Off balance sheet Items
• Off-balance sheet exposures refer to activities that are effectively assets or liabilities of a company but do not appear on the company’s balance sheet. The off-
balance sheet exposures in banking activities refers to activities that do not involve loans and deposits but generate fee income to the banks.
• For e.g. Loans given to borrowers and securitisation
• Securitisation enables banks to remove loans from balance sheets and transfer the credit risk associated with those loans. The former i.e. loans are indicated on asset side of the balance sheet whereas securitised loans are represented off the balance sheet.
• Off balance sheet items are not assets or
liabilities to be reported in the balance sheet as on its date. But these may get converted into an asset or liability at a later date, depending upon the happening of the event.
• The non-fund based facilities like
– Issuance of letter of guarantee – letter of credit
– deferred payment guarantee – letter of comfort
– Investments of clients held by an investment company etc. which are contingent in nature are some of the examples off -balance sheet exposures of the banks.
Off Balance sheet items
• Guarantees
–
The issue of guarantee does not result in outlay of funds but liability arises only when the customer fails to perform the act for which the guarantee was provided.
• Performance Guarantees
– Issued by bank in respect of performance of a contract.
– Example- guarantee in lie of tender money or security deposit
• Financial Guarantees
– Issued by bank in respect of completion of a contract
– Example- Bank guarantee for supply of goods on creditbasis
• Deferred payment guarantee
– Normally arise in the case of machinery or other capital equipment.
– The manufacturer supplies the machinery against a cash payment (say10%) and gets accepted bills for the balance amount by the purchaser’s bank .
– The seller of the machinery gets guarantees issued
• Letter of Credit
– An undertaking given by the buyer’s bank on behalf of the buyer to the seller, stipulating that if specified documents are presented within an stipulated date, the bank
establishing the credit will pay the amount of the bill drawn in terms of such LC
