Some off balance sheet exposures such as bank guarantees, letters of credit, irrevocable commitments to lend and unused overdraft limits should be treated as impaired and adequate provisions raised against them if the bank believes it is likely they will be called upon and the financial position of the customer has deteriorated.

In this case the exposures should be converted to on balance sheet using 100% credit conversion factor (CCF) then assigned to the one of the three defaulted categories (3 to 5) as mentioned in 1 and 2 above and specific provision allocated against as appropriate.

Where the off balance sheet exposure is in the form of a derivative contract and there is doubt that all contractual future cash flows will be received from the counterparty, the bank should assess the net marked to market exposure to the counterparty taking into account any enforceable netting arrangements in place. The net position (if due from) should then be converted to on balance sheet asset using 100% CCF and assigned to one of the three defaulted categories (3 to 5) as mentioned in 1 and 2 above and specific provision allocated as appropriate.

Please note that under Basel II, all off balance sheet exposures are converted to on balance sheet exposures using Credit Conversion Factors “CCF” and Risk Weights are then assigned in order to arrive at the Credit Risk Weighted Assets which are then multiplied by 1.5% to arrive at the General provision.