GLOSSARY OF FINANCIAL / BANKING TERMS

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
To recognise the effects of transactions
and other events as they occur, without
waiting for the receipt or payment of
related cash or its equivalent.

Actuarial Assumptions
An entity’s unbiased and mutually
compatible best estimates of the
demographic and financial variables
that will determine the ultimate cost of
providing post-employment benefits.

Actuarial Gains and Losses
Actuarial gains and losses comprise
the effects of differences between the
previous actuarial assumptions and what
has actually occurred and the effects of
changes in actuarial assumptions.

Actuarial Present Value of Promised
Retirement Benefits
The present value of the expected
payments by a retirement benefit plan to
existing and past employees, attributable
to the service already rendered.

Actuarial Valuation
Fund value determined by computing its
normal cost, actuarial accrued liability,
actuarial value of its assets, and other
relevant costs and values.

Amortisation
The systematic allocation of the
depreciable amount of an asset

over its useful life. In the case of an
intangible asset or goodwill, the term
“amortisation” is generally used instead
of “depreciation”. Both terms have the
same meaning.

Amortised Cost
The amount at which a financial asset or
liability is measured at initial recognition,
minus any repayment of principal,
minus any reduction for impairment
or uncollectibility, and plus or minus
the cumulative amortisation using
the effective interest method of the
difference between that initial amount
and maturity amount.

Anti-Money Laundering (AML)
A set of procedures, laws or regulations
designed to prevent money laundering.
Money laundering is an activity which
aims to disguise the ownership of money
that has an illegal origin such as trading
of drugs, organised crimes, fraud and
terrorism.

Associate Company
A company other than a subsidiary
in which a holding company has a
participating interest and exercises a
significant influence over its operating
and financial policies.

Attrition Rate
A measure of how many employees leave
over a certain period of time.

Average Weighted Deposit Rate
(AWDR)
AWDR is calculated by the Central Bank
of Sri Lanka monthly on the weighted
average of all outstanding interest
bearing deposits of commercial banks
and the corresponding interest rates.

Average Weighted Prime Lending Rate
(AWPLR)

AWPLR is calculated by the Central Bank
of Sri Lanka weekly based on commercial
banks lending rates offered to their prime
customers during the week.

BASEL III
The Basel Committee on Banking
Supervision (BCBS) issued the BASEL III
rules text, which presents the details of
strengthened global regulatory standards
on bank capital adequacy and liquidity.

Basis Points
A unit that is equal to 1/100th of 1%.
Often used in quotation of spreads
between interest rates or to change in
yield in securities.

Bills of Exchange
A signed, written unconditional order
addressed by one person (the drawer)
directing another person (the drawee)
to pay a specified sum of money to the
order of a third person (the payee). The
terms bills of exchange and drafts are
often used interchangeably.

Capital Adequacy Ratio (CAR)
The ratio between capital and risk
weighted assets, as defined under the
framework of risk-based capital standards
developed by the Bank for International
Settlements (BIS) and as modified to suit
local requirements by Central Bank of Sri
Lanka.

Cash Equivalents
Investments / assets that are readily
convertible to cash, subject only to an
insignificant risk of change in their value.

Collectively-Assessed Loan Impairment
Provisions
Impairment assessment which carried out
on a collective basis for homogeneous
groups of loans that are not considered
individually significant, in order to cover
losses that has been incurred but has not
yet been identified at the Reporting date.

Compound Annual Growth Rate
(CAGR)
The year over year growth rate over a
specified period of time.

Common Equity Tier 1 (CET 1)
Common Equity Tier 1 (CET 1) is a
component of Tier 1 capital that consists
mostly of Stated Capital. It is a capital
measure that was introduced as a
precautionary measure to protect the
economy from a financial crisis.

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.

Corporate Governance
The process by which corporations are
directed and controlled. It is concerned
with the rights and responsibilities
among stakeholders used to determine
and control the strategic directions and
performance of the corporation.

