August 23Dr. Pronab Sen, former Principal Economic Advisor, Planning Commission, on Tuesday said that there is a massive asset liability mismatch in the Indian banking system waiting to explode any moment.

According to him, the reason that they have not exploded yet is because a majority of the banks were in the public sector space and the government is picking up the risk. Privatization could lead to heightened risks.

“The tenure of the average asset of the bank is becoming extremely long. Today, the average tenure of bank lending has gone to about nine years while liability is around two and half years. You have a massive asset liability mismatch and that can explode at any moment. It hasn’t happened so far because large chunk of our banks are in the public sector,” Sen said while delivering the anniversary lecture on Bandhan Bank’s Foundation Day on Tuesday.

India should follow the universal banking model adopted by countries like Europe and Japan to mitigate the risks.

Focus more on MSMEs

According to Sen, banks should focus on lending to MSME sector as they are the key drivers of growth and employment creation.

“Banks are willing to give working capital loans to MSMEs but not long term loans as their risk profile does not fit. Bank lending in India is severely inefficient,” he said.

Highlighting the need to build back the MSME sector in a better manner, he said there has been a significant increase in the pricing power of the corporates as competition from non-corporate entities including MSMEs is currently absent. This has made it easier for corporates to pass on cost to consumers. The situation will not get better unless MSMEs come back.

“If we rely on corporate sector to push our development forward for the same amount of investment and saving we are doing today we will be experiencing far slower growth and that has started happening already,” he said.

Earlier NBFCs were largely filling in the gap by lending to the sector but today NBFCs are also in trouble. So, banks should work with NBFCs as partners to lend to the sector.