RBI again warns banks on asset-liability mismatch

Maturity of deposits has fallen drastically, reverse this or cut credit: Anand Sinha.

Two days after the Reserve Bank of India (RBI) raised a red flag over the high incremental credit-deposit (ICDR) ratio, it on Thursday commented adversely on banks’ average maturity of deposits.

“The maturity of deposits has gone down drastically. More than 70 per cent of these are of around two years. While on the lending side, if you consider infrastructure, it needs financing for a longer term,” RBI Deputy Governor Anand Sinha said in an interaction with analysts. “This imbalance needs to be controlled, otherwise it could pose a big systemic risk. If you do not have resources, then (you must) slow down credit growth.”

The asset-liability management of banks is critically dependent on the maturity profile of their deposits. As banks generally raise resources through short-term liabilities to finance both short and long-term assets, the liquidity and credit risks get multiplied, particularly during crisis periods.

On Tuesday, the central bank said the ICDR of banks was 102 per cent, indicating that banks were supporting their loan growth by borrowing one-day money from the repo window of RBI.

ICDR indicates how much banks are lending for every rupee received as deposits. For every Rs 100 deposit, banks have to set aside Rs 30 in the form of the cash reserve ratio and the statutory liquidity ratio, which are six per cent and 24 per cent, respectively. So, for every Rs 100 deposit, banks can only lend up to Rs 70. Apart from deposits, banks can use borrowed funds for lending. However, RBI data show that Indian banks rely heavily on deposits, which constituted 78 per cent of all liabilities of banks in 2009-10. Borrowing accounted for only 8.7 per cent.

The high ICDR is mainly on account of lower deposit growth as compared to credit growth. While credit growth has been a little over 24 per cent in the past one year, deposit growth has been 16 per cent. During the beginning of the financial year, RBI had projected credit and deposit growth at 20 per cent and 18 per cent, respectively. The central bank still maintains the projection and wants banks to cut credit expansion.

RBI data show that for 2009-10, public sector banks experienced a shift in their deposit liabilities towards the short-term end of the maturity spectrum, while loans and investments moved towards the long term. New generation private sector banks, which normally rely heavily on short-term deposits, exhibited a shift in favour of medium and long-term deposits, while their loans moved closer towards the short end of the spectrum.
 

BANKS’ ASSETS AND LIABILITIES                                                                      (in %)
Liabilities	‘08-09	‘09-10	Assets	‘08-09	‘09-10
Deposits			Loans and Advances
Up to 1 year	48.60	49.40	Up to 1 year	38.90	38.90
Over 1 year and up to 3 years	28.50	29.40	Over 1 year and up to 3 years	33.30	33.30
Over 3 years	22.90	21.20	Over 3 years	27.80	27.80
Borrowings			Investments
Up to 1 year	46.30	43.70	Up to 1 year	31.20	27.70
Over 1 year and up to 3 years	19.20	15.30	Over 1 year and up to 3 years	16.10	14.50
Over 3 years	34.50	41.00	Over 3 years	52.60	57.80