Correspondent Banks
A bank in a foreign country that offers
banking facilities to the customers of a
bank in another country.

Cost to Income Ratio
Operating expenses excluding
impairment charge for loans and other
losses, as a percentage of total operating
income.

Country Risk
The credit risk associated with lending
to borrowers within a particular country,
sometimes taken to include sovereign
risk.

Credit Risk
The risk of loss due to non-payment
of a loan or other line of credit (either
the principal or interest or both), by the
borrower or a counterparty.

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.

Dealing Securities
Securities acquired and held with the
intention of reselling them in the short
term.

Debt Equity Ratio
Long-term borrowings divided by
shareholder’s equity.

Deferred Taxation
Sum set aside for tax in the Financial
Statements that will become payable/
receivable in a financial year other
than the current financial year. It arises
because of temporary differences
between tax rules and accounting
conventions.

Defined Benefit Plans
Retirement benefit plans under which
amounts to be paid as retirement
benefits are determined by reference to
a formula usually based on employees’
earning history, tenure of service and
age.

Derivatives
A financial instrument, the price of
which has a strong relationship with an
underlying commodity, currency variable
or financial instrument.

Documentary Letters of Credit (LC)
Written undertakings by a bank on behalf
of its customers (typically an importer),
authorising 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.

Domestic Systemically Important Banks
(D-SIBs)
Systemically Important Banks (SIBs)
are perceived as banks that are “Too
Big To Fail”. D-SIBs are critical for the
uninterrupted availability of essential
banking services to the country’s real
economy even during crisis. The CBSL
has designated Licenced Commercial
Banks with total assets equal to or
greater than Rs. 500 Bn. as D-SIBs

Equity Method
A method of accounting whereby the
investment is initially recorded at cost
and adjusted thereafter for the post
acquisition change in the investor’s
share of net assets of the invested.
The Statement of profit or loss reflects
the investor’s share of the results of
operations of the invested.

Events After the Reporting Date
Events after the Reporting date are
those events, both favourable and
unfavourable, that occur between the
Reporting date and the date when the
financial statements are authorised for
issue.

Exchange Company / House
An overseas location where the Bank’s
representatives provide banking services
as a promotional tool.

Fair Value
The price that would be required to sell
an asset or paid to transfer a liability in
an orderly transaction between market
participants at the measurement date.

Finance Lease
Leases which transfer risks and rewards
of ownership. Title may or may not
eventually be transferred.

GLOSSARY OF FINANCIAL/ BANKING TERMS

Financing Activities
Activities that result in changes in the size
and composition of the equity capital
and borrowings of the entity.

Financial Instruments
Financial instrument is any contract
that gives rise to financial asset of one
entity and a financial liability or equity
instrument of another entity.

Financial Assets Measured at
Amortised Cost
A financial asset is measured at
amortised cost if the asset is held within
a business model whose objective is to
hold assets to collect contractual cash
flows and the contractual terms of the
financial asset give rise on specified
dates to cash flows that are solely
payments of principal and interest on the
principal amount outstanding.

Financial Assets Measured at Fair Value
through Other Comprehensive Income
(FVOCI)
FVOCI include debt and equity
instruments measured at fair value
through other comprehensive income. A
debt instrument is measured at FVOCI, if
it is held within a business model whose
objective is achieved by both collecting
contractual cash flows and selling
financial assets and the contractual
terms of the financial asset give rise on
specified dates to cash flows that are
solely payments of principal and interest
on the principal amount outstanding.

Equity investments may be irrevocably
classified as FVOCI when they meet
the definition of Equity under LKAS 32-
“Financial Instruments: Presentation”,
and are not held for trading.

Financial Assets Measured at Fair Value
through Profit or Loss (FVTPL)
All financial assets other than those
classified at Amortised Cost or FVOCI are
classified as measured at FVTPL. These
are held for trading or managed and their

performance is evaluated on a fair value
basis as they are neither held to collect
contractual cash flows nor held both to
collect contractual cash flows and to sell
financial assets.

