The Hindu Business Line : Banks likely to face asset, liability mismatch in H2

WITH a shrinking deposit portfolio and burgeoning demand for credit, several banks could face a credit-liability mismatch during the second half of the current year.

"The right stimulants for a revival in credit offtake are visible. After a long gap, there was an accelerated credit growth during the first half of the current year. A good monsoon and industrial revival have stimulated demand and economic growth. All these factors should translate into a surge in credit offtake in the economy," Mr K.P. Padmakumar, Chairman of Federal Bank, told Business Line.

If there is a sudden surge in credit offtake, the current liquidity position in the economy could be reversed and several banks could confront a temporary asset liability mismatch. This is primarily because the deposit portfolio of several banks have not been able to keep pace with the surge in advances.

Unlike the trend of previous years, advances have grown at twice the rate of accretion in deposits during the first half of the current year. That too, most of the accretion in deposits have come about from savings bank and current account portfolios, based on which banks cannot build long-term assets, the bankers said.

During the half year, savings bank account and current account of Federal Bank grew rapidly by 37 and 24 per cent respectively, but the total deposit portfolio could grow only at half the pace of the advances growth. This is a trend prevalent across the whole sector, bankers said.

With an imminent surge in credit offtake, some leading banks have initiated steps to shore up their deposit base. In a departure from recent trends, a few banks have begun to increase the interest rates on short-term deposits, although marginally. But even these revised returns are not likely to prove lucrative enough to spur a surge in deposits, the bankers said. They said that alternative avenues such as post office savings, real estate and mutual funds have begun to pose a formidable threat to the growth in bank deposits.

There is every possibility that the growth in deposits will not be able keep pace with the growth in advances in the coming months, nurturing an asset-liability mismatch in the banking industry. This could eventually lead to a liquidity crunch in the economy.

Bankers warned that this would not augur well for the economy. A sustained asset-liability mismatch could trigger accelerated inflationary spiral, which will have a cascading impact on the economy as a whole.