Home loans fuel banks' A-L mismatch

The runaway growth in housing loans over the last few years has played a major part in worsening banks' asset-liability maturity mismatch.

The deterioration in the asset-liability maturity mismatch is even forcing some banks to consider scaling down exposure to long-term loans.

Most of the lending in the past couple of years happened in the higher maturity buckets, particularly housing loans.

The situation has been further aggravated by growing preference for shorter term deposits. Even as the average maturity on assets has increased, the average lock-in on deposits has reduced.

While the average maturity of assets of banks has risen to four to five years from over two years about five years ago, the average maturity of deposits has shrunk to less than two years from about two and a half years. For a large Mumbai-based public sector bank, the average maturity of deposits has fallen to 2.5-3 years from 4-5 years a few years earlier.

"We are internally containing exposure to term loans to some extent (to bring the maturity mismatch to comfortable levels)," said a senior official of a large public sector bank.

Total outstanding housing loans of banks at the end of June 2006 were Rs 1,71,917 crore, up by Rs 60,495 crore from a year ago. The growth came on the back of 50 per cent growth in 2004-05.

"Banks are feeling maturity mismatch more acutely now because of the high growth in housing loans. Housing loans typically have an average maturity of 7-8 years. These are term loans with a maturity of even up to 20 years," according to a senior official with a Mumbai-based nationalised bank.

Working capital loans, which are of very short tenures, have remained stagnant over the years, with corporates increasingly relying more on term loans and debt market to fund their operational credit requirements.

"This further precipitated the mismatch. Our portfolio is heavily skewed towards term loans, while working capital loans are not growing," said a senior banker with another nationalised bank.

"There is a gap of 2-3 years between longer-term asset and liability maturities," executive director of a public sector bank said. A maturity mismatch of a maximum of up to one year is considered comfortable.

Bankers are more worried about the impact of infrastructure financing, which is expected to take-off from now. "Banks are increasing their approvals for lending to infrastructure projects with maturity of 7-15 years. While, the outstandings may not be significant now, it will form a significant portion in the future," a treasury head said.

The preference of depositors for shorter tenures in a rising interest rate scenario is also adding to bankers' worries. With rising interest rates, depositors are unwilling to lock-in their money for longer periods as the incremental interest offered on deposits between one and five years is not much, said bankers.

Corporate savings are also at the shorter end with an average maturity of six months and are likely to flee to another bank on maturity. About 70 per cent of deposits raised by public sector banks have a maturity of up to three years.

For new private sector banks and foreign banks the short to medium term deposits constitute more than 95 per cent of total deposits.

Bank of Maharastra Chairman and Managing Director M D Mallya said the asset-liability mismatch at the current level is still manageable as "small deposits by and large are stable."

Banks distribute savings and current account balances among various maturity buckets, based on the Reserve Bank of India's criteria.