Senior Bonds: A Structural Fix for Banks Necessary to Cure ALM Gaps, Improve Liquidity

Rising Asset-Liability Mismatches: Growing divergence in the tenors of loans and deposits has resulted in rising asset-liability mismatches (ALMs) in government banks, says India Ratings & Research (Ind-Ra). The cumulative negative funding gap up to one year increased to 15.7% of assets at end-March 2014 for government banks, from below 4% in 2002. The gap was over 20% for nine banks. In fact, six government banks (up from three banks in FY13) had a negative gap higher than the stock of government securities and cash. The gap implies a shortage of ready collateral that could be used to repo with the Reserve Bank of India (RBI) in
a liquidity squeeze. Read more

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