India’s banking sector is facing the predicament of a “massive asset-liability mismatch” that could explode at any moment, adding that there is a need to reassess the laws governing the sector, famed economist Pronab Sen said.
Mr Sen said “that explosion” has not yet happened as most banks are in the public sector.
He explained the situation, saying that Indian banks had adopted the British model and that the laws do not allow lenders to borrow from the capital market, leaving deposits essentially the only source of funds.
“Today, the average maturity of bank loans is about nine years and the maturity of deposits is almost two and a half years. So you have nine years on the asset side and 2.5 years on the liability side… meaning there is a huge mismatch between assets. and liabilities that could explode at any moment,” the former chairman of the statistical commission said here during a talk at Bandhan Bank’s 7th anniversary on Monday night.
“It didn’t happen because most of our banks are in the public sector… But now banks have to assess not only the risk of the borrower, but also the duration of the lending… There is a huge risk to the banking sector,” he said.
Banks’ loan portfolios, Mr. Sen said 20 years ago, included 70 percent working capital financing and 20 percent retail, while term loans to corporates made up 10 percent of the share.
In current times, fixed-capital term loans make up 45 percent of the loan portfolio, and working capital financing has shrunk to about 35 percent, he said.
According to the former chief economic adviser to the Planning Commission, India’s banking sector has become universal by default and not by definition, which is why the laws need to be reconsidered.
“Banking laws should allow lenders to raise money in the capital market. We need to align our laws with those of Japan and Europe,” said Sen.
Talking about the adverse effects of COVID-19 on the economy, he said the pandemic has “broken and damaged” micro, small and medium-sized enterprises (SMEs) that need to be rebuilt.
The noted economist said that a major problem in their recovery path is that banks are unwilling to lend to a vast majority of MSMEs, due to the risk profile of these units.
“In the past, the non-banking financial corporations (NBFCs) filled this gap, but today they are in just as much trouble as the MSMEs. This is where the relationship between the NBFCs and banks comes into the picture, and it is not a healthy one. .
“We need to rethink the ties between NBFCs and banks. The relationship should be that of a partner, not that of a customer or borrower,” said Sen.
Mr Sen also issued a word of caution about the privatization of state-owned banks, claiming that it could lead to greater risks.
“Privatization would mean moving the entire deposit and loan portfolio from lenders to a private entity without government support,” he added.
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