RBI-Central Banking glossary on Funds and Investment

CASA deposit and Bulk deposit:

CASA stands for Current Account and Savings Account in banking parlance. Besides in India, the term CASA is popularly is used in West Asia and South-east Asia countries. The high-cost deposits or bulk deposits are those deposits which are solicited by banks at rates higher than card rates’. Card rates are those published by banks for various kinds of deposits.

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CASA deposit and Bulk deposit:

Liquid Assets:

The land, building, machinery etc. are known as non-liquid assets because it can take months for a person or company to receive cash from the sale of such assets. Unlike non-liquid assets, the liquid assets also known as quick assets are cash in hand or the other assets which are cash equivalent. In simple words, liquid asset can be described as all those assets which can be converted to cash quickly (with little impact on its value) in the event of financial emergency.

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Liquid Assets

Banking Book:

In accounting jargon banking book is referred to registers of accounts that cover assets and liabilities of the bank. The assets of banks include the assets that are expected to be held to maturity. These assets listed in banking books are usually not marked to market; they are accounted at their actual purchase (acquisition) price or book value.

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How assets in the trading book and banking book are distinguished?

Trading Book:

The trading book of the banks refers to assets held by a bank that are regularly traded by the bank. These assets are required to be marked to the market to comply Basel II & III framework. The value-at-risk for assets in the trading book is measured on a 10-day time horizon under Basel II norms in order to determine the capital requirement.

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How assets in the trading book and banking book are distinguished?

Venture Capital Fund:

Venture capital is a type of private equity, a form of investment funds set up for the purpose of investing in startup and small- to medium-sized enterprises with strong growth potential but do not have access to capital markets.

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Venture Capital Fund

Held to maturity (htm):

The entire investment portfolio of the banks (including SLR securities and non-SLR securities) should be classified under three categories viz. ‘Held to Maturity’, ‘Available for Sale’ and ‘Held for Trading’.

Held-to-maturity securities are debt security investments which the holder has the intention and ability to hold them until specific date of maturity. The investments classified under HTM need not be marked to market and will be carried at acquisition cost, as subsequent changes in market value are ignored because the return is predetermined. Therefor this type of security is reported at amortized cost on a bank’s balance sheet.

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What is HTM – held to maturity?

Available for Sale:

The Available for Sale (AFS) are debt and equity securities purchased and held by banks principally for trading (buying and selling) purpose in the short term usually less than one year.

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What is AFS available for sale?

Inflation indexed bonds or IIBs:

The inflation-linked bonds, or IIBs, are securities primarily issued by sovereign governments, designed to help protect investors from inflation. The investments in IIBs, the capital increases with the inflation, and actual interest is better than originally promised, unlike term deposits in banks, where a depositor receives a pre-defined static interest rate at the end of the tenure.  However in case of deflation, interest payments decrease with the negative inflation but capital does not decline below the face value of bonds.

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What are Inflation-indexed bonds or IIBs?

Difference between HTM and HFT securities:

Contrasting HTM securities which the holder has the intention to hold them until specific date of maturity ‘Held for Trading’(HFT) investment are the securities that a holder   purchases with the intent of selling within a short period of time, with the sole intent of generating short term profits by taking advantage of short-term price / interest rate movements.

What is the difference between HTM and HFT securities?

GILTS or Gilt edged securities:

The term ‘Gilt’ is of British origin. The British called ‘Gilt edged securities’ to the bonds and the securities issued by the British Government (through Bank of England) on behalf of His/Her Majesty’s Treasury, whose paper certificates had a gilt edge. The term Gilt edged securities is used in India for the Government securities like Central Government loans and State Government loans because they carry no risk similar to that of British Government securities. In US these type securities are referred as US Treasury securities.

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What are Gilts or Gilt-edged securities?

Gilt Account Holders (GAHs):

Gilt Account Holder (GAH)/Constituent means an entity or a person including ‘a person resident outside India’ maintaining a “Gilt Account” with a Custodian. [“Custodian” is an entity permitted by the Reserve Bank of India to open and maintain Constituent Subsidiary General Ledger Account with the Public Debt Office of RBI]. A GAH is entitled to open only one Gilt Account having a unique account number with any of the Custodians. The GAHs permitted by RBI include NBFCs, Provident Funds, Pension Funds, Mutual Funds, Insurance Companies, Cooperative Banks, Regional Rural Banks, Trusts, Corporates, and Individuals etc.

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Who are Gilt Account Holders (GAHs)?

Investment Fluctuation Reserve (IFR):

Banks are required to build up of adequate reserves for mark to market (MTM) losses on investments held in AFS and HFT with effect from the year 2018-19. The provisioning for each of these quarters may be spread equally over up to four quarters, commencing with the quarter in which the loss is incurred. The annual provision requirement on account of depreciation in the AFS and HFT categories is known as Investment Fluctuation Reserve (IFR)

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Investment Fluctuation Reserve (IFR)

Debenture:

Debentures are issued by corporates including NBFCs for raising resources to their upcoming expenses or their business expansions. In the other words debentures are unsecured loans taken by the companies from the public (other than accepting deposits) by issuing instruments of debt, acknowledging money lent and guaranteeing repayment with interest. The investors subscribe in debentures only on the basis of the good name and credit history of the issuer company without the backing of any collateral. Debentures are typically in two varieties.  The companies which issue debentures may give an option to investors convert the debentures on maturity into equity shares of the company either in full or part. Depending upon convertibility, these debentures are classified as fully convertible debentures or partly convertible debentures.

