Glossary Of Financial Terms starting with C

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List of Financial Terms (Alphabet Wise)

Call Money A term used for funds borrowed and lent mainly by banks for overnight use. This is a market, which banks access in order to meet their reserve requirements or to cover a sudden shortfall in funds and the interest rate is determined by supply and demand conditions. The situation arises when banks face an unforeseen shortfall in funds, perhaps because they have invested a large amount in other ASSETS, e.g., GOVERNMENT SECURITIES and loans or due to heavy withdrawals by depositors for different reasons. High call money rates are an indication of such a mismatch or of a deliberate policy to substantially borrow short-term and lend long-term. The more stringent requirements relating to the Cash Reserve Ratio from January 1995, particularly the severe penalty for default, has also forced banks to borrow short-term; this explains the sudden but short-lived jumps in the call money rate.

An alternative source for banks would be to do REPOS deals with the Discount and Finance House of India (DFHI) or Securities Trading Corporation of India (STCI), using the excess security holdings. Incidentally, DFHI is also an active intermediary in the call money market. Besides, certain FINANCIAL INSTITUTIONS and corporate entities (through PRIMARY DEALERS) have also been permitted to participate as lenders. The announcement by the Reserve Bank of India (RBI) in April, 1995 to permit private sector MUTUAL FUNDS to lend in the call money/NOTICE MONEY/BILL REDISCOUNTING market may alleviate the situation considerably. Incidentally, this measure also provides these entities a facility for parking short-term funds. Ultimately, though, the RBI intends to make the call money/notice money/term money market into a purely inter-bank market, with the additional involvement of Primary Dealers. Accordingly, the REPOS market is being widened and developed for the benefit of non-bank participants, who may be permitted to do repos deals (i.e., borrowing funds) as well. Further, the underlying eligible securities will include PSU BONDS, corporate BONDS, and others in dematerialized form. Moreover, the participation of non-banks in the call/notice money market is to cease by the end of 1999.

Capital Adequacy Ratio A requirement imposed on banks to have a certain amount of capital in relation to their ASSETS, i.e., loans and investments as a cushion against probable losses in investments and loans. In simple terms, this means that for every Rs.100 of risk-weighted assets, a bank must have ` X in the form of capital. Capital is classified into Tier I or Tier II. Tier I comprises share capital and disclosed reserves, whereas Tier II includes revaluation reserves, hybrid capital and subordinated debt. Further, Tier II capital should not exceed Tier I capital. The risk weightage depends upon the type of assets. For example, it is zero on government guaranteed assets, 20 percent on short-term bank claims on 100 percent on private sector loans. (Risk weights on GOVERNMENT SECURITIES are being introduced.) The capital adequacy ratio is percentage of total capital funds to the total risk-weighted assets.

The capital risk-weighted assets ratio system introduced by the Reserve Bank of India (RBI) in 1992, in accordance with the standards of the Bank for International Settlements (BIS), had set the deadlines indicated below. Subsequently, RBI had to extend the deadline in some cases up to March 1997.
Institutions Norm Date
Foreign banks operating in India 8% 31-Mar-93
Indian banks with branches abroad 8% 31-Mar-95
All other banks 8% 31-Mar-96


The ratio is being raised to 9%, to take effect from March 31, 2000.

The impact of this system on Indian banks was reflected in the increased demand for capital and changes in the composition of assets. The trend of fund-raising by banks through equity and other issues, as well as the accumulation of GOVERNMENT SECURITIES should be seen in this perspective.

To shore up the capital position of public sector banks, the Government of India has injected several thousand crore rupees in the last few years. This infusion is reflected in the banks' investment in Government BONDS known as 'Recapitalization Bonds'. Incidentally, capital adequacy norms have also been announced for term-lending institutions and NON-BANKING FINANCIAL COMPANIES. See also NARASIMHAM COMMITTEE (1998).

