Asset-liability mismatch, a hitch in core sector lending: Subbarao

Asset-liability mismatch, a hitch in core sector lending: Subbarao
The Hindu Business Line, November 26, 2009, Page 6

Banks must hone their skills in appraisal, risk management.

Our Bureau, Mumbai

The asset-liability mismatch is a problem with bank financing to the infrastructure sector. Such loans typically require long-term funding, and deposits of banks are relatively short-term, said Dr D. Subbarao, Governor, Reserve Bank of India.

“This huge and growing demand of infrastructure finance will have to be met even as banks wrestle with expanding their traditional banking services. Apart from finding the resources, banks will also need to hone their skills in appraisal and management of risks inherent in infrastructure financing,” Dr Subbarao said, while addressing a banking conference organised by the Indian Merchants’ Chamber, here on Wednesday.

The Eleventh Five-Year Plan has targeted cumulative infrastructure investment of Rs 20 lakh crore. “Almost one half of this investment is to be funded through debt, and as much as 43 per cent of this total debt requirement (21 per cent of overall planned investment) is planned to be financed by banks,” he said.

High Operating costs

Stressing that banks have a lot of scope to increase efficiency, Dr Subbarao said that the intermediation cost in India is still high due to high operating costs.

“Banks will have to constantly reinvent business models and design products and services demanded by a rapidly growing and diversifying economy. Also, higher capital standards, stricter liquidity and leverage ratios and a more cautious approach to risk will raise banks’ funding costs, even as they try to improve efficiency,” he said.

He pointed out that resources are not being utilised in an efficient manner by banks.

“Non-interest sources of income constitute a very small share in total income of banks in India. Although overall efficiency and productivity have improved, resources are not being utilised in the most efficient manner.” He said there is a degree of stickiness and non-transparency in bank lending rates.

Challenge

The challenge for Indian banks is to reduce costs and pass on the benefits to both depositors and lenders.

Dr Subbarao said that making banking ‘boring’ is neither a cure to the ills that the banking system was plagued with before the crisis nor an appropriate path for the future of banking. “Banking has to evolve, grow and innovate in response to the developments in financial markets and institutions. The excitement lies in responding to the challenges that this growth brings. He was referring to the views expressed by some economists that making banking boring (banks to do only traditional business of accepting deposits and providing credit and the whole business is regulated) will help prevent financial crisis.

He also referred to the remarks of the former RBI Governor, Dr Y.V. Reddy, calling for ‘back to basics’ in banking urging banks to focus on lending to real sectors of the economy, particularly agriculture and the small and medium industries.