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

The Bangladesh Bank today issued policy guidelines on the off-balance sheet (OBS) exposures in banks, asking them to keep a maximum of 5 per cent provision instead of 1 per cent to strengthen their financial health.

A Bangladesh Bank official says that OBS exposures in banks have been increasing in recent years, which is why it drew up the guidelines to mitigate their unexpected financial risks.

The OBS item is a term for assets or liabilities that do not appear on a balance sheet.

Although not recorded on the balance sheet, they are still assets and liabilities of banks.

Off-balance sheet items are typically those not owned by or are a direct obligation of banks.

For example, when loans are securitised and sold off as investments, the secured debt is often kept off the bank's books.

For instance, letters of credit (LCs) issued by banks are considered an off-balance sheet item. But when a business people can't settle the LCs on time, banks create a loan favouring the individual or entity such that the loan can be settled timely.

Under such a situation, the funds disbursed to settle the LC are converted into a balance sheet item of banks.