Capital Asset Pricing Model (CAPM) A theoretical construct, developed by William Sharpe and John Lintner, according to which, a security's return is directly related to its SYSTEMATIC RISK, that is, the component of risk which cannot be neutralized through DIVERSIFICATION. This can be expressed as :

Expected rate of return – Risk-free rate of return + Risk premium

Further, the model suggests that the prices of ASSETS are determined in such a way that the RISK PREMIUMS or excess returns are proportional to systematic risk, which is indicated by the BETA coefficient. Accordingly, the relationship

Risk Return on Risk-free (Beta of premium market portfolio return security)

Determines the risk premium. Thus, according to the model, the expected rate of return is related to the beta coefficient. This relation is portrayed by the SECURITY MARKET LINE.

Capital Market Line This is a graphical line which represents a linear relationship between the expected return and the total risk (standard deviation) for efficient PORTFOLIOS of risky and riskless securities. When lending and borrowing possibilities are considered, the capital market line becomes the EFFICIENT FRONTIER starting from the riskless rate for the point of tangency on the efficient frontier of portfolios.

Capital Reserves The reserves created in certain ways, that include the sale of FIXED ASSETS at a profit. These amounts are regarded as not available for distribution as DIVIDENDS.

Cash Reserve Ratio (CRR) A legal obligation on all SCHEDULED COMMERCIAL banks excluding REGIONAL RURAL BANKS to maintain certain reserves in the form of cash with the Reserve Bank of India (RBI). The reserves, to be maintained over a fortnight, are computed as a percentage of a bank's net demand and time LIABILITIES. Banks earn interest on eligible cash balances thus maintained and it contributes to their profitability. However, such interest payment tends to attenuate monetary control, and hence these outflows need to be moderated if the situation so demands. An alternative that has been suggested is to fix a lower level of reserves and pay a modest interest.

Central Bank The premier bank in a country that discharges the responsibilities of issuing currency, managing MONEY SUPPLY by appropriate measures in order to maintain price stability and economic growth, maintaining the exchange value of the domestic currency, superintendence and regulation of the commercial banks, etc. In India, the Reserve Bank of India (RBI) is the Central Bank. RBI, therefore, carries out the duties mentioned above, and also acts as a banker to the Central and State Governments. Besides this, it also manages the public debt, i.e., fund-raising programmes of the government.

Chakravarty Committee A committee set up by the Reserve Bank of India (RBI), under the chairmanship of S. Chakravarty to appraise the working of the monetary system and suggest measure for improving the effectiveness fo monetary policy in promoting economic development. In its report submitted in April 1985, the committee made several recommendations to reform the financial system including :

  1. MONETARY TARGETING as a policy tool, that is, controlled increase in money supply to maintain price stability while facilitating increase in real output.
  2. Removal of ceilings on interest rates on bank loans to the non-priority sectors and on call loans.
  3. Upward revision on interest rates on TREASURY BILLS and GOVERNMENT SECURITIES. Selling marketable securities to the public (instead of the RBI) at attractive YIELDS would avoid the excessive creation of money.
Chelliah Committee A committee on tax reforms constituted by the Government of India in 1991, under the chairmanship of Raja Chelliah. Its recommendations encompass the areas of corporate taxes, customs and excise duties, and personal income taxes. Among its numerous suggestions aimed at improving revenue buoyancy and simplicity are the following :

