Off Balance Sheet Exposure of Indian Commercial Banks - Some Emperical Results

Abstract

For commercial banks operating in India, off balance sheet activities have become important in the reform years because of the following reasons:(i) The deregulation of the banking sector entry and relaxation of branch licensing policy resulted in substantial decline in banking sector spread (in terms of total assets) compelling the commercial banks to look for some other source of income.(ii) The introduction of asset classification, income recognition and capital adequacy norms made lending a relatively risky proposition.The paper seeks to compare the Indian commercial banks (for the reform period)in respect of their ability to generate income out of off balance sheet activities by using the Data Envelopment Approach. Further, the paper seeks to find out, in the context of a panel data framework, the impact of operating efficiency, capital adequacy and NPA incidence on the (off balance sheet) risk taking behaviour of the Indian commercial banks.The results obtained from the non-parametric exercise show that the public sector commercial banks are lagging behind the private sector commercial banks in terms of off balance sheet activities. This is one area where the banks must pay adequate attention to improve their financial health. Further, almost all the commercial banks exhibited decreasing returns to scale which is not very encouraging for the banking sector. The econometric exercise indicates that off balance sheet activity is positively related to operating profit ratio and negatively related to NPA ratio. This reinforces the hypothesis that strong banks have greater market risk taking ability as compared to the weak banks.