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Indian banks fail to fill in the 'gap' 
(Wed, 5 May Pre-Open) 
 
They have had a reasonable growth in asset book despite severe liquidity pressures in the past fiscal. Most have seen their net interest margins improve by a few percentage points despite lower pricing power. In spite of the distress on credit cards and personal loans, they have maintained some of the best asset quality amongst global peers. These may seem to suggest that Indian banks have nothing really to worry about. We wish we could agree with this logic. A closer look at their balance sheets shows some gaping holes that need to be filled in.

Banks need to ensure that the loans that they have sanctioned are also given out. They also need to ensure that the duration of their assets (loans) and corresponding liabilities are matched. The low interest rate and slow economic growth scenario seem to have created a gap in these.

Indian banks have in the past fiscal continued to sanction more loans. But unfortunately a significantly lower proportion has actually gone out of their books. The reason being that most banks were risk averse and chose to fund only corporate assets. These did belong to good quality corporate capex and infrastructure funding segment. But due to project delays and debt averseness of companies the loan disbursal lagged behind.

This is not just the case with the PSU or project financing companies. Things are no different at private sector and smaller banks. Infact even infrastructure financing companies reported similar numbers . Take the case of IDFC for instance. The institution doubled its sanctions in FY10, despite a muted first half. But the growth in disbursements was only 60% YoY. The large sanctions give the impression of impending robust growth in credit. But the same cannot fructify unless they go out of the banks and finance companies' books. This explains the relatively higher sanctions but lower interest revenues in their books in FY10.

Another gap that can be dangerous to the banks' future is the mismatch in duration. Banks have been taking on plenty of short term deposits on their books. But these have been lent out for long term project financing. On one hand this poses the risk of lower margins due to re-pricing of deposits. On the other hand, the mismatch in funding can also destabilize banks' balance sheets. The RBI has already issued a warning in this regard to them.

We believe that their eye on growth, profitability and asset quality can certainly help Indian banks rise above their peers. But keeping a watch on their balance sheet stability and revenue sustainability is paramount to their existence.

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