ALM rises as banks lend long but borrow short
Apart from the large credit risks involved, banks are facing another problem with their over-exposure to infrastructure firms: a large and increasing asset-liability mismatch. With no other long-term lenders willing to take on the risk of funding these high-risk ventures, especially in the initial phase, banks have been writing out the cheques. With the result that these loans currently comprise a good 15% of their total assets. The credit risks apart, this exposure, taken together with products such as home and education loans—roughly 11-12% and 3%, respectively, of all loans—has driven up the long-term assets of banks to an estimated 30% of their portfolios. However, even as they’re lending long, banks seems to be falling short of matching liabilities. RBI data puts deposits with a maturity of longer than five years at just 16.5% of the total deposits. The asset-liability mismatch can be seen across other buckets too—loans with a tenure of between 3 and 5 years accounted for 11.2% of all loans in FY12 while the share of deposits of this maturity was just 8.5%. Indeed, the mismatches seem to be getting worse; the gap in the 1-3 year tenure rose from 1.6% in FY2008 to 4.7% in FY12.
While there may be no immediate cause for alarm given there’s adequate liquidity in the system and because banks are holding more than the required quantum of government securities, the trend is nonetheless disconcerting. In its recent Financial Stability Report, RBI said banks were relying increasingly on borrowings to fund credit and investments and highlighted the growing short-term mismatches in the balance sheets of banks, adding that the rollover and liquidity risks associated with these trends needed to be ‘assessed and managed’. Since banks are clearly becoming vulnerable, other market players need to step in to take the load off them. If funding to the infrastructure sector is not to be disrupted, the bond market needs to be fixed; it currently contributes less than 5% of the resources required by larger corporates and the bulk of the bonds are privately placed. A recent paper by NIPFP suggested ways to make it more vibrant, saying the investor base could be broadened by offering tax breaks while the issuer base could be increased by lowering stamp duties for mid-sized firms. Of course, the issue of varying stamp duties across states would need to be resolved.