Off balance sheet items a concern for private banks

Off balance sheet items a concern for private banks

Macquarie Equities Research in a report said, “Over the past two years, contingent liabilities have increased substantially for the banking sector and private banks in general have larger proportion of off – balance sheet items, compared to PSUs." Contingent Liabilities are obligations to pay a certain sum depending on the future events.

Moreover, stress on the asset quality of private banks such as the Axis Bank and ICICI Bank would increase because of the large exposure to guarantees and a substantial rise in the non-fund based exposure to the power sector, said Macquarie Research. Non-fund based exposure is a credit facility which is extended generally by private banks where there is no actual lending involved. For example, a credit guarantee where in banks would have to payin case the lender defaults.

It is already known that the power sector is grappling with crisis of coal shortages leading to un-utilized capacities and low tariffs which is affecting the profitability of the companies. If the power company defaults, the lender will catch the neck of the banks who have issued guarantees on their behalf.

ICICI Bank and Axis Bank rank poorly because theserisk-weighted assets as a proportion of assets stand at 83% on average compared to 74% for the other private sector peersand 62% for public sector lenders.

RWA are assets such as letter of credit which are more risky compared to a loan which is secured with a collateral. The RWA helps in gauging the asset quality of the bank.

Moreover, to make matters worse, the gross non-performing assets of Axis Bank advanced 30% year-on-year and 10.8% quarter-on-quarter. On the other hand, provisioning surged 7.1% y-o-y and 130.7% q-o-q. Giving the high exposure to the power sector and guarantees worth 60% of net-worth, these issues may be a spoiler forbanks’ earnings.

On the other hand,PSU banks except State Bank of India and Punjab National Bank are better off because they are involved in “plain vanilla lending," and they have limited expertise in carrying out off-balance sheet activities, the report said.