The Hindu Business Line : Asset-liability mismatch worries banking sector

WITH a virtual stampede from term deposits to demand deposits in the banking industry in the recent past, several bankers have expressed a deep sense of concern.

Talking to Business Line, Mr K.P. Padmakumar, Chairman of Federal Bank, said: "While the maturity period of the deposits held in banks is getting shortened, the average period for our credit disbursals is getting longer. The norm of the industry for vehicle loan, which was three years, has lengthened to seven years now. The tenure in the housing loan segment has stretched to 20 years. If the situation is allowed to persist, it could create serious asset-liability mismatch in the banking industry."

"Though there has been a perceptible shift in the deposit pattern, it is likely to be of a temporary nature. This uncertainty will be resolved once the next credit policy is announced," Mr N.R. Achan, Chairman of the Catholic Syrian Bank, said.

Not only has there been a shift from fixed deposit to savings bank accounts, there has also been a shifting of funds with banks to other high return segments. "Even as NRI deposits inflow slackened in the last couple of months, there has also been a definite outflow from these accounts, raising serious cause for concern," Mr Padmakumar said.

As a result, the liabilities have begun to dwindle although marginally and the tenure of these liabilities shorter But the bankers can be rest assured with the substantial amount of liquidityin the market, they can still borrow at very low rates of interest.

But the greater cause of worry for them has been the inflationary spiral which eventually could result in the hardening of the interest rate regime. In such an eventuality, they foresee the possibility of an asset-liability mismatch gripping the banking system. But the bankers are confident that the situation would not deteriorate to unmanagable levels.

There are two avenues for the Government to tackle this impending crisis in the banking sector. On the one hand, they can increase the interest rate regime, which would reverse the outflow of liabilities from the banking sector. They could, otherwise, address the inflationary pressures which would ease both money supply and the interest regime.

But, neither of these can offer long-term solutions to specific problems: erosion from fixed to demand deposits or the outflow from NRI deposits held with banks, bankers said.