Author(s) :

Yogesh.

Volume/Issue :

Abstract :

This paper investigates the nature of off-balance sheet activities and its role in performance and stability of commercial banks. Explain about depth of systematic literature review (SLR). We examined the trend of off-balance sheet activities with the help of contingent liabilities and total income of different ownership group of banks. It seems private banks are more effective than public sector banks in generating total income. Furthermore their treatment of off-balance sheet activities in terms of risk management seems sound as compared to public sector banks. The observations also indicate a positive relationship between contingent liabilities and the total income of different ownership groups of banks, as a research question seeking empirical evidence. This indicates an opportunity for banks to improve their overall profitability by engaging in different types of contingent liabilities.

No. of Downloads :

78

KEYWORDS:

Banking; Off-balance sheet activities; Non-interest income; Diversification of income

INTRODUCTION & OBJECTIVES:

Since the 15th century, banks have come into existence. Their growth and relevance have grown ever since around the world and across different strata of society. Even in the 21st century, the role of banks cannot be undermined, and the banking industry has acquired an important place in the global market because of its size and role in economic development. But today the global banking industry is facing contemporary problems concerning its operations and earnings structure (Covid-19 is one of the reasons behind it). This is mounting pressure on banks to find new ways to improve their profitability (Li et al., 2021). In recent years, development and deregulation of the financial markets and improvements in financial innovation have also encouraged banks to offer new products and services to meet the modern demands of customers and increase the profits for such unique types of financial institutions (Boyd & Graham, 1986). Since the mid 1980s, there has been a substantial increase in off-balance sheet (OBS) activities (blackwell, 2019). Like fee-based activities, off-balance sheet activities also generate fees income for commercial banks. Off-balance sheet activities are an intriguing part of the financial statements because OBS activities have the feature of representing either contingent assets or contingent liabilities. They have an important economic impact that affects the future rather than the current shape of an institution. Off-balance sheet activities of a commercial bank normally include activities like loan commitments, guarantees and derivatives, etc. In today’s contemporary environment, these non-traditional activities have become an important source of a bank’s revenue, especially for large commercial banks. By engaging in off-balance sheet activities, a financial institution doesn’t only increase its earnings, but the institution can also avoid some regulatory costs or taxes. Reserve requirements and deposit insurance premiums are not applicable to off-balance sheet activities, but in the recent past, several central banks have globally the existing norms for banks and similar financial institutions. With changing basel norms, now financial institutions are required to convert off-balance sheet items to on-balance sheet using a conversion factor as per Basel III (blackwell, 2019). On one hand, diversification into non-traditional activities has been beneficial to the banking sector specifically, by implementing an additional fee income or by developing a new technique for hedging specific risk. On the other hand, non-traditional activities have also influenced the bank’s conditions by increasing bank’s exposure to different types of risks (Abbas & Ali, 2022). A school of thought argues that diversification of banking activities into non-traditional activities is the result of the decreasing in profitability of traditional banking and the increasing in competitiveness among financial institutions (Edwards & Mishkin, 1995).

DOI:

10.58426/cgi.v4.i1.2022.68-80