  1. Reduction of the corporate tax rate on domestic companies progressively to 40 percent.
  2. Introducing of the system of 'Presumptive Taxation' for groups such as small traders, contractors, transport operators and others.
  3. Simplification of the excise duty structure and a move towards a Value Added Tax (VAT) system covering commodities and services.
  4. Substantial reductions in import tariffs and excise duties in a phased manner.
  5. Levying taxes on the service sector to cover stock-brokers, telephone services and insurance contracts among others.
Chore Committee A working group appointed by the Reserve Bank of India (RBI), in 1979, to review the operation of the CASH CREDIT SYSTEM, to suggest improvements in the same, as well as to propose alternative types of credit facilities in order to ensure greater discipline and a more productive use of credit. The group headed by K. B. Chore of the RBI made several recommendations including :
  1. To administer lending under method II of the TANDON COMMITTEE norms.
  2. In assessing credit requirements, banks should appraise and fix separate limits for the normal level and for peak level needs.
  3. Simplification of the Quarterly Information System (QIS) and penalty for delay in submitting the reports.
  4. Establishment of a discount house in India.
Chit Fund This is a non-banking financial intermediary. A chit fund scheme typically involves the collection of periodic subscriptions from enrolled members, which is then disbursed as a loan to a member. The member is selected either by lot or through an auction. The promoter is also called the 'Foreman' and the capital given out is called 'Prize Money'.

Closed-end Fund A scheme of an investment company in which a fixed number of shares are issued. The funds so mobilized are invested in a variety of vehicles including shares and DEBENTURES, to achieve the stated objective, e.g., capital appreciation for a GROWTH FUND or current income for an INCOME FUND. After the issue, investors may buy shares of the fund from the secondary market. The value of these shares depends on the NET ASSET VALUE of the fund, as well as supply and demand for the fund's shares. Examples are Mastershare and Ind Ratna.

Commercial Paper (CP) A short-term, unsecured PROMISSORY NOTE issued by BLUE CHIP companies. Like other MONEY MARKET instruments, it is issued at a DISCOUNT on the FACE VALUE and is freely marketable. Commercial Paper may be issued to any person including individuals, banks and companies. The Reserve Bank of India (RBI) has laid down certain conditions regarding issue of CPs. The issuing company must have a certain minimum tangible NET WORTH, working capital limit, asset classification, etc. and the paper must have a CREDIT RATING of P2, A2 or PR-2. Moreover, the rating must not be over two months old at the time of issue. From November 1996, the extent of CP that can be issued by all eligible corporates has been raised to 100 percent of the working capital credit limit. As for restoration of the limit consequent on redemption of CP, banks have been given freedom to decide on the manner of doing so.

Commodity Futures A standardized contract guaranteeing delivery of a certain quantity of a commodity (such as wheat, soybeans, sugar or copper) on a specified future date, at a price agreed to, at the time of the transaction. These contracts are standardized in terms of quantity, quality and delivery months for different commodities. Contracts on certain commodities such as pepper and coffee are already traded in India. Moreover, the Kabra Committee in 1994 recommended that futures trading be permitted in several other commodities including rice, cotton, Soya bean and castor oil. Further, in an interesting development, a committee appointed by the Reserve Bank of India under the chairmanship of R.V. Gupta has recommended that Indian corporates be allowed to hedge in offshore futures and OPTIONS markets in a phased manner. The committee submitted its report in November 1997. (See also Appendix II).

Consortium A term generally used in banking: it refers to a group of banks associating for the purpose of meeting the financial requirements of a borrower, such as WORKING CAPITAL or a term loan. In business, the term applies to a group of companies, national or international, working together as a joint venture, sharing resources and having interlocking financial agreements.

Contingent Liabilities The liabilities that may arise as a result of some future event which, though possible, is deemed unlikely; for example, a court judgement on a pending lawsuit may impose a financial payment on a company.

Corporate Governance The manner in which a company is managed. The term, Corporate Governance connotes the importance of responsibility and accountability of a company's management to its shareholders and other stakeholders, viz., employees, suppliers, customers and the local community. Hence it calls for ethics, morals and good practices in running a company. Good corporate governance would be reflected in generally good performance, clean business practices, improved disclosure and sound policies relating to capital expenditure, financing and dividend payment, which will enhance shareholders' wealth.

Cost of Capital The weighted average cost for long-term funds raised by a company from different sources such as term loans, DEBENTURES/BONDS, PREFERENCE SHARES, EQUITY SHARES and retained earnings.