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Convertible and non-convertible debentures explained

Bonds:

A bond is a debt instrument issued by a company or the Government for the purpose of raising capital by way of borrowing from the investors. The investors in the bonds are actually debt holder (lenders/creditors). The issuer of bonds is obliged to pay bond holders the interest (the coupon) at the pre-decided rate and to repay the principal on a due date termed as the maturity date.

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What are Bonds?

Coupon:

Coupon rate (or simply a coupon) is the periodic rate of interest to be paid by bond issuer to the bond holders. The coupon rate is calculated on the bond’s face value (or par value) not on the issue price or market value of the bond.

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What is the coupon rate?

Yield to maturity (YTM) or Yield:

In simple words, if an investment is held till its maturity date, the rate of return that it will generate will be Yield to Maturity. YTM is the estimated internal rate of return earned by an investor who buys the bond today at the market rate on the assumption that it will be held until its maturity date with all payments made as scheduled and reinvested at the same rate.

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What is Yield to maturity (YTM) or Yield?

Foreign Currency Convertible Bond:

A foreign currency convertible bond (FCCB) is a special kind of convertible bond issued in a currency different than the issuer’s domestic currency. Multinational companies and governments routinely issue bonds denominated in various currencies to benefit from lower borrowing costs, and also match their currency inflows and outflows. FCCB gives investors an opportunity to convert these bonds at a fixed conversion price or as per a pre-determined pricing formula. A convertible bond is a mix between a debt and equity instrument. Like any other type of bond, an FCCB makes regular coupon and principal payments till a certain date. When the bonds mature, if the shares are trading above that price, bondholders can convert their bonds into equity. Else, they settle for redemption of bonds if equity conversion isn’t more beneficial.

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What is a ‘Foreign Currency Convertible Bond’?

Convertible Bonds:

Convertible bonds are exceptional securities that have features of both bonds and equity options. The holders of convertible bonds have the opportunity to convert bonds held by them into specified number of company’s equity shares during validity period for options mentioned in the bonds.

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Convertible bonds

Floating Bond;

A floating rate bond does not have a pre-determined coupon rate. The Bond Issuer Company resets the coupon rate regularly on the basis of fluctuation in the prevailing market rates of interest or some other external measures. The investors of floating bonds buy them in anticipation of hike in the reference rate so that they earn a higher coupon rate in future.

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Floating rate bonds

Negative Bonds:

Negative Bonds:  The investors of negative bonds are those investors who are ready to accept slightly less than the purchase value of the bonds on maturity of bonds, in anticipation of prolonged period of deflation.

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Negative bonds

Foreign Bonds:

A foreign bond is a bond issued by a foreign company or institution in a country which is outside its home country. The foreign bond is usually denominated in the currency of where it is expected to be sold.

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Foreign Bonds

Euro Bonds:

Eurobond is a generic term that applies to any bond issued without a specific jurisdiction. It does not refer to bonds issued only in Europe. “Eurobond” is a bond issued by a company denominated in a currency other than that of its country. For example, if an Indian company issued a U.S. dollar currency bond in Japan that is known as USD-denominated Eurobonds.

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Euro Bonds:

Global bonds:

Global bonds are bonds that are issued and traded in two or more markets at the same time. These bonds are normally issued by Multinational Corporations or Governments offering the bond to a large number of international investors. The bond is denominated in one market’s currency.

Foreign-Pay Bond

A foreign-pay bond is a bond issued by a local company in its local country that is denominated in a foreign currency. For example, a USD -denominated bond issued by Infosys in India would be a foreign-pay bond.

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Foreign-Pay Bond

Overseas Rupee denominated bonds under ECB

Any investor from a Financial Action Task Force (FATF) compliant jurisdiction is considered as recognized investor who can invest in Rupee denominated bonds. All corporate or corporate body, Real Estate Investment Trust (REIT) and Infrastructure Investment Trusts (REITs) are eligible to borrow under ECB policy

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Overseas Rupee denominated bonds under ECB

What is Inflation indexed bonds or IIB?

The inflation-linked bonds, or IIBs, are securities primarily issued by sovereign governments, designed to help protect investors from inflation. The investments in IIBs, the capital increases with the inflation, and actual interest is better than originally promised, unlike term deposits in banks, where a depositor receives a pre-defined static interest rate at the end of the tenure.  However in case of deflation, interest payments decrease with the negative inflation but capital does not decline below the face value of bonds.

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What is Inflation-indexed bonds or IIB?

Sovereign Gold Bond

The Reserve Bank of India, in consultation with Government of India, issues Sovereign Gold Bonds from time to time in tranches. Each of those tranches will be kept open for a specified period for investors to buy through banks, Stock Holding Corporation of India Limited (SHCIL), designated Post Offices and recognised Stock Exchanges viz., National Stock Exchange of India Limited and Bombay Stock Exchange

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Advantage of Sovereign Gold Bond over Physical form of gold