Banks need to hone financing skills

Bracing for the squeeze, the government wants commercial banks to hone their skills in project financing. With the number of developmental financing institutions (DFIs) dwindling, and no replacements in sight, it has become critical for the economy that commercial banks slip into the role that former DFIs have been playing.The governments suggestion is ironical, given that most DFIs have been converted into commercial banks.

While ICICI has already merged with ICICI Bank, the government has decided to transform IDBI into commercial bank without eschewing its developmental finance obligation.

The survey further feels that with the implementation of FRBM and the consequent cut down of the government’s borrowings program, the banks would have to cut down their exposure in government securities and, in turn, undertake focused long term financing to the commercial sector.

Long term financing to commercial sector would be the only alternative left for banks. But to avoid asset-liability mismatch, alternative financing mechanism like take-out financing would have to evolve in order to reduce the exposure tenure of commercial banks that generally have short to medium term maturity profile of their liabilities.