Explaining the situation, he said that Indian banks have adopted the British model, and the laws do not allow it. Lenders Borrowing from the capital market, which essentially makes deposits the only source of funding.
“Today, the average tenure of bank lending is around nine years, and the tenure of deposits is closer to two and a half years. So, you have nine years on the asset side and 2.5 years on the liability side. That means a massive asset. There is a liability mismatch that can explode anytime,” the former chairman of the Statistical Commission said while delivering a lecture at the 7th anniversary celebrations here.
on Monday night.
“This has not happened because the largest part of our banks are in the public sector… But, now banks have to assess not only the borrower’s risk appetite, but also the lending period. Huge for the banking sector. risk,” he said.
Elaborating, Sen said that 20 years ago, the loan portfolio of banks consisted of 70 per cent working capital finance and 20 per cent retail, while the share of term loans to companies was 10 per cent.
He said that at present, term loans to fixed capital account for 45 per cent of the loan portfolio, and working capital finance has shrunk to around 35 per cent.
According to the former chief economic advisor of Planning CommissionThe Indian banking sector became universal by default and not by design, and that is why the laws need to be re-looked at.
“Banking laws should allow lenders to raise funds from the capital market. We must align our laws with the laws of Japan and Europe,” said Sen.
Talking about the adverse effects of COVID-19 on the economy, he said that the pandemic has “broken and damaged” the Micro, Small and Medium Enterprises (MSMEs) which need to be rebuilt.
The eminent economist said a major problem in the way of their recovery is that banks are unwilling to lend to the vast majority of MSMEs due to the risk profile of these units.
“Earlier, non-banking financial companies (NBFCs) used to fill this gap, but today, they are in the same trouble as MSMEs. This is where the relationship between NBFCs and banks comes into the picture, and it is not a healthy one. .
“We need to rethink the relationship between NBFCs and banks. The relationship should be that of the partner, not the customer or the borrower,” Sen said.
Sen also cautioned on the privatization of state-run banks, arguing that it could increase the risk.
“Privatization would mean the entire deposit and loan portfolio of the lenders going to a private entity without government support,” he said.