Mismatch in maturity profiles of banks’ assets & liabilities-BusinessLine
It would appear that the clamour for reduction in policy rates has its roots in this basic imbalance and consequent liquidity stress.
April 14, 2013:
The ‘Report on the Trend and Progress of Banking in India for 2011-12’ reveals some interesting issues on the maturity profile of select liabilities/assets of different bank groups. A perusal of the accompanying Table indicates that 50 per cent (48.5 per cent as on March-end 2011) of deposits of all scheduled commercial banks (SCBs) have a maturity of up to one year as at the end of March 2012; in the case of foreign banks, it is 61.8 per cent (63.7 per cent as at end March 2011).
The report merely says that the share of CASA (current account and savings account) deposits declined during 2011-12 and formed one-third of the total deposits of SCBs. The maturity profile of loans and advances, on the other hand, shows that those having a maturity of more than one year constitute 64.1 per cent of the total advances as at the end of March 2012.
On the investments side, only 30.4 per cent has maturity of less than one year. While it is agreed that there cannot be a perfect matching of maturity profile of different assets and liabilities, perhaps this imbalance has necessitated/resulted in short-term borrowings of SCBs (up to one-year category) constituting 52.6 per cent of total borrowings.
In the case of foreign banks, it was 84.5 per cent as at end-March 2012. It would appear that the clamour for reduction in policy rates has its roots in this basic imbalance in the maturity profile of select assets and liabilities and consequent liquidity stress.
RESERVE REQUIREMENT
Borrowing may have been more advantageous as compared to penalties to be borne by banks in case of non-compliance with reserve requirements. One wonders if the voices heard regarding doing away with reserve requirements can be traced to a need for high level of borrowings for compliance with reserve requirements. Further, a credit-deposit ratio of around 78 per cent and incremental credit-deposit at over 85 per cent may not be sustainable on a long-term basis.
It would have been more interesting if the Report had provided the share of ultra short-term, wholesale and high-cost deposits. One guess is that the share of such deposits could be anywhere between 15 and 20 per cent of the total deposits. The other issue is whether strict compliance with KYC norms has been achieved in obtaining such deposits. This assumes importance in the context of the reports of alleged money laundering and role, if any, played by banks in this regard.
NARROWING SPREAD
There are certain other issues highlighted in the Report which require a closer look. It is mentioned (paragraph 4.23) that spread of banks narrowed due to higher increase in cost of funds. Is it only because of higher cost of funds? And, if so, which area of funds mobilisation is the villain?
Or has the spread come down due to some borrowers in select verticals having been financed at rates not in line with what the credit risk rating approved by the bank boards and applicable for the particular borrower? Or, in other words, have any (or how many) borrowers with lower credit rating been financed at rates applicable to prime borrowers?
At one stage 40-45 per cent of borrowers had been financed at rates applicable to prime borrowers despite their ineligibility going by risk-based rating. It is true that gross NPAs (non-performing assets) have increased and this phenomenon has been a drag on spread. The Report has analysed which segment of borrowers has contributed to higher NPAs.
In the same manner, will it not be advantageous to know which category of borrowers has given the best yield to the banks? Are they in the large credit vertical or housing/educational/consumer durable segments? Is there any cross-subsidisation of interest?
It would be in the interest of transparency and good corporate governance to publish how both components constituting spread are arrived at by banks.
NIM DIPS A TAD
The other interesting point brought out by the Report is that net interest margin (NIM) dipped slightly in 2011-12 to 2.90 from 2.91 in the previous year. It is true that there is no norm for this parameter. It would appear that the comfort level of banks in India with regard to NIM has perhaps been derived from that of the position obtaining in banks in advanced economies where the environment is totally different and, hence, the Governor of Reserve Bank of India has been repeatedly harping on the need to have a lower NIM for banks in India.
It is felt that it would be worthwhile to evolve a policy towards a stable or consistent NIM through different economic cycles taking into account business/geographical risk as well as management profiles, and not blindly follow the pattern of banks in developed countries.
When a Senior Consultant of World Bank was asked during a private conversation in the early 1990s about the sanctity of a CRAR (capital adequacy ratio) of 8 per cent, his answer was that banks in G-7 countries had an average CRAR of 8 per cent.
TENURE OF HEADS
While one can understand the compulsions under which the top managements of banks work, it is felt that there is greater scope for transparency in day-to-day operational matters. One factor coming in the way of transparency could be the short tenure of CMDs who are satisfied to see that status quo is maintained during their tenure.
It should be possible to evolve a system under which the CMDs are given a minimum term, say, three to five years, with a mandate to bring about improvements in select areas of operation of different banks and the Finance Minister himself monitoring the performance periodically.
The evaluation of top managements’ performance has to be based on parameters such as the management of banks’ balance-sheets, maintaining stability in the financial system, contribution to the national economy in terms of financial inclusion, priority sector lending, compliance with the regulatory requirements, and so on, and definitely not pleasing the political bigwigs by dancing to their tunes.
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