Banks’ asset-liability mismatch (ALMi), on the rise due to infrastructure financing, needs to be curbed to safeguard the stability of the banking system, a working paper by a Reserve Bank of India (RBI) staff member has said.
The paper noted that ALMi has risen not just due to infrastructure loans, but also due to personal loans, excluding credit card outstanding.
The data used for statistical analysis by the author are up to March 2009. The paper said personal loans accounted for 32.5% of long-term loans as of end-March 2009.
“Thus, it is not only infrastructural loans, but also the increase in personal loans that (exclusive of amount outstanding against credit cards) can result in ALMi of the banking sector,” the working paper said. However, the paper noted that growth in infrastructure loans was greater than that of overall non-food credit, while increase in personal loans lagged credit growth.
Moreover, the growth in infrastructure loans is partly structural, the paper said.
“Since January 2008, banks’ lending to the infrastructure sector witnessed a statistically significant higher growth rate compared with its growth during the period prior to it,” the paper said.
Banks' dependence on short-term deposits and the rapid growth in infrastructure loans has raised concerns over ALMi, the paper said.There is a need to look for alternative financing instruments for infrastructure sector and banks, too, need to raise more long-term deposits to curb the ALMi.
Basel-III norms will reduce banks ALMi, the paper said, adding that a large share of equity capital will lend stability. Basel-III norms require banks to have higher common equity as Tier-I capital.
The paper was authored by PB Rakhe, assistant adviser at the Department of Economic and Policy Research at RBI’s Kolkata office.