InvestorQ : Why has the economist Pronab Sen spoken about the Indian banks being vulnerable to maturity mismatch?
Priyanka N made post

Why has the economist Pronab Sen spoken about the Indian banks being vulnerable to maturity mismatch?

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Neelam Naik answered.
2 months ago
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The renowned economist and the former planning commission member, Pronab Sen, has warned that Indian PSU banks may be running a huge risk of maturity mismatch. The issue of maturity mismatch arises when there is a mismatch between the tenure of the borrowing and the tenure of loans given. Borrowing short term and lending long term has its risk. Similarly, borrowing long term and lending short term also has its own set of risks. Either ways, Sen feels that the risks have been glossed over due to government support.

Now, Sen feels that the Indian banking sector may be headed for a massive asset liability mismatch. According to Sen, most banks rely on their regular deposits to fund loan books and that is where the problem of maturity mismatch is evident. For instance, the average tenure of deposits of Indian banks is around 2.5 years while that of loans is 9 years. In normal circumstances, this does not pinch as deposits get perpetually rolled over. However, problems could arise midst rising rates or a run on deposits. This is largely because working capital finance shrank from 70% to 35% of bank loan books in last 20 years.

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