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ICICI, IDBI face asset-liability mismatch

Tamal Bandyopadhyay

ICICI and the Industrial Development Bank of India are facing huge asset-liability mismatches.

ICICI is also tapping private banks to raise fresh resources since its existing credit limit with public sector banks has been exhausted-and it is paying marginally higher interest on its borrowings.

To take advantage of the current low interest rate regime, both the institutions have been borrowing short and lending long.

The outcome has been a huge asset-liability mismatch, so much so that both will have to generate substantial sums to meet redemptions of existing liabilities.

ICICI managing director and CEO KV Kamath said that ICICI had no problem of solvency, liquidity and capital adequacy.

"Triple-A rated financial intermediaries always pay a slightly higher rate of interest on their borrowing than a triple-A rated manufacturing company," Kamath said. IDBI deputy managing director and chairman-in-charge S K Kapur declined to comment.

Officials at ICICI and IDBI also justify their strategy of borrowing short by citing the current low interest rates. "You take a call on interest rates. In a declining interest rate scenario, we have nothing to lose," said ICICI executive director Kalpana Morparia.

But ICICI insiders say that "there is concern on the liquidity front".

Indeed, almost all public sector banks have reached their exposure limits to ICICI. In other words, public sector banks cannot take fresh exposure to ICICI, unless they get special permission from the Reserve Bank of India.

So ICICI proposes to target retail investors in a bigger way. ICICI will be raising Rs 250 billion this financial year (versus Rs 200 billion last financial year) -- Rs 60 billion from individual investors, Rs 100 billion from semi-retail investors and Rs 90 billion from provident funds, regional rural banks, corporate bodies, public trusts and insurance companies.

The fundamental problem is that both ICICI and IDBI are building medium and long-term assets on short-term money. For instance, in the 'less than one year' bracket, ICICI has assets of Rs 196.79 billion, against a comparable maturity liability of Rs 263.52 billion, leaving a gap of Rs 66.73 billion, going by ICICI balance sheet figures.

These figures are very conservative and are based on the assumption that 100 per cent of the assets maturing in this category are standard assets.

The gap can widen if part of the assets maturing in this slot turn into non-performing assets and the institution fails to realise 100 per cent of the proceeds.

If this is the case with ICICI, IDBI presents no different picture. IDBI's assets in the up to one year category are to the tune of Rs 246.43 billion; the comparable maturity liability is pegged at Rs 313.81 billion, leaving a gap of Rs 67.38 billion.

In other words, both these institutions will be required to generate over Rs 130 billion (either through internal generation or from the markets) this year alone to meet redemptions of old liabilities.

"The bulk of the borrowings of these institutions will be used to meet the redemption pressure, leaving very little scope for asset growth. And if there is a sudden tightening of liquidity in the system, they will find themselves in a tight spot," analysts said.

ICICI is said to be paying a tad higher rate for its privately placed bonds, though ICICI officials deny this. "If you compare the yields on ICICI bonds with those on government securities, the spread has widened. But yields on government securities are at this point abnormally low," said ICICI's Morparia.

In the one to three year bracket, ICICI is running a mismatch of over Rs 50 billion (total assets: Rs 170.84 billion; total liabilities: Rs 221.52 billion). In the case of IDBI, the figure is close to Rs 170 billion (total assets: Rs 388.78 billion; total liabilities: Rs 555.37 billion).

The RBI's asset liability management rules allow up to 5 per cent mismatch in time brackets of 1-14 days and 15-28 days. It has been left to the boards of financial institutions to monitor the mismatches in other time brackets.

Morparia pointed out that ICICI liabilities are fixed maturity liabilities where investors do not have a call option and hence cannot suddenly withdraw money.

On the assets side, generally a 45-day notice is stipulated for disbursement of loans which gives ICICI time to arrange for funds to be disbursed.

Morparia also said that besides its ability to tap the market for raising funds, ICICI has standing rupee lines of credit and cash credit worth Rs 6 billion from Indian banks.

It also has a committed foreign currency line of about $250 million that it has not drawn on. The institution has aggressively been securitising its loan portfolio to bring down its assets.

Over the last two months it has securitised Rs 6.50 billion worth of loan portfolio. The total marketable debenture and loan portfolio identified is around Rs 100 billion, she said.

An IDBI statement said the institution is comfortable on the liquidity front. During the last fiscal, IDBI exercised its call option and prepaid high cost borrowings of Rs 39 billion.

This year it plans to pre-pay high-cost borrowings of over Rs 30 billion. The entire debt servicing of Rs 167.40 billion during the last fiscal year was met through internal generation.

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