PNB fraudulent transaction issue: The danger of contingent liability to banking sector

Punjab National Bank  has reported a fraudulent transaction  of USD 1.77 billion (Rs 11.395 crore) which is part of its contingent liabilities.  In case the liability crystallizes, the bank will have to pay a heavy price.  These liabilities are off balance sheet items like letter of credit , guarantees , derivative contracts etc.  The latest case of PNB once again raises the danger of rising contingent liabilities in the Indian banking sector. In fact , the  foreign banks operating in India have a disproportionate share in the contingent liabilities.  The foreign banks have a 50 per cent share in the Indian banks’ contingent liabilities as per figures of 2016-17.  Let’s analyse the contingent liabilities of the banking sector.

• The Punjab National Bank’s total contingent liabilities as on March 2017 was  at Rs 3.32 lakh crore , which is almost half of its total assets of Rs 7.20 lakh crore.
• The  total contingent liabilities of the commercial banks  are at Rs 151. 61 lakh crore in 2016-17. This is actually more than the  total assets of banks at Rs 141.58 lakh crore. These liabilities are generally off balance sheet items , with not much implications because it gets crystallized in very few cases. Theoretically , the size of the contingent liabilities could easily wipe out the total assets of the Indian banks if it gets crystallized fully.
• The contingent liabilities have been growing steadily  from Rs 111.52 lakh crore in 2009 to Rs 132.59 lakh crore in 2013 to Rs 151.61 lkh crore in 2017.
• The foreign banks have the highest share in the contingent liabilities.  The share is  close to 50 per cent at Rs 75.02 lakh crore.  Foreign banks are  actually very small players in the Indian market with a share of  just 4-5 per cent of the total deposits and advances of the banking sector in India.  Experts say the higher share of contingent liabilities of foreign bank is quite natural because they do bulk of the business like letter of  credit , foreign exchange forward contracts etc.

• JP Morgan Chase has the highest contingent liabilities at Rs 9.02 lakh crore followed by banks like HSBC , Deutsche  and Citibank.
• Amongst the public sector banks, Canara Bank has the highest share of contingent liabilities at Rs 4.32 lakh crore followed by Bank of India ( Rs 3.59 lakh  crore), Punjab National Bank ( Rs 3.32 lakh  crore)  and  Bank of Baroda ( Rs 2.52 lakh crore).