A massive asset-liability mismatch in the Indian banking sector could explode anytime, warned noted economist Pronab Sen.

The explosion has not happened yet because most of the banks are in the public sector, Sen said.

“Today, the average tenure of bank lending is about nine years, and deposits’ tenure is close to two-and-a-half years. So, you have nine years on the asset side, and 2.5 years on the liability side… which means there is a massive asset-liability mismatch which can explode anytime,” the former chairman of the statistical commission said while delivering a lecture at the 7th anniversary celebrations of Bandhan Bank.

If the explosion has been averted so far, it is “because the largest chunk of our banks are in the public sector”. But “banks now have to assess not only the risk of the borrower but also the length of time of lending”. There is “an enormous risk for the banking sector”.

Sen said 20 years back, the loan portfolio of banks comprised 70% working capital finance and 20% retail, while term loans to companies accounted for the remaining 10%.

This has changed now with term lending for fixed capital comprising 45% of the loan portfolio and working capital finance shrinking to around 35%.

The former principal economic advisor to the Planning Commission said that the Indian banking sector turned universal by default and not by design and that is the reason there is a need to have a relook at the laws, news agency PTI reported.

There is a need to reassess laws governing the industry. The Indian banks had adopted the British model and the laws don’t allow lenders to borrow from the capital market, which essentially makes deposits the only source of funds, Sen said.

“Banking laws should allow lenders to raise money from the capital market. We should align our laws with those of Japan and Europe,” Sen added.

Talking about the adverse impacts of Covid-19 on the economy, he said the pandemic “broke and damaged” the micro, small & medium enterprises (MSMEs) , which need rebuilding.

The noted economist said a big problem in the path of their recovery is that banks are not willing to lend to a vast majority of the MSMEs due to the risk profile of these units.

“Earlier, the non-banking financial companies (NBFCs) used to fill this gap, but today, they are as much in trouble as the MSMEs. This is where the relationship between the NBFCs and banks come into the picture, and it is not a healthy one.

“We need to reconsider the ties between NBFCs and banks. The relationship should be that of a partner, not of that of a client or borrower,” Sen said.

Sen also sounded a word of caution on privatisation of state-run banks, contending that it could lead to heightened risks, PTI reported.

“Privatisation would mean the entire deposit and loan portfolio of lenders going to a private entity without government support,” Sen said.