Foreclosed Properties
Properties acquired in full or partial
settlement of debts, which will be held
with the intention of resale at the earliest
opportunity.

Foreign Exchange Income
The gain recorded when assets or
liabilities denominated in foreign
currencies are translated into Sri
Lankan Rupees on the Reporting date
at prevailing 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.

Forward Exchange Contracts
Agreements between two parties to
exchange one currency for another at a
future date at a rate agreed upon today.

Global Reporting Initiatives (GRI)
GRI is a leading organisation in the
sustainability field. GRI promotes the
use of sustainability reporting as a way
for organisations to become more
sustainable and contribute to sustainable
development.

Gross Domestic Product (GDP)
The value of all goods and services
produced domestically in an economy
during a specified period, usually a year.
Nominal GDP, adjusted for inflation,
gives GDP in real terms.

Guarantees
Primarily represent irrevocable assurances
that a bank will make payments in
the event that its customer is unable
to perform its financial obligations to

third parties. Certain other guarantees
represent non-financial undertakings such
as bid and performance bonds.

Hedging

A strategy under which transactions
are effected with the aim of providing
cover against the risk of unfavourable
price movements (interest rate, foreign
exchange rate, commodity prices, etc.).

Historical Cost Convention
Recording transactions at the actual value
received or paid.

Impairment
This occurs when recoverable amount of
an asset is less than its carrying amount.

Individually Significant Loan
Impairment Provisions
Impairment measured individually for
loans that are individually significant to
the Group.

Intangible Asset
An identifiable non-monetary asset
without physical substance held for use
in the production or supply of goods
or services, for rental to others, or for
administrative purposes.

Interest Margin
Net interest income as a percentage of
average interest earning assets.

Interest Spread
Represents the difference between the
average interest rate earned on interest
earning assets and the average interest
rate incurred on interest bearing liabilities.

Investment Securities
Securities acquired and held for yield or
capital growth purposes and usually held
to maturity.

Key Management Personnel (KMP)
Those persons having authority and
responsibility for planning, directing and
controlling the activities of the entity,
directly or indirectly.

Key Performance Indicators (KPI)
KPIs are quantifiable measures that a
company user to gauge its performance
over time.

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.

Liquid Assets Ratio
Liquid assets expressed as a percentage
of total liabilities other than shareholders’
funds.

Liquidity Coverage Ratio – LCR
Refers to highly liquid assets held by
Banks to meet short-term obligations.
The ratio represents a generic stress
scenario that aims to anticipate market-
wide shocks.

Loss Given Default (LGD)
LGD is the percentage of an exposure
that a lender expects to lose in the event
of default.

Mark to Market
The practice of periodically revaluing
marketable securities to their current
market value.

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
That portion of the profit or loss and
net assets of a subsidiary attributable
to equity interests that are not owned,
directly or indirectly through Subsidiaries,
by the Parent.

Mortality Rate
A measure of the number of deaths in
some population, scaled to the size of
that population, per unit time.

Net Asset Value Per Share
Shareholders’ equity divided by the
number of ordinary shares in issue.

Net Interest Income
The difference between what the Bank
earns as interest on assets such as loans
and securities and what it pays as interest
on liabilities such as deposits, refinance
funds and interbank borrowings.

Net Realisable Value
The estimated selling price in the
ordinary course of business, less the
estimated costs of completion and the
estimated costs necessary to make the
sale.

Net Stable Funding Ratio (NSFR)
NSFR measures the amount of long-term,
stable sources of funding employed
by a bank relative to the liquidity
profiles of the assets funded and the
potential for contingent calls on funding
liquidity arising from off-balance sheet
commitments and obligations.

Nostro Account
A nostro account is a bank account held
in a foreign country by a domestic bank,
denominated in the currency of that
country.

Off-Balance Sheet Transactions
Transactions not recognised as assets
or liabilities in the Statement of
Financial Position but which give rise to
contingencies and commitments.

