Instead of outright rejection of the Khan panel recommendations on universal banking, the RBI said banks and DFIs should continue with their respective roles in the medium term. "Drastic changes in their respective roles at this stage may have serious implications for financing requirements of funds of crucial sectors of the economy," the discussion paper said.

The thrust of the Khan panel report was on a progressive move towards universal banking and the development of an enabling regulatory fremework for this purpose. The panel, which submitted its report in May last year, recommended that a full banking licence should eventually be granted to DFIs and in theinterim the institutions should be permitted to have banking subsidiaries with holdings up to 100 per cent.

"Given the unique position of DFIs in relation to term lending at this stage, it is desirable that they remain engaged in term-lending activity even as they diversify into new opportunities opened to them by progressive desegmentation of the sector," the paper said.

Reacting to the RBI discussion paper, former Industrial Development Bank of India chairman SH Khan, who headed the working group for harmonising the role and operations of DFIs and banks, said: "If the RBI wants the DFIs to continue with their historical role, they should be given some special dispensations. They cannot work as DFIs unless they have access to long-term cheap funds."

According to Khan, the RBI should either give them access to long-term funds or let them convert into banks. "I do not think they require five years to transform themselves into banks. May be one or two years will be sufficient for them to adopt the newrole," Khan said.

The RBI paper admitted that given the requirements of the industry for long-term financing and maintaining the profitability of DFIs, the institutions should have access to both long- and short-term funds. "It is necessary to have a framework for DFIs to access such funds. At the current juncture, a tentative framework is under consideration in consultation with DFIs," the RBI said.

The Khan panel had recommended that overall ceiling on DFIs' resource mobilisation through term money borrowings, certificates of deposit and inter-corporate deposits should be removed.

The DFIs, according to the RBI, should have the freedom to remain DFIs specialising in meeting the long-term fund requirements till the capital market is fully developed. "However, if a DFI chooses to become a bank, venturing into commerical banking activities, that option should also be available. However, in that case the `converted' DFI should fully conform to all prudential, regulatory and supervisory norms which areapplicable to banks," it said.

It also made it clear that there would be no uniform guidelines for a DFI's transformation into a bank and the RBI clearance in this regard will be given only on a case by case basis. The central bank will, however, not come in the way of a DFI converting itself into a bank within a shorter time span if it can demonstrate its capabilities and conform to the regulatory framework, it said.