According to newspaper reports, the State Bank of India (SBI) is planning to introduce a new structure of interest rates for long-term deposits with 5-10 years maturity. The move is aimed at avoiding long term asset liability mismatch.
SBI (FY99 total income: Rs 19.11 bn) is India's largest bank. It runs the world's largest network of 8,900 branches and controls about 22% of India's loans and deposits.
Such a move would be beneficial to both the bank and its customers. SBI would benefit in terms of a more stable liability structure with a known cost of long term liabilities. This would enable it to design more efficiently priced long-term instruments, which could then be offered to its customers.
Moreover, by matching duration of long term liabilities with long term assets the bank would optimise the utilisation of its funds, resulting in better margins.
However, by taking on long-term liabilities, the bank is exposing itself to a larger amount of risk, arising primarily from uncertainity pertaining to political and economic conditions in the future.
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