This page is defines the central banking terminologies for the CAIIB Elective paper’s upcoming 2023 Attempt.



Market discipline Market Discipline seeks to achieve greater transparency through expanded disclosure requirements for banks.
Reducing credit risk Techniques used to mitigate credit risk through an exposure that is wholly or partially collateralized by cash or securities or guaranteed by a third party.
Reverse mortgage security A bond-type security in which security is provided by a pool of mortgages. Proceeds from the underlying mortgages are used to pay interest and principal payments.
Derivative A derivative instrument derives its value from the underlying product. There are basically three derivativesa) 

Forward contract – A forward contract is an agreement between two parties to buy or sell an agreed quantity of a commodity or financial instrument at an agreed price with delivery on an agreed future date. 

Future Contract – is a standardized forward contract tradable on the stock exchange, which is concluded on the stock exchange. Unlike futures, a forward contract is not transferable or exchange-traded, its terms are not standardized, and there is no exchange of margin. 

Option – an option is a contract which gives the buyer the right to buy (call option) or sell (put option) an asset, commodity, currency or financial instrument at an agreed rate (strike price) on or before an agreed date (expiration or settlement date). The buyer pays the seller an amount called a premium in exchange for this right. This premium is the price of an option.

Swaps – This is an agreement to exchange future cash flows at predetermined intervals. Typically, one cash flow is based on a variable cost and the other is based on a fixed cost.

Duration Duration measures the price volatility of securities having fixed income. It is often used to compare interest rate risk between securities having different coupons and maturities. It is defined as the weighted average time to cash flows of the bond, where the weights are nothing but the present value of the cash flows themselves. It is expressed in years. The duration of a fixed-income security is always shorter than the time to maturity, except for zero-coupon securities, where they are the same.
Modified duration Modified Duration = Macaulay Duration/ (1+y/m) where ‘y’ is the yield (%), ‘m’ is the number of times compounding occurs per year. For example, if interest is paid thrice a year m=3. Modified duration is a measure of the percentage change in a bond’s price for a 1% change in yield.
Non-Performing Assets (NPAs) An asset, including a leased asset, becomes non-performing when it ceases to generate income for the bank.
Net NPA Gross NPA – (interest balance in suspense account + DICGC/ECGC claims received and held pending adjustment + partial payment received and held in suspense account + total reserves held).
Coverage ratio Equity – net NPA / (total assets minus intangible assets).
Slip ratio (Fresh accrual of NPAs during the year / Total standard assets at the beginning of the year)*100
Restructuring A restructured account is an account where the bank provides concessions to the borrower that the bank would not otherwise consider. Restructuring would normally involve an amendment to the terms of the advances/securities, which would generally include, but are not limited to, a change in the repayment period/amount due/amount and interest rate. It is a mechanism to nurse an otherwise viable unit that has been adversely affected back to health.
Non-standard assets A non-standard asset would be one that has remained NPA for a period less than or equal to 12 months. Such an asset will have well-defined credit weaknesses that threaten the liquidation of the debt, and there is a distinct possibility that the banks will suffer some loss if the weaknesses are not remedied.
Doubtful asset An asset would be classified as doubtful if it remained in the substandard category for 12 months. A loan classified as doubtful has all the weaknesses inherent in assets that have been classified as substandard, with the added characteristic that these weaknesses make collection or liquidation in full – based on currently known facts, conditions and values ​​– highly debatable and unlikely.
A loss asset A non-performing asset is one where a loss has been identified by the bank or internal or external auditors or RBI inspection but the amount has not been fully written off. In other words, such an asset is considered uncollectible and has so little value that its continuation as a bankable asset is not warranted, even though there may be some salvage or recovery value.
Off-balance sheet exposure Off-balance sheet exposures refer to the bank’s business activities, which generally do not include accounting for assets (loans) and accepting deposits. Off-balance sheet activities typically generate fees but create liabilities or assets that are deferred or contingent and therefore do not appear on the institution’s balance sheet until they become actual assets or liabilities.
Current exposure method The credit equivalent amount of a market off balance sheet transaction is calculated using the current exposure method by adding the current credit exposure to the potential future credit exposure of these contracts. The current credit exposure is defined as the sum of the positive market value of the contract. The current exposure method requires a regular calculation of the current credit exposure by marking contracts to market, thereby capturing the current credit exposure. The potential future credit exposure is determined by multiplying the nominal principal amount of each of these contracts irrespective of whether the contract has a zero, positive or negative market value, by the appropriate added factor prescribed by the RBI, as per nature. and the residual maturity of the instrument.
Total income The sum of earned interest/discounts, commissions, exchange, brokerage and other operating income.
Total operating costs The sum of interest expense, personnel costs and other overhead costs.
Operating profit before adjustments Excluding total revenue and total operating expenses.
Net operating profit Operating profit before provisions less provisions for loan losses, write-downs of investments, depreciation and other provisions.
Profit before tax (PBT) (Net operating profit +/- realized gains/losses on sale of assets)
Profit After Tax (PAT) Profit before tax – reserve for tax.
Undivided profit Profit after tax – dividend paid/proposed.
Average yield (Interest Earned and Discount/Average Interest Earning Assets) * 100
Average price (Interest spent on deposits and loans/average interest bearing liabilities) * 100
Return on assets (ROA) – after taxes Return on assets (ROA) is a profitability ratio that indicates the net profit (net income) generated from total assets. 

Formula = (Profit After Tax/Avg. Total Assets)*100

Return on equity (ROE) – after tax Return on equity (ROE) is the ratio of net income (net profit) to equity. Equity here refers to the bank’s capital reserves and surplus. 

Formula = {Profit after tax/(total equity + total equity at the end of the previous year)/2}*100

Addition to equity = Retained earnings / Total capital at the end of the previous year * 100
Net non-interest income The difference (surplus or deficit) between non-interest income and non-interest expenses as a percentage of average total assets.
Net Interest Income (NII) NII is the difference between interest income & interest expense.
Net interest margin Net interest margin is net interest income divided by average interest-bearing assets.
Cost-benefit ratio (efficiency ratio) The cost-to-income ratio reflects the degree to which the bank’s non-interest expenses burden the total net income (total income – interest expense). The lower the ratio, the more efficient the bank. 

Formula = Non-interest expenses / Net total income * 100.


You can also find part 1 of the terminologies right here.

And if you find it hard to understand the above terms, then you are welcome to join the batch of the CAIIB expert team which is highly qualified to help you understand the meaning of these as well as other concepts of Central banking & other papers of Certified Associate of the Indian Institute of Bankers.

You can also find the below very useful application for CAIIB Exam preparation for classes & Mock tests of CAIIB 2023:


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