Massive Mismatch of Assets and Liabilities in the Indian Banking System
August 23Dr. Pronab Sen, a former senior economic adviser to the Planning Commission, said on Tuesday that there is a huge asset-liability mismatch in India’s banking system waiting to explode any moment.
According to him, the reason why they have not yet exploded is that the majority of banks were in the public sector space and the government bears the risk. Privatization could lead to increased risks.
“The life of the average bank’s assets is becoming extremely long. Today, the average duration of bank loans has risen to around nine years, while the liability is around two and a half years. You have a huge mismatch between assets and liabilities and it can explode at any time. This has not happened so far because a large part of our banks are in the public sector,” Sen said at Bandhan Bank’s founding day anniversary conference on Tuesday.
India should follow the universal banking model adopted by countries like Europe and Japan to mitigate risks.
Focus more on MSMEs
According to Sen, banks should focus on lending to the MSME sector as they are the main drivers of growth and job creation.
“Banks are willing to provide working capital loans to MSMEs, but not long-term loans because their risk profile does not match. Bank lending in India is seriously inefficient,” he said.
Highlighting the need to better rebuild the MSME sector, he said there had been a significant increase in the pricing power of businesses, as competition from unincorporated entities, including MSMEs, is currently absent. . This has made it easier for businesses to pass costs on to consumers. The situation will only improve if MSMEs come back.
“If we rely on the corporate sector to drive our development forward for the same amount of investment and savings that we are making today, we will experience much slower growth and that has already started to happen,” he said. he declared.
Previously, NBFCs largely filled the gap by lending to the sector, but now NBFCs are also struggling. Thus, banks should work with NBFCs as partners to lend to the sector.
August 24, 2022