For banks, ALM as big a problem as NPA

Sorting out take-out financing could help counter the double whammy of asset liability mismatch and non-performing assets

That non-performing asset (NPA), a euphemism for bad debts, is ballooning beyond comfort levels for Indian banks is common knowledge. What perhaps is not so well known is banks are beset with another equally serious problem -Asset Liability Mismatch (ALM) - the Reserve Bank of India (RBI) would do well to pay its attention to. Banks in India accept deposits from one month to five years. Prudence demands that a one month deposit should be on-lent for a month at the most and a five-year deposit should be on-lent for five years at the most. If this fundamental caution is not heeded, there would be a problem of ALM because when deposits mature, the bank will have to make distress sale of its assets to repay deposits now that its money is locked up in long-term loans that should not have been given in the first place. Take-out financing is what the doctor had ordered for banks to overcome the problem of ALM and to ensure opportunities to lend to long term infrastructure projects were not lost.

It can be likened to a relay race. Suppose a project needs a 15-year loan. Now a bank can lend only for five years. It would, thus, need three banks to come together with the first bank passing on the baton, as it were, to the second after five years and the second passing on the baton to the third after tenth year.

The Indian government tried to usher a take-out finance regime first by promoting Infrastructure Development Corporation (IDFC) and then India Infrastructure Finance Company Ltd (IIFC).

But the regime ushered in for the purpose has been a huge let down so much so that takeout financing has not taken off in India.

The problems bedeviling take-out financing, along with solutions, are:

n The commercial banks kickstart the process by being the first ones in the relay race in forking out funds. It should be the other way round. The specialised agencies such as IIFC should be the ones making project appraisal and the first disbursement. Commercial banks, traditionally providing working capital, simply are not equipped to appraise complicated infrastructure projects. It is wrong to expose them to the vagaries and intricacies of infrastructure project financing which is a different ball game altogether.

n There are too many "ifs" and "buts" in the IIFC conditionalities which could come in the way of passing on of the baton, as it were. For example, while IIFC agrees to pick up 100 per cent of the outstanding loan, there is a rider that the amount picked up shall not exceed 50 per cent of the total loan portfolio of the project at that time. To wit, if the outstanding amount of the loan is Rs 100 crore, the IIFC would normally pick up the whole amount but if the project has borrowed Rs 10 crore from another source, IIFC would pick up only Rs 55 crore from the bank.

There are other niggling aspects and caveats - IIFC will not pick up anything more than 30 per cent of the project cost; the outstandings in the books of the lender bank should appear as standard i.e. not classified as bad debt when the baton is sought to be passed on to it; and commercial use of the project must have started. It would be clear on none of these the commercial banks have any control because they step in late in the day. It is all fine for lenders to save their own skins but this is precisely the reason why take-out finance has not taken off in India. The bottom line for banks is the baton not being taken by institutions like IIFC at the appointed time on one pretext or the other

Thus, the simple solution both to the problem of ALM and its putative, half-baked and half-hearted solution, the extant take-out financing, is to mandate that the specialised agencies lead from the front and pass on the baton instead of receiving it. No scheme should contain seeds of frustration of its objects. The alternative could be commercial banks coming together and operating take-out financing schemes among themselves, bypassing the specialised agencies. That would be the most supreme irony given the fact that it would be the admission of the saddest truth - the catalyst alas has turned an obstructionist.
The author is a chartered accountant