RBI May Allow Banks To Raise Long-term Debt To Manage ALM

Mumbai, April 29 | Updated: Apr 30 2004, 05:30am hrs
The Reserve Bank of India (RBI) is considering allowing banks to raise long-term debts as a liability product to facilitate banks to minimise the liquidity and interest rate mismatch in their assets and liabilities, generally called asset liability mismatch (ALM).

RBI has constituted an internal group to study the issue. The group will also dwell upon the eligibility conditions for the banks to raise resources through issuance of long term bonds as a liability product and also the procedural aspects, sources indicated.

A number of state-owned and private sector banks have written to the apex bank highlighting the need for allowing them to float long term bonds to minimise the ALM. RBI may have something for banks on the subject in the forthcoming annual policy statement on May 18, a source pointed out.

The majority of commercial banks have a large part of their assets investment portfolio and term-loans with long-term maturity profile while their liabilities borrowings and deposits continue to be relatively short-term. To minimise the ALM, these short-term liabilities are continuously renewed.

According to the RBIs Report on Trend and Progress of Banking in India (2002-03), the maturity profile of commercial banks liabilities continues to be relatively short, with the bulk of the deposits in the one-to-three year maturity bucket. In the case of assets, a large part of the investment portfolio is long term in nature, with a maturity of over five years.

With the deposit rates moving northwards and declining renewal rates of term deposits with emergence of other competitive investment avenues, banks are finding it difficult to manage various risks associated with ALM, a senior banker said.

Currently, commercial banks are allowed to float debts, but for augmenting their Tier-II capital and not as a liability product. Issuance of long-term bonds may help banks to tackle ALM issue in a better way and also facilitate them to finance long-term projects like infrastructure, a banker noted.

Banks have considerable high level of ALM in the 3-5 year and over five year maturity buckets. Banks can have liabilities or asset driven strategies for correcting the ALM. Asset-driven strategies such as securitisation focus on shortening the duration of the asset portfolio. Many banks have securitised their long term home loan portfolio.

The proceeds of securitisation are either redeployed in short-term assets or utilised for repaying short-term liabilities.