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OBS exposures

and Non interest

income sources
of Indian Banks
Ashu Bhardwaj
Dej Hegde
Gaurav Choudhary
Sujoy Gupta
Msuya K
Off-Balance Sheet Activities
• Financial guarantees
• Standby letters of credit
• Bank loan commitments
• Note issuance facilities
• Derivatives
• Forward rate agreements
• Currency and interest rate swaps
• Interest Rate futures
• Currency options
• Foreign exchange forwards
• Interest rates caps and floors
• Other off-balance sheet activities

Financial guarantees
• Standby letters of credit:
• In a traditional letter of credit, the beneficiary obtains
payment against documents evidencing
performance. In a standby credit, the beneficiary
usually obtains payment from a bank when the
applicant for the credit has failed to perform as per
• Financial SLCs: Backup lines of credit on bonds, notes,
and commercial paper serve as guarantee.
• Performance SLCs: Completion of construction
contracts guaranteed.
• SLCs are considered loans. They may be
• Bank loan commitments:
• Promise by a bank to a customer to make a future
loan under certain conditions. Most commercial and
industrial loans are made under some form of
guarantee (informal or formal).
Financial guarantees
• Note issuance facilities
 A syndicate of commercial banks that have
agreed to purchase any short to medium-term
notes that a borrower is unable to sell in the
eurocurrency market
 The bank acts as an underwriter. Should the
borrower be unable to sell all notes, the syndicate
is obligated to purchase all the remaining notes
from the borrower, essentially providing credit.
Note issuance facilities are useful in reducing risk
and costs for both the borrower and the lender.

• Forward Rate Agreement (FRA) –
 It is a forward contract in which one party pays a fixed
interest rate, and receives a floating interest rate equal to
a reference rate (the underlying rate)
• Interest Rate Swap (IRS)
 An agreement between two parties (known as
counterparties) where one stream of future interest
payments is exchanged for another based on a specified
principal amount. Interest rate swaps often exchange a
fixed payment for a floating payment that is linked to an
interest rate (most often the LIBOR).
• Interest Rate Futures (IRF)
 An interest rate future is a financial derivative (a futures
contract) with an interest-bearing instrument as the
underlying asset.
• Interest Rate Caps and Floors
 An interest rate cap is an interest rate option in which
payments are made when the reference rate exceeds the
strike rate. Analogously, an interest rate floor is an interest
• Foreign Exchange Forward
 A foreign exchange forward is an over-the-
counter contract under which a purchaser agrees
to buy from the seller, and the seller agrees to sell
to the purchaser, a specified amount of a
specified currency on a specified date in the
future - beyond the spot settlement date - at a
known price denominated in 26 another currency
(known as the forward price) that is specified at
the time the contract is entered into.
• Currency Options
 Investors can hedge against foreign currency
risk by purchasing a currency option put or call.
• Currency Swaps
 It is an interest rate swap where the two legs to
the swap are denominated in different currencies.
Non-Interest Income.
• Non-interest income is earned by providing a
variety of services, such as trading of
securities, assisting companies to issue new
equity financing, securities commissions and
wealth management, sale of land, building,
profit and loss on revaluation of assets.

 Components of non interest income
 The major components of non interest income
in India banking sector are as follows:
• Commission/ exchange and brokerage
• Profit or loss on Sale of investments
• Profit or loss Sale of land& buildings
• Profit/loss on revaluation of investments
• Profit or loss on Exchange transaction etc.
• Miscellaneous income source which includes
advisory, trading.


• Leasing by the bank is to provide a high-quality

asset-based financing. The Bank structures a
range of products and services for lessees and
vendor partners.
• Provides leasing for most asset classes including
industrial, manufacturing, medical, printing and
publishing, construction, telecommunications,
IT, transportation, marine and special purpose
real estate.
Commission/ exchange and
• Banks acts as a broker by performing the job of
intermediating between buyers and sellers of
securities, they help through build up order
book, price discovery and responsible for
contract being honoured,for this services banks
earn a fee known as a commission or
Foreign Exchange.
• Banks do Currency trading that is simultaneous
exchange of one country's currency for that of
another for the purpose of hopefully making a
profit. This type of trading characterized by
high liquidity and low transaction costs, which
result in pure profit.