Cost of Goods Sold Alternatively called the Cost of Sales, it is the sum of total input costs associated with a certain quantity of goods sold. The total input costs include materials used, direct and indirect labour, utilities, and other manufacturing expenses including DEPRECIATION.

Coupon Rate It is the rate of annual interest on the PAR VALUE of DEBENTURES or BONDS that an issuer promises to pay. In India, till a few years ago, coupon rates were subject to a ceiling stipulated by the Controller of Capital Issues. With the removal of the ceiling, issuers have fixed their coupon rates by taking into consideration, market perceptions and expectations. The rate may be fixed or it may be floating in relation to some benchmark.

Credit Rating The exercise of assessing the credit record, integrity and capability of a prospective borrower to meet debt obligations. Credit rating relates to companies, individuals and even countries. In the case of a company's debt instrument, such formal evaluation with the aid of quantitative and qualitative criteria, culminates in the assignment of a letter rating to the security. The instrument could be a DEBENTURE, FIXED DEPOSIT OR COMMERCIAL PAPER. The rating represents in rating agency's opinion at that time on the relative safety of timely payment of interest and principal associated with the particular debt obligation. This opinion rests on the agency's assessment of the willingness and capability of the issuer to meet the debt obligations. The methodology is to examine key factors like the business, the management, regulatory environment, competition and fundamental aspects including the financial position. A high credit rating can help in reducing the interest cost and also facilitate placement of the debt security. The rating agencies in India are Credit Rating and Information Services of India Limited (CRISIL), ICRA, and Credit Analysis and Research (CARE).

A recent development in India is the rating of fixed deposits of banks, STRUCTURED DEBT OBLIGATIONS and securitized debts. Moreover, performance ratings can now be obtained by real estate developers and LPG bottlers. It is expected that ratings will soon be extended to chit funds and MUTUAL FUNDS, Besides, a general credit rating service not linked to any debt issue may be availed of by a company. This service is already offered by Indian rating firms. CIRSIL, for example, calls it Credit Assessment. This rating can be used in negotiations with new bankers, for performance guarantees, etc. International rating agencies also undertake sovereign rating, i.e. of countries.

Credit appraisal also covers individuals. This type of information is useful to consumer credit firms

Cross Currency Option An instrument that confers a contractual right on the purchaser of the OPTION to buy (call) or sell (put) a currency against another currency, e.g., Yen for U.S. dollar. For this privilege, the purchaser pays a cost termed PREMIUM. Incidentally, the terminology applicable to cross currency options is similar to the one for stock options. For instance, the STRIKE PRICE is the contracted exchange rate at which the option buyer buys or sells a currency. The advantages with a cross currency option, (introduced in India in January 1994) as compared to forward and futures deals are that the option buyer is under no obligation to exercise the right; moreover, the maximum possible loss, it at all, becomes known to the option buyer at the outset. Thus, when the direction of a currency's movement is uncertain, a cross currency option may be preferable to a FORWARD CONTRACT.

Current Assets The assets which are expected to be converted into cash or consumed during the 'Operating Cycle' of a business. The operating cycle is the time taken for the sequence of events from the purchase of raw materials to the collection of cash from customers for goods sold. Hence, it is also known as the 'Cash Conversion Cycle'. However, if raw materials are bought on credit, then the cash conversion cycle is shorter than the operating cycle by the period of credit available. Examples of current assets are cash, short-term investments particularly MONEY MARKET securities, raw materials, work-in-process, finished goods, and ACCOUNTS RECEIVABLE.

Current Liabilities The claims against a company that will become due within a year. These are mainly LIABILITIES on account of purchase of materials or services rendered to the firm. Examples include accounts and PROMISSORY NOTES payable, as well as taxes and loan repayments falling due within the year. Current Ratio This ratio is a measure of a company's ability to pay its short-term debts as they become due. It is computed from a BALANCE SHEET by dividing CURRENT ASSETS by CURRENT LIABILITIES. In India, the general norms for this liquidity ratio is 1.33