An asset earns cash over fifteen years. It is funded with money that has to be given back in ninety days and borrowed again from somebody willing to lend it that week. For sixteen consecutive quarters this works, and it works better each time: the issuer has a record, the paper is taken up quickly, and the spread it pays narrows. Then, in one particular week, the buyers of that paper are dealing with something of their own — a redemption wave, a scare elsewhere in the market, a rule change — and they do not buy. The asset is unchanged. The tolls are being collected. The borrower has ninety days of cash and a fifteen-year receivable, and no arithmetic anywhere in its accounts turns the second into the first.
You are working at the top of a ladder that a friend is steadying at the bottom. Nothing you are doing is reckless, the ladder is sound, and you have been up and down it all afternoon. Your safety is nevertheless not a property of the ladder. It is a property of somebody choosing to stay at the bottom, and that choice is renewed continuously by a person whose reasons have nothing to do with your work.
A company funding a fifteen-year asset with ninety-day paper is doing nothing unsound on any given day. Its solvency is genuine and its accounts are honest. Its ability to keep operating is a decision taken four times a year by lenders whose reasons may be entirely unrelated to it.
What the mismatch actually is
Solvency asks whether the assets are worth more than the liabilities. Liquidity asks whether cash is available on the date it is demanded. A maturity mismatch leaves the first question untouched and makes the second one somebody else’s to answer. This is why a company can fail while remaining, on every measure of value, solvent — and why the failure looks inexplicable to a reader who has only examined the profit and loss account and the leverage ratio.
| Three ways to fund the same ₹4,000 crore asset | What has to go right | What breaks it |
|---|---|---|
| A fifteen-year amortising term loan | The business earns roughly what was planned, and the instalments are met from collections | A long, visible deterioration in the business itself. There is time to see it and time to act |
| Five-year debentures repaid in a bullet | The business earns, and the market is willing to refinance once, in year five | One bad month, five years from now — and the date is known to everybody from the day of issue |
| Ninety-day paper, rolled | The market is willing to refinance about sixty times across fifteen years, and never declines | Any one bad week out of those sixty, for a reason that need have nothing to do with the borrower |
Where it shows in published numbers
- Short-term borrowings as a share of gross debt, read against the life of the assets they fund. A trader financing inventory with ninety-day money is matched. A company financing a plant with the same money is not, and the difference is not visible in the ratio — it is visible only when you know what the money bought.
- Commercial paper outstanding. Short-term paper carries its own short-term rating scale, separate from the long-term rating, and a company using paper heavily will have one. A downgrade on the short-term scale is a more immediate event than a long-term downgrade, because the paper matures inside weeks.
- Growth in the balance sheet funded by growth in current borrowings. Compare, over three years, the increase in fixed assets and long-term investments against the increase in equity and non-current borrowings. Where the first outruns the second, the difference was funded short.
- For a lender — a bank or a non-banking financial company — the asset-liability statement. It buckets expected inflows and outflows by period, and the number that matters is the cumulative gap in the buckets up to one year, expressed as a percentage of outflows in those buckets. It is disclosed, it is rarely read by equity investors, and it is the whole subject of this lesson stated as a table.
- Whether the facilities are committed. A sanctioned working capital limit in India is generally repayable on demand and reviewable, and the drawing power against it is recomputed against stock and receivables. That is a permission to borrow, not a promise of funding, and it is worth the least on the day it is needed most. A genuinely committed facility — one the lender is contractually obliged to fund for a defined period — is a different instrument, and a company that has arranged one will say so.
The plant is being funded with commercial paper
A manufacturer you have been researching is halfway through a ₹2,000 crore plant. The concall mentions, in passing, that construction is being funded with commercial paper "because it is materially cheaper than term debt at the moment". Leverage is 2.8 times and interest cover is comfortable.
A company funds a fifteen-year asset entirely with ninety-day commercial paper that it has rolled successfully for four years at narrowing spreads. What has the improving spread told you about the risk?
Aap seedhi pe upar kaam kar rahe ho aur neeche dost pakde khada hai. Seedhi mazboot hai, aap kuch galat nahi kar rahe — par aapki safety seedhi ki nahi, uske khade rehne ki property hai. Pandrah saal chalne wale asset ko 90 din ke paper se funding karna bilkul yahi hai: saal mein 4 baar, yaani pandrah saal mein lagbhag 60 baar dobara udhaar lena padega. 59 baar sab theek raha toh bhi ek kharab hafta kaafi hai, aur woh hafta aksar kisi aur ki wajah se kharab hota hai. Company diwaaliya nahi hoti — bas tareekh pe paisa nahi hota.
- A maturity mismatch leaves solvency untouched and hands liquidity to somebody else to decide.
- Short-term funding is cheaper because the lender is exposed for less time; the borrower has bought that saving with refinancing risk.
- Fifteen years of ninety-day paper is about sixty separate lending decisions, and the exposure is to the worst of them, not the average.
- A sanctioned working capital limit is usually repayable on demand — a permission to borrow rather than a promise of funding.
- For a lender, the asset-liability statement’s cumulative gap in the up-to-one-year buckets states this risk directly.
Mark it done to track your progress through the curriculum.
Common questions
Short, direct answers to what people ask about this topic.
- asset liability mismatch meaning
- An asset-liability mismatch is funding an asset that pays out over years with borrowing that must be returned in weeks or months, so the money has to be raised again long before the asset has repaid it. Solvency is untouched — the assets can still be worth far more than the liabilities — but liquidity becomes somebody else’s decision, because continuing to operate depends on lenders agreeing to refinance on each maturity date.
- why is commercial paper cheaper than a term loan
- Because the lender is exposed for a much shorter period, and the reason the lender is exposed for a shorter period is that the borrower has agreed to face the market again sooner. The saving is the price of accepting refinancing risk, not free money or clever treasury. Fifteen years of assets funded with ninety-day paper is roughly sixty separate lending decisions, and the structure fails on the worst of them rather than the average.
- a sanctioned working capital limit in india is generally repayable
- On demand — and the drawing power against it is recomputed against stock and receivables, so the limit contracts in exactly the conditions that would make a company want to use it. That makes an undrawn limit a permission to borrow rather than a promise of funding. A genuinely committed facility, one the lender is contractually obliged to fund for a defined period, is a different instrument, and a company that has arranged one will say so.
- how can I tell if a company is funding long term assets with short term debt
- Compare, across three years, the increase in fixed assets and long-term investments against the increase in equity and non-current borrowings; where the first outruns the second, the difference was funded short. Then read short-term borrowings and commercial paper outstanding against what the money actually bought — a trader financing inventory with ninety-day money is matched, a company financing a plant with it is not. For a bank or non-banking financial company, the asset-liability statement’s cumulative gap in the up-to-one-year buckets states the same thing directly.
- why did indian nbfcs face a liquidity crisis in 2018
- Debt mutual funds were among the principal buyers of the short-term paper that non-bank lenders issued, and after a large infrastructure financing group defaulted in 2018 those funds faced redemptions, reappraised credit and stopped rolling the paper. Lenders that had funded housing, infrastructure and project loans with short-dated paper then had maturities they could not meet from collections designed to arrive over years. Some of those loan books were performing and only cash on particular dates was missing, yet from outside that looked identical to genuine asset-quality trouble for weeks.