a specified date and price.
Retained Earnings
Reserves that are set aside for future distribution and investments.
Return on Average Assets (ROA)
Profit after tax divided by the average assets.
Return on Average Equity (ROE)
Net profit for the year, less preference share dividends, if any, expressed as a percentage of average ordinary shareholders’ equity.
Revaluation Reserve
Part of the shareholders’ equity that arises from changes in the current value of property, plant & equipment.
Revenue Reserve
Reserves set aside for future distribution and investment.
S
Segment Reporting
Segment reporting indicates the contribution to the revenue derived from business segments such as banking operations, leasing operations, stock broking and securities dealing, property and insurance.
Segmental Analysis
Analysis of financial information by segments of an entity specifically, the different industries and the different geographical areas in which it operates.
Shareholders’ Funds
Total of stated capital and capital and revenue reserves.
Significant Influence
If an entity holds, directly or indirectly (e.g. through subsidiaries), 20% or more of the voting power of the investee, it is presumed that the entity has significant influence, unless it can be clearly demonstrated otherwise.
Single Borrower Limit (SBL)
33% of the regulatory capital base.
Specific Impairment Provisions
Impairment is measured individully for loans that are individually significant to the Bank
Statutory Reserve Fund
A capital reserve created as per the provisions of the Banking Act No. 30 of 1988.
Subsidiary
An entity, including an unincorporated entity such as a partnership, which is controlled by another entity (known as the Parent).
Substance Over Form
The consideration that the accounting treatment and the presentation in Financial Statements of transactions and events should be governed by their substance and financial reality and not merely by legal form.
Swaps
The simultaneous purchase of an amount of a currency for spot settlement and the sale of the same amount of the same currency for forward settlement.
T
Tier I Capital
Core capital representing permanent shareholders' equity and reserves created or increased by appropriations of retained earnings or other surpluses.
Tier II Capital
Supplementary capital representing revaluation reserves, general provisions and other capital instruments, which combine certain characteristics of equity and debt such as hybrid capital instruments and subordinated term debts.
Total Capital
Capital base is summation of the core capital (Tier I) and the supplementary capital (Tier II).
Transaction Costs
Incremental costs that is directly attributable to the acquisition, issue or disposal of a financial asset or financial liability.
Transfer Pricing Arrangement
Transfer pricing involves the terms and prices at which related parties sell (or should sell) goods or services to each other. When the parties are located in different taxing jurisdictions, opportunities exist for the movement of income to a lower-taxing jurisdiction. A transfer pricing arrangement is developed to combat potential losses of income tax revenue.
U
Unit Trust
An undertaking formed to invest in securities under the terms of a trust deed.
Useful Life
Useful life is the period over which an asset is expected to be available for use by an entity or the number of production or similar units expected to be obtained from the asset by an entity.
V
Value Added
Value of wealth created by providing banking and other related services less the cost of providing such services.
Value-at-Risk (VaR)
A measure of the loss that could occur on risk positions as a result of adverse movements in market risk factors (e.g. rates, prices, volatilities) over a specified time horizon and to a given level of confidence.
Vostro Account
A local currency account maintained by a local bank for a foreign (correspondent) bank. For the foreign bank, it is a Nostro account. The domestic bank acts as custodian or manages the account of a foreign counterpart.
Y
Yield-to-Maturity
The discount rate at which a security’s present value of future cash flows will be equal to the security’s current price.
