OFF-BALANCE SHEET
ACTIVITIES IN INDIAN BANKS
BANKING SECTOR

Banking sector plays an important role in the
economy of a country. It supplies the lifeblood-money that supports and foster
growth in any economy.
Primary function of Banks
Banks
Accept deposits
(liability)
Lending
(asset)
RISK INVOLVED IN BANKS
Market risk
•Interest rates
•Exchange rates
•Government
policies
Credit risk
•Business cycle
•Firm specific
events
Operational
risk
•Human error
•Systems failure
Risk management techniques
Risk management techniques
On balance sheet
activities
• Portfolio
Management
• Asset liability
Management
• Gap analysis
Off-balance sheet
activities
•
•
•
•
Overdraft Facilities
Credit Lines
Guarantees
Swap and Hedging
Transactions, etc.
Off-Balance sheet activities:

OBS denotes those activities that
involve contingent commitments or
contracts which generate income to a
bank, but are normally not captured
as
asset
or
liabilities
under
conventional accounting procedure.
Characteristics:
Off balance sheet activities are
vehicles of information and risk
sharing services.
 They seek to unbundled the risk
inherent in underlying assets.
 They make it possible to repackage
such decomposed risks into synthetic
product and deal in it separately.

Credit Risk
Market risk
Offbalance
Sheet
activities
Forward contracts
Guarantee
Acceptance,
Endorsement, etc.
Advantages:

Avoid cash reserves .

Avoid implicit tax.

Passes on the cost of saving to
customers.
Total Off-balance sheet activities in Public Sector Bank
Amt. in Cr.
2500000
2000000
1500000
Public Sector Banks
1000000
500000
0
2002
2003
2004
2005
2006
2007
2008
2009
Years
Source: Off-Balance Sheet exposures of Scheduled Commercial Banks (2002-09).
3000000
2500000
2000000
1500000
1000000
500000
0
Private Sector Banks
20
02
20
03
20
04
20
05
20
06
20
07
20
08
20
09
Amt. in Cr.
Total Off-balance sheet activities in Private Sector
Banks
Years
Source: Off-Balance Sheet exposures of Scheduled Commercial Banks (2002-09).
Total Off-balance sheet activities in Foreign Banks
12000000
Amt. in Cr.
10000000
8000000
6000000
Foreign Banks
4000000
2000000
0
2002 2003 2004 2005 2006 2007 2008 2009
Years
Source: Off-Balance Sheet exposures of Scheduled Commercial Banks (2002-09).
Off-balance sheet activities of Different Banks
12000000
Amt. in Cr.
10000000
8000000
Public Sector Banks
6000000
Private Sector Banks
4000000
Foreign Banks
2000000
20
02
20
03
20
04
20
05
20
06
20
07
20
08
20
09
0
Years
Source: Off-Balance Sheet exposures of Scheduled Commercial Banks (2002-09).
Forward Exchange Contracts in Banks
10000000
Amt. in Cr.
8000000
Public Sector Banks
6000000
Private Sector Banks
4000000
Foreign Banks
2000000
0
2002
2003
2004
2005
2006
2007
2008
2009
Years
Source: Off-Balance Sheet exposures of Scheduled Commercial Banks (2002-09).
Guarantees given in Banks
300,000.00
Amt. in Cr.
250,000.00
200,000.00
Public Sector Banks
150,000.00
Private Sector Banks
100,000.00
Foreign Banks
50,000.00
0.00
2002 2003 2004 2005 2006 2007 2008 2009
Years
Source: Off-Balance Sheet exposures of Scheduled Commercial Banks (2002-09).
Acceptances, Endorsements, etc. in Banks
1,800,000.00
Amt. in Cr.
1,600,000.00
1,400,000.00
1,200,000.00
1,000,000.00
Public Sector Banks
Private Sector Banks
800,000.00
600,000.00
Foreign Banks
400,000.00
200,000.00
0.00
2002 2003 2004 2005 2006 2007 2008 2009
Years
Source: Off-Balance Sheet exposures of Scheduled Commercial Banks (2002-09).
Findings:



The exposure of public sector banks to OBS
items, has risen 2.3% to Rs19,09,422 Cr. from
Rs18,66,824 Cr. in 2009.
Public sector banks have emphasized on
guarantee as a major off-balance sheet activity
followed by private sector banks and then
foreign banks.
Foreign banks’ exposure to derivatives, letters of
credit and guarantees declined 31.2% to Rs.
70,20,667 Cr. at the end of March 2009 from
Rs.1,02,10,744 Cr. last year.
Cont.



Foreign banks are extensively involved in offbalance sheet activities as compared to private
and public sector banks.
They are highly involved in forward contracts,
acceptances and endorsements.
It is evident that all the three banking sectors
have experienced a decline in off-balance sheet
activities in 2009 which may be due to market
conditions.
Conclusion:


According to RBI, leveraged positions in
derivatives as a means of diversifying income
and increasing use of derivatives as tools for risk
mitigation appear to have contributed to the
growth in contingent liability exposures.
The level of contingent liability exposure of
banks have seen significant rise in the last few
years as companies rushed to hedge their
foreign exchange contracts to tide over the
volatility in currency markets except last year,
which may be due to prevailing market
environment.
Cont.

“Foreign and private banks in 2008-09 on
account of the liquidity crunch and rising nonperforming loans were reluctant to take
exposure on corporates,” said a senior general
manager in charge of corporate credit in a
Mumbai-based public sector bank. “Corporates
were forced to come to public sector banks and
hence the rise in guarantees given on behalf of
corporates and forward contracts.’’
Cont.

The economic slowdown had affected corporate
activity in 2008-09,’’ Expansion, investments and
borrowing plans of corporates had slowed down
hence the number of forward contracts entered
by corporate India saw a dip which also led to a
drop in exposure.” Banks have stayed away
from the derivative business after some
companies took legal action against banks’ misselling of exotic derivative products on account
of which companies had to incur huge losses.”
Off-balance sheet activities: Road ahead



The future of banking undoubtedly rest on risk
management dynamics.
Banks success lies in its ability to assume and
aggregate risk within tolerable and manageable
limits.
Banks should adopt a coordinated approach to
risk management.
THANK YOU