Operating Activities
The principal revenue producing
activities of an entity and other activities
that are not investing or financing
activities.

Plan Assets of an Employee Benefit
Plan

Assets held by a long-term employee
benefit fund.

Price Value Per Basic Point (PVBP)
Estimated change in the value of
portfolio due to one basic point change
in interest rate.

Primary Dealer Special Risk Reserve
Reserve maintained in order to
strengthen capital base further with
development of capital market.

Probability of Default (PD)
PD is a financial term describing the
likelihood of a default over a particular
time horizon. It provides an estimate of
the likelihood that a borrower will be
unable to meet its debt obligations.

Projected Unit Credit Method
An actuarial valuation method that sees
each period of service as giving rise to an
additional unit of benefit entitlement and
measures each unit separately to build
up the final obligation.

Property, Plant and Equipment (PPE)
Tangible assets that:

(a) are held for use in the production

or supply of goods or services, for
rental to others, or for administrative
purposes; and

(b) are expected to be used during more

than one period.

Prudence
Inclusion of a degree of caution in the
exercise of judgement 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.

Redemption
Repayment of principal monies.

Related Parties
Two parties where one controls the
other or exercise significant influence in
financial and operating decisions, directly
or indirectly.

Repurchase Agreement
Contracts relating to securities sold to
creditors (who lend money for funding
purposes), with the intention of buying
them back at a set price on a specified
future date.

Return On Average Assets (ROAA)
Profit before tax expressed as a
percentage of average total assets.
Used along with ROAE, as a measure
of profitability and as a basis of intra
industry performance comparison.

Return On Average Equity (ROAE)
Profit after tax less preferred share
dividends, if any, expressed as a
percentage of average ordinary
shareholders’ equity.

Revenue Reserves
Reserves set aside for future distribution
and investment.

Right of Use Assets
An assets which bears the lessee’s right
to use that throughout the lease term.

Risk-Weighted Assets
On-balance sheet assets and the credit
equivalent of off-balance sheet assets
multiplied by the relevant risk weighting
factors.

Securities Purchased Under Resale
Agreement
The purchase of securities under an
agreement to resell at a given price on a
specific future date.

Shareholders’ Equity
Shareholders’ equity consists of issued
and fully paid ordinary share capital plus
capital and revenue reserves.

Significant Influence
Significant influence is the power to
participate in the financial and operating
policy decisions of an investee but is not
controlled or jointly controlled over those
policies.

Solvency
The availability of cash over the long
term to meet financial commitments as
they fall due.

Subordinated Debenture
The claims of the debenture holders
shall in the event of winding up, rank
after all the claims of the secured and
unsecured creditors and any preferential
claims under any statutes, but in priority
to and over claims and rights of the
shareholders.

Swaps
The simultaneous purchase and sale of
foreign exchange or securities, with the
purchase executed at once and the sale
back to the same party. Carried out on
an agreed upon price to be completed
at a specified future date. Swaps include
interest rate swaps, currency swaps and
credit swaps.

Syndicated Loan
A large loan by a group of banks to a
large multinational firm or government.
Syndicated loans allow the participating
banks to maintain diversification by not
lending too much to a single borrower.

Tier 1 Capital
Consists of the sum total of paid
up ordinary shares, non-cumulative,
non-redeemable preference shares,
share premium, statutory reserve fund,
published retained profits, general and
other reserves, less intangible assets and
other deductions.

Tier 2 Capital
Consists of the sum total of revaluation
reserves, general provisions, hybrid
capital instruments and approved
subordinated debentures.

Total Capital
The sum of Tier 1 and Tier 2 capital.

Unit Trust
An undertaking formed to invest in
securities under the terms of a trust
deed.

Unsecured
Repayment of the principal and interest
not being secured by any specific asset.

Value at Risk (VaR)
Estimated maximum loss that the Bank
may incur in a given horizon at 99%
confidence level.

Vostro Account
A local currency current account
maintained with a bank by another bank