Indian banks have often been pulled up by the RBI for borrowing short-term money for long-term lending purposes — known as asset-liability mismatch in banking parlance. While the problem persists, banks’ dependence on deposits with maturities of one year and below has come down significantly from a year ago, notes the RBI’s report on Trends and Progress in Banking.
According to data compiled by the central bank, bank deposits with maturity of up to one year, or short-term deposits, contributed nearly 35.6% of the total deposits compared with 50% a year ago. However, short-term deposits were still the largest contributors to total deposits.
Part of the drop in short-term deposits may be attributed to an attempt by public sector banks to reduce bulk deposits. Earlier this year, the government had asked PSU banks to reduce bulk deposits to under 15% as a way to reduce cost of funds.
The contribution of deposits between one- and three-year maturities stood close to 31% against 26.3% in the year ended March 2012. Deposits over five years contributed only 18.4% of the total deposits in FY13 compared with 15.7% in the year before.
In case of foreign banks, the dependence on short-term deposits was the highest at 62% of their total deposit base in FY13, while deposits with maturities above five years constituted only 0.1%. Public sector banks, on the other hand, showed only 34% of their deposits in the short-term categories, while the five-year-and-above bucket contributed 19% of their total deposits.
Meanwhile, loans and advances of up to one year contributed only 25.8% of the total against 36% a year ago. The contribution of loans between one and three years stood at nearly 48% of the total loans, showing that banks continue to run an asset-liability mismatch. Longer-term loans of over five years constituted 17.8% of total loans for the banking system.
“Such a mismatch can put strain on liquidity, earnings and, at times, even solvency of the bank,” RBI said in its report on Thursday.
Bank borrowing up to one year stood as high as 57% of the total borrowing by the banking system against 52.6% last year. Long-term borrowing of over five years was only 21.3% in comparison while 43% of bank investments were in the above-five-year category.