The scam at Punjab National Bank, emerging from Letters of Undertaking issued fraudulently by the lender's staff, has brought an underlying issue to light - that of contingent liabilities sitting on bank books.
Data compiled by Bloomberg Intelligence shows that India's banks have more contingent liabilities than their total assets. In a report, Bloomberg Intelligence's senior banking analyst Diksha Gera, points out that total contingent liabilities for Indian commercial banks stood at Rs 151 lakh crore at the end of fiscal 2017, while overall assets stood at Rs 141.6 lakh crores.
"That's a cause for concern as these liabilities aren't reflected in the lenders' balance sheets," Gera said in an interview.
State-owned Punjab Bational Bank's total contingent liabilities stood at Rs 3.3 lakh crore as of March last year, almost half of its total assets. For State Bank of India, contingent liabilities were at 39 percent of assets. The figure is higher for Canara Bank (74 percent) and Bank of India (57 percent). The data is based on company filings.
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Contingent liabilities include instruments like Letters of Undertaking but they also include items like foreign exchange contracts. Because of this private and foreign banks have higher contingent liabilities. Contingent liabilities of private banks stood at 106 percent of total assets, showed the Bloomberg Intelligence report.
These are event based risks that are not expected to materialise under steady circumstances, explained Gera while adding that if these liabilities do materialize, they could pose a sizable risk.
While it's rare for these liabilities to materialize, in the cases where they do, as in Punjab National's case, they have the potential to wipe out substantial portions of banks' balance sheets.
Also Read: Timeline to the Discovery of India's Biggest Ever Bank Fraud
Watch BloombergQuint's interview with Diksha Gera for more insights.
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