Banks asked to keep 5% provision for off-balance sheet liabilities

The central bank has issued new guidelines asking banks to keep provisions from 0.5% to a maximum of 5% according to risk against off-balance sheet (OBS) liabilities.

As per earlier policy, banks had to keep a maximum of 1% provision against OBS liabilities.

The Banking Regulation and Policy Department (BRPD) of Bangladesh Bank issued a circular in this regard on Tuesday. 

The OBS item is a term for assets or liabilities that do not appear on a bank's balance sheet. The OBS items are typically those not owned by or are a direct obligation of banks.

For instance, if a bank issues a Letter of Guarantee, it does not appear on its balance sheet but it is a potential liability of the bank. Because if the customer does not pay the due amount, the bank has to pay that amount on behalf of the customer. That is why it is shown as liabilities in OBS.

Several senior officials of the central bank told The Business Standard that earlier there was no clear guidance on OBS liabilities. The new policy defines these liabilities. 

Five main liabilities are identified under the headings: Acceptances & Endorsements, Letters of Guarantee, Irrevocable Letters of Credit, Bills for Collection and Other Contingent Liabilities. Risk-wise provisions have to be made for these liabilities.

Banks have been asked to keep a provision of 0.50% to 1% against most of these liabilities.

However, the new policy calls for a provision of 1%-5% depending on the period of OBU Exposures overdue. 

In addition, another 5% provision has to be kept separately for those OBU exposures that are overdue due to litigation.