Term liability can ease funding strain in banks, boost liquidity: India Ratings

Current rising refinancing pressure is discouraging to long-term savings, may dilute transmission of monetary easing

Credit rating agency, India Ratings, says that the widening mismatch in banks’ funding will continue to put pressure on systemic liquidity and keep money market interest rates elevated. The growing refinancing pressure is ultimately reflected in the current inverted-to-flat yield curve, which, together with sticky inflation, discourages long-term savings and may dilute transmission of monetary easing.
 
The cumulative negative funding gap in the one-year bucket for government banks increased to 17% of assets in March 2012 from 4% of assets in March 2002. This was partly due to an increase in short-term deposits. For instance, deposits less than one-year have grown to 50% of deposits from 29% of total deposits for government banks during this period. The impact on systemic liquidity has been fairly dramatic, the banking system has changed from being a net lender in the money market during the early 2000s to being a borrower now.

Raising long-term liability to reduce the funding gap can provide a sustained remedy, particularly as loan tenures may not reduce in the short to medium term. Apart from refinancing lines from nodal agencies and debt capital instruments, banks can also raise long-term senior bonds to the extent of their infrastructure funding. Large banks enjoy easy access to long-term investors such as insurance and pension funds and are well placed to tap this market. Senior bonds are rated at the same level as the bank’s issuer long-term rating and are not notched like loss-absorbing hybrid capital.