RBS 2003 Annual Report Download - page 181

179
Annual Report and Accounts 2003
Notes on the accounts
Banking commitments and contingent obligations, which have
been entered into on behalf of customers and for which there
are corresponding obligations from customers, are not included
in assets and liabilities. The Group’s maximum exposure to
credit loss, in the event of non-performance by the other party
and where all counterclaims, collateral or security proves
valueless, is represented by the contractual nominal amount
of these instruments included in the table above. These
commitments and contingent obligations are subject to the
Group’s normal credit approval processes and any potential loss
is taken into account in assessing provisions for bad and doubtful
debts in accordance with the Group’s provisioning policy.
Contingent liabilities
Acceptances – in accepting a bill of exchange drawn on it by
a customer a bank undertakes to pay the holder of the bill at
maturity. Most acceptances are presented for payment and
reimbursement by the customer is usually immediate. In the
UK, bills accepted by certain banks designated by the Bank of
England are eligible for rediscount at the Bank of England.
Endorsements – in endorsing a bill of exchange a bank
accepts liability for payment of any shortfall on the bill at
maturity. Unlike acceptances, the endorsing bank receives
value for the bill, which is then rediscounted.
Guarantees – the Group gives guarantees on behalf of
customers. A financial guarantee represents an irrevocable
undertaking that the Group will meet a customer’s obligations
to third parties if the customer fails to do so. The maximum
amount that the Group could be required to pay under a
guarantee is its principal amount as disclosed in the table above.
The Group expects most guarantees it provides to expire unused.
Other contingent liabilities – these include standby letters of
credit, supporting customer debt issues and contingent
liabilities relating to customer trading activities such as those
arising from performance and customs bonds, warranties and
indemnities.
Commitments
Documentary credits and other short-term trade related
transactions – documentary letters are commercial letters of
credit providing for payment by the Group to a named
beneficiary against presentation of specified documents.
Commitments to lend – under a loan commitment the Group
agrees to make funds available to a customer in the future.
Loan commitments, which are usually for a specified term may
be unconditionally cancellable or may persist, provided all
conditions in the loan facility are satisfied or waived.
Commitments to lend include commercial standby facilities and
credit lines, liquidity facilities to commercial paper conduits
and unutilised overdraft facilities.
Other commitments – these include forward asset purchases,
forward forward deposits placed and undrawn note issuance
and revolving underwriting facilities.
Additional contingent liabilities arise in the normal course of
the Group’s business. It is not anticipated that any material loss
will arise from these transactions.
41 Memorandum items
Contingent liabilities and commitments
The amounts shown in the table below are intended only to provide an indication of the volume of business outstanding at
31 December. Although the Group is exposed to credit risk in the event of non-performance of the obligations undertaken by
customers, the amounts shown do not, and are not intended to, provide any indication of the Group’s expectation of future losses.
2003 2002
£m £m
Contingent liabilities:
Acceptances and endorsements 595 2,407
Guarantees and assets pledged as collateral security 8,787 5,200
Other contingent liabilities 5,482 7,981
14,864 15,588
Commitments:
Documentary credits and other short-term trade related transactions 605 655
Undrawn formal standby facilities, credit lines and other commitments to lend
– less than one year 85,424 87,645
– one year and over 51,827 39,784
Other commitments 1,837 508
139,693 128,592