Off-balance sheet exposure of banks remains a concern

Despite a reduction in off-balance sheet exposure of Indian banks in 2008-09, the Reserve Bank of India (RBI) said the regulators needed to be watchful of the invention of the new pooled asset derivatives, which contributed to the financial turmoil in the US.

Recently, some leading international investment banks have planned securitisation of assets for restructuring portfolios of assets to achieve risk, capital and funding efficiency in a transparent and less complex way.

The off-balance sheet operations of banks include forward exchange contracts, guarantees, acceptances, endorsements etc.

Scheduled commercial banks reduced their off-balance sheet exposure by 26.4 per cent during 2008-09, partly due to strengthening of prudential norms by RBI. While foreign banks recorded 32 per cent reduction in the off-balance sheet exposure, public sector banks recorded 2.3 per cent increase in the exposure (see table).

Although foreign banks recorded the sharpest drop it continued to have largest share of off-balance sheet exposures of the scheduled commercial banks at 65.8 per cent, followed by public sector banks share of 17.9 per cent and new private sector banks 15.2 per cent. “The ongoing international initiatives indicate a multipronged approach, covering several important aspects of stability, introducing automatic stabilisers into the regulatory framework by adopting countercyclical capital charge, capital requirements for reputational and other risks in respect of securitisation activities and activities undertaken by the sponsored or connected banks,” said RBI.

It said that while there is no disagreement that securitisation helps the banks to cut their capital requirements, the success of securitisation lies in the pooling of high quality assets and a thorough understanding of the underlying structures and standards by all the concerned parties.

The new products will, however be different, as it will be rated by the rating agency and will involve securitisation of banks’ existing assets, rather than of new lending and also the bankers argue that the new products do not disguise the transfer of risk.