Thursday, October 30, 2008

Can our banks weather the financial crisis? - PSM Rao

We want accurate information not assurance:

More than the assurances of the prime minister, finance minister and the RBI governor on the safety of the banks and the money therein, it is accurate information on the uses this public money is put to by the banks holding it in trust that would satisfy people. But, where does one get this information?

It is naive to think that our financial system, of which banks are an important part, will remain totally unaffected once they are allowed to have overseas exposure.

Banks have dealings related to the stock market, so they are not totally outside the danger zone. But, by how much, is the question.

‘Off balance sheet items’ or the ‘Contingent liabilities’:

Though the balance sheets which we talked about do not provide clarification for every single doubt, they give some vital information and scope for useful inference. The amount shown under ‘off balance sheet items’ or the ‘contingent liabilities’ of all the public sector banks aggregated to Rs 18.57 lakh crore in 2007-08, a 46.16% increase over 2006-07’s level of Rs 12.70 lakh crore as per the Indian Banks Association’s (IBA) report on public sector Banks.

IBA report on Private Sector Banks:

In a similar publication on private sector banks, the IBA found that these banks have much bigger sums involved under the head. All the private sector banks put together had Rs 23.61 lakh crore in 2007-08, higher by 77.53% compared with the 2006-07 figure of Rs 13.30 lakh crore. The 16 old private sector banks have Rs 1.11 lakh crore contingent liabilities, whereas the eight new private sector banks account for a whopping Rs 22.50 lakh crore.

ICICI bank and SBI: Contingent Liabilities:

the largest private sector bank in the country, tops the private banks list with 48.76% share. More interestingly, the ICICI Bank’s Rs 11.51 lakh crore off balance sheet amount is 288% higher than its balance sheet size of Rs 3.99 lakh crore.

Also, there is a quantum jump in these liabilities from Rs 5.62 crore last year.
Among public sector banks, SBI’s share in the contingent liabilities was the highest at 43.66%.

Although this bank’s off balance sheet transactions are higher than its balance sheet size, they are not as large as those of some private sector banks including ICICI. SBI’s contingent liabilities of Rs 8.10 lakh crore in 2007-08 work out to about 112% of its balance sheet size of Rs 7.21 lakh crore.

The off balance sheet items also include: derivatives, forward contracts and currency futures, which are not easily understood by the common man, but which have inherent risks all the same.

RBI Notification:

So, the Reserve Bank has recently (notification dated October 13) and rightly so brought these off balance sheet under the scanner of prudential norms and directed for provisioning of the specific items under the head. The impact of this measure will only be discerned in the 2008-09 balance sheets.
All these facts suggest that there is an urgent need for a thorough scrutiny - a bank by bank examination - to take timely and preventive measures needed to put the house in order and to lend credence to the assurances given by the government and the RBI.

The threat created by the US crisis may be converted into an opportunity, through timely measures, to better safeguard the banks and the public savings in them.
- Daily News & Analysis

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