The Hindu Business Line : Banks do a nice balancing act

Chennai, July 27 Banks cater to borrowers with needs spread across different time periods. But as institutions which themselves rely on borrowed money, they need to raise resources in a matching manner or lend to borrowers with a profile broadly similar to the maturity profile of their resources.

Assets & liabilities

If they didn’t do this, banks would run the risk of what is called an asset-liability mismatch. For instance, if they borrowed heavily in short duration deposits and used it to fund long term assets they would be vulnerable. They would have to continuously pay higher costs to keep refunding these assets.

Banks, therefore, constantly monitor the maturity profiles of their resources and loans through their asset liability management committees (ALCOs). Of course, a perfect match rarely exists and regulations do make provision for a slight gap between the two.

Distribution

The distribution of loans by public sector banks seems perfectly spread over the short, medium and long term. Thirty six per cent of the loans given as of March 2007 were of a period below one year, while 33 per cent were for 1-3 year period, and 31 per cent were for above 3-year period.

At the systemic level, there is a small gap in the matching between loans and deposits, only in the short term. More resources (deposits) seem available at the short end as against available lending opportunities.

This is what emerges from the figures of residual maturity of loans given by 27 public sector banks. These 27 public sector banks (including IDBI, but not State Bank of Saurashtra whose detailed numbers were not available), had cumulative loans of Rs 13,95,266 crore.

The loan maturity profiles for the banking sector in this year are broadly similar to the pattern seen in the last few years. Of course there are some variations in individual banks.

Maturity profiles

For instance, Indian Overseas Bank had a high percentage of loans in the shortest tenure of 1-14 days. About 21.6 per cent of its loans were classified in this category. In the same time bucket, Bank of India had 19 per cent of its loans while State Bank of India had 16.8 per cent of its loans in this category, as compared to the average for the system of 12 per cent.

On the other side, some banks had a high proportion of their loans as long-term assets. Banks such as IDBI (38.6 per cent), UCO Bank (45 per cent), and State Bank of Hyderabad (36 per cent), had a high proportion of their loans in the above 5-year category.

More Stories on : Banking | Credit Market | Fixed Deposits

Article E-Mail :: Comment :: Syndication :: Printer Friendly Page