Banks face asset-liability mismatch on infra lending

The Reserve Bank of India (RBI) has expressed deep concern over asset-liability mismatches (ALMs) in banks’ balance sheets, arising mainly from lending to infrastructure projects.

At a meeting with bank chiefs after announcing the annual policy, the central bank asked banks to sit together and find out the specific challenges and suggest solutions.

According to bankers present in the meeting, the main concern of the regulator is the huge pipeline of sanctions on which banks are sitting, mostly for core sector projects.

With deposit tenures becoming shorter due to low interest rates, mismatches in banks’ balance sheets are likely to get bigger. With economic activity picking up and expectation that unsanctioned loans will now get disbursed, RBI feels banks are heading for deep trouble if corrective steps are not taken immediately.

“Infrastructure loans are of 10-15 years duration, while most bank deposits have a tenure of one-two years. In the last financial year, not much disbursement took place, and now every bank is sitting on huge sanctions waiting to be disbursed. This is going to create a major problem, as we won’t have deposits of equal maturity,” said the chairman and managing director of a public sector bank.

With deposit rates hitting the floor in the last financial year, depositors are not committing themselves to long-term maturities. According to rough estimates, about 70 per cent of incremental deposits of some public sector banks have short tenures. With government emphasising infrastructure development, RBI announced steps to beef up core sector lending in the annual credit policy for 2010-11 on Tuesday. The central bank allowed banks to classify their investments in non-SLR (statutory liquidity ratio) bonds issued by infrastructure companies having a residual maturity of seven years under the held-to-maturity (HTM) category.

Furthermore, RBI clarified in the meeting that banks were allowed to top their HTM holding cap (25 per cent at present) if invested in bonds issued by infrastructure companies.

There is little hope on the horizon for banks, as the much-awaited take-out financing products from India Infrastructure Finance Co (IIFCL) are yet to pick up. Banks find norms set by the New Delhi-based company unacceptable. IIFCL is willing to take only those loans from banks’ books which are of the standard category.