The Reserve Bank of India (RBI) has told banks to focus on lending for the short and medium term rather than lock themselves in long-term loans. This follows concerns that banks are running huge asset-liability mismatches by extending very longterm project loans even as their funding comes from short-term deposits.

"This was an issued that was raised by a deputy governor in a recent meeting with bank chiefs," said the chairman of a public sector bank on the condition of anonymity. In the meeting, RBI told banks that since the average liability on the books of banks was is in the range of one to two years, they would be better positioned to lend projects for short to medium term (three years). This, is turn, will help banks in improving their asset-liability mismatches. Banks can lend long-term projects only if they have long-term liabilities on their books. As of now, the share of deposits maturing over five years is 9% of total deposits while the share of one to two years deposits have risen from 26.5% in 2006 to 40% in 2008. Banks have been lobbying with RBI to allow them to issue tax-free, long-term bonds to enable them to raise funds for long-term projects.

RBI is of the view that banks should finance a project in the initial stage of implementation and these loans could be then taken over by longer term financiers. Following which banks could provide working capital loans while term-financing institutions could focus on long-term loans. Take-out financing is a mechanism wherein originator enters into an agreement to sell loan to another lender at a mutually agreed price in future date. Here the originator holds the loan in his books for the initial years while the buyer of the loan retains its till maturity. In a last credit policy, RBI has said that it is very close to finalising the guidelines on take-out financing.

Source: Economic Times Bank On Short-Term Loans In Line With Deposit Trend: RBI