| Pub. Date | : Sep, 2019 |
|---|---|
| Product Name | : The IUP Journal of Financial Risk Management |
| Product Type | : Article |
| Product Code | : IJFRM31909 |
| Author Name | : Kamal Kishore |
| Availability | : YES |
| Subject/Domain | : Finance Management |
| Download Format | : PDF Format |
| No. of Pages | : 13 |
A contingent liability is one, the occurrence of which is contingent on the occurrence or nonoccurrence of an event. Contingent liabilities, also known as Off-Balance Sheet (OBS) exposure of banks, are not shown in the main balance sheet in assets and liabilities, but in footnotes. The quantum of such exposure in different components depends on bank factors like banks’ business operations, policies and risk expertise. The present paper studies the pattern of contingent liabilities as well as its components prevailing in Indian public and private sector banks for a period of three years ending March 2017. The contingent liabilities of banks in India display no particular pattern and they take exposure in different components in accordance with their business strategy, risk-taking appetite and overall banking operations. While public sector banks have a conservative stance with about 41% exposure in contingent obligations, private sector banks have followed a more liberal approach with around 110%. The volume of contingent exposure in private banks is larger due to their better expertise and risk-prone approach. The extent of contingent exposure depends on individual bank’s business strategy and client needs. In case of both public and private sector banks, the dominant form of contingent exposure is in terms of outstanding forward exchange contracts, which include derivative contracts. Banks’ contingent exposure also includes guarantee obligations on behalf of constituents, acceptances and endorsements, investments in capital contracts, securitization transactions, etc., but their proportion is relatively smaller than forward exchange contracts. Given that they are risk-prone contracts, banks have to be prudent while undertaking contingent contracts.
A contingent liability is a potential liability that may occur depending on the outcome of an
uncertain future event. A contingent liability is recorded in the accounting records if the
contingency is probable and the amount of the liability can be reasonably estimated
(Investopedia, 2018). Indian Accounting Standard 29 explains a contingent liability as:
A possible obligation that arises from past events and the existence of which will
be confirmed only by the occurrence or non-occurrence of one or more uncertain
future events not wholly within the control of the enterprise.