Importance of Non
Interest Income
• Loan yields have fallen on a relative basis due to
credit scoring and increased competition
among lenders
• NIM is being squeezed, so banks must
concentrate more on non-interest income to
grow profits.
• Banks must rely less on net interest income and
more on non-interest income to be more
• The highest earning banks will be those that
generate an increasing share of operating
revenue from non-interest sources, like fee
• Largest contributors are deposit service charges
and other non-interest income
SBI Off Balance
Sheet Items
PNB Off Balance
Sheet Items
ICICI Off Balance
Sheet Items
DBOI Off Balance Sheet
SBI Non Interest Income
PNB Non Interest Income
ICICI Non Interest Income
DBOI Non Interest Income
OBS/Total Assets
General Banking Trends with
regard to OBS

 The Off balance sheet

operations of the SCBs
has increased manifold
in recent years.
 However in 2008-09, SCBs
reduced their OBS
exposures by 26.4% as
compared to 2007-08.
 This was due to the
strengthening of
prudential regulations
effected by RBI on OBS

Foreign Banks continued to have
largest share of off balance
sheet exposures of the SCBs
(65.8%),followed by
PSBs(17.9%) and new pvt
sector banks (15.2%)
General Banking Trends with regard to Non
Interest Income
 The share of non
interest income in
total income was
increasing during
2002-04 but
declined in 2005-
 However for 2007-
09,this share is
again witnessing a
 The non interest income
witnessed acceleration at a
higher pace as compared to
the growth rate of both the
interest income during 2004-
05 to 2007-08.
 In a reversal of this trend , the
deceleration in growth of non
interest income during 2008-
09 was much sharper than
the other two series.

Non Interest Income
• Burden

• Lower is better (Burden > 0)

• Net Non-Interest Margin

• Lower is better

• Operating Risk Ratio

• Lower is better because proportionally more
income comes from fees

SBI’s operating risk increase
in FY10
• Year-on-year, fee income was up 26.57%.

• Operating expenses were 29.84% higher in FY10,

driven by five key costs: during Q4FY09, when
nearly 27,000 new employees came on board,
the full impact of costs was felt in FY10;
• Rs 627 crore went into wage revision arrears;
• Rs 1,998 crore was spent towards additional
contribution for pension
• an additional Rs 59 crore was spent on financial
• Rs 347 crore was spent to open 1,049 branches
• Installing 7,788 new ATMs during the year
Drastic Decrease in ICICI’s
Operating Risk Ratio
• Q1,FY2010- The bank, has been on an aggressive cost-
cutting drive for the past few quarters, reduced its total
expenditure by more than 20 per cent to Rs 5,304 crore
from Rs 6,694 crore in the June 2009 quarter. Gross
advances, at Rs 1,84,378 crore, were 7 per cent lower
than the same period last year, but the bank managed to
grow its loan book by about 2 per cent over the quarter
ended in March
La rg e r b a n ks te n d to h a ve lo w e r ( b e tte r) e fficie n cy ra tio s
b e ca u se th e y g e n e ra te m o re n o n -in te re st in co m e .

Lo w e fficie n cy ra tio s d o n o t a lw a ys le a d to h ig h e r R O E s
BASEL II Norms :
Provisioning for Off-balance sheet
FACTORS (contd)

M a rk to N o tio n a l
M a rke t Prin cip a l
Risks of OBS exposures
• Off balance sheets obligations in the Indian
banking system have grown exponentially- from
56% of balance sheet in 2004-05 to 106% in
2007-08. In new private banks, the growth has
been larger- from 173% to 301%.
• In the sub-prime crisis, contingent obligations are
at the root of banks' problems. There, the
exposures were mostly towards securitisation
vehicles and credit default swaps.
• In India, these obligations seem to be more in the
nature of forex derivatives. Banks abroad face
losses as a result of their exposures; Indian
banks are seeing an 'involuntary' expansion in
• From the banks disclosures, it appears that the
range of losses and/or provisions for private
banks is from 0.02 to 0.05 percent of total
contingent liabilities. However for the PSU State
Bank of India its only about 0.004 percent of
total contingent liabilities.

After effects of RBI’s
• 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


• Loan yields will fall on a relative basis due to the

new base rate system and increased
competition among lenders
• NIM is being squeezed, so banks must
concentrate more on non-interest income to
grow profits.
• Banks must rely less on net interest income and
more on non-interest income to be more
• Banks must grow their non-interest income
relative to non-interest expense if they want to
see net income grow.
• The highest earning banks will be those that
generate an increasing share of operating
• Gaurav C : Off balance sheet items of Indian
• Msuya K: Non interest income sources of Indian
• Dej: Trend analysis of Indian Banking sector
• Ashu: Ratio Analysis of OBS and NI income
• Sujoy: Basel 2 Norms and conclusion
• RBI circular DBOD.No.BP.BC.15 / 21.06.001 /
2010-11 dated July 1, 2010
• Annual reports of SBI,ICICI,PNB,DBOI