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Rediff.com  » Business » Bank bonds likely to fix liability gap

Bank bonds likely to fix liability gap

By BS Banking Bureau in Mumbai
March 02, 2004 08:45 IST
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The Reserve Bank of India is set to allow banks to float long-term bonds to take care of their asset-liability mismatches.

The move is significant, keeping in mind the huge demand for long-term infrastructure funding. It would help banks to raise long-term funds that could be used for infrastructure funding, said a banking source. The core sector's total fund requirement is Rs 100,000-150,000 crore (Rs 1,000-Rs 1,500 billion).

So far, banks have been allowed to float bonds to prop up their Tier-II capital. But they will now be permitted to float bonds as a liability product.

These bonds will not form part of banks' Tier-I or Tier-II capital but will be treated as pure debt and will, therefore, have to fulfill the statutory liquidity ratio and the cash reserve ratio requirement.

Almost all the banks have asset-liability imbalances in the 3-5 year and over 5-year maturity brackets.

The Standing Panel on Financial Regulation, which is slated to meet this week, will finalise the guidelines on floating of bonds by banks.

RBI Deputy Governor K J Udeshi, Indian Banks' Association Secretary H N Sinor, State Bank of India chairman A K Purwar, Punjab National Bank Chairman and managing director S Kohli and HSBC India CEO Niall Booker are some of the members of this committee.

"There is no regulation on banks tapping the bond market, but no bank has floated bonds till now. Only ICICI Bank, after its conversion to a bank from a financial institution, moved the RBI with a proposal and got clearance," said a source familiar with the development.

Banks are facing huge liquidity and interest rate mismatches. Though they fund long-term assets (housing loans that typically have a tenure of 10 years and above) at fixed interest rates, the liabilities they contract are relatively short-term (not more than three years), which have to be continuously renewed.

On the liabilities front, banks face two risks: deposit rates moving northwards and deposits not being renewed if other investment avenues prove more attractive.

Once they are allowed to raise long-term bonds, banks will be in a better position to tackle asset-liability mismatches.
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BS Banking Bureau in Mumbai
 

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