The Reserve Bank of India (RBI) on Friday sought public discussion on whether there was a need to establish wholesale and long-term finance (WLTF) banks. The discussion paper said WLTF banks will be a set of differentiated banks and are expected to be very large institutions to take on large exposure to the industrial, commercial and infrastructure sectors.
“A higher level of initial minimum paid-up equity capital, say `1,000 crore or more, may be considered for these banks,” it said.
With regard to the sources of funding, the RBI said WLTF banks are not expected to accept savings deposits, but current account and term deposits may be mobilised by them. “A higher threshold for term deposits, say above `10 crore, might be considered and there could be reasonable restrictions on premature withdrawal of these deposits,” the discussion paper said.
The paper said at present, the scheduled commercial banks (SCBs) provide the entire gamut of banking products and services in India and abroad to the retail, corporate and government sectors alike. While India had set up development finance institutions (DFIs) over the past few years, some of the major development finance institutions have amalgamated with their banking outfits (such as ICICI and IDBI) and other DFIs have been reclassified as systemically important non-deposit taking NBFCs (such as IFCI).
“The remaining four all-India financial institutions – Exim Bank, National Bank for Agriculture and Rural Development (Nabard), National Housing Bank (NHB) and Small Industries Development Bank of India (SIDBI), which are primarily refinancing agencies, are under the oversight of the Reserve Bank of India (RBI),” the paper said.
According to the discussion paper, commercial banks account for about 67% of the total financial sector assets in the country as on June 2016. “Today, the universal banks operate in retail as well as corporate segments and offer varieties of financial products and services.” However, the paper argued, with the deepening of the financial sector, it may be necessary for the system to evolve towards a structure where apart from universal banks, multiple differentiated banks also operate in their specialised domains.
“As the niche banks develop core competency, expertise will be fostered in the banking system that could lead to enhanced efficiency in terms of reduced intermediation cost, better price and improved allocation of capital,” the paper said.
It added that while the 12th Five Year Plan had projected the infrastructure financing requirement at $1 trillion during the plan period, the funding gap is estimated to be above `5,000 billion. “Outside of budgetary support, which accounts for about 45% of the total infrastructure spending, commercial banks are the second-largest source of finance for infrastructure (about 24%). However, banks have since been saddled with non-performing and restructured assets in the infrastructure sector,” the paper said.