Asset-liability mismatch may hurt banks’ profits

DESPITE prodding by the FM to lower interest rates and lend a bit more generously, many banks may struggle to grow their loan books in the near future. Analysts are saying the balance sheets of most banks are showing a short-term funding challenge and this could lead to a pronounced slowdown in their lending to Indian companies. This asset-liability mismatch is also likely to dent banks' earnings, they warn.
    "Over the last three years, banks funded their long-term credit via short-term liabilities, mostly deposits, a large part of which were corporate bulk deposits and certificates of deposits," says Aditi Thapliyal, analyst at Noble Group. "As a result, in the shorter end of the duration curve (less than or equal to one year), Indian banks face an asset-liability mismatch with a large volume of deposits maturing faster than loans," says Ms Thapliyal.
    In fact, RBI has been pointing out that banks have been facing these mismatches. But Partha Mukherjee, who heads credit at Axis Bank says Indians regulations allow banks to keep a certain amount of ALM and the current levels at banks are within the permissible limit. "But banks are trying to set this in order by encouraging the shortterm loans and long-term deposits, especially in times of stress," he says. However, analysts like Ms Thapliya say replacing these maturing deposits will be difficult in the current climate where liquidity is scarce.
    Deposits, the cheapest form of financing available to a bank, took a back seat during the past two years as banks funded incremental credit disbursals by eating into their investment portfolio. Liquid assets (as a proportion of net demand and time liabilities or NDTL) held by the banks to meet the Statutory Liquidity Ratio have come down from 40% 10 years ago to 26% in Sept-08. This resulted in banks operating near the statutory minimum level of 25% of NDTL (24% from November 8). An SLR near the statutory minimum means that a bank cannot borrow from RBI via the repo window against excess SLR-eligible securities to tide over their short-term funding needs.
    This lending slowdown is almost likely to coincide with rising NPAs. This combination of funding problems for specific banks, a lending slowdown for those banks and rising NPAs across the sector could mean that although the Indian banking sector is trading at 8 times the estimated earnings for the current year (down from 16x in January 08), they are still not trading at the "bottom-of-the-cycle" valuations, say analysts.