RBI proposes new banks for long-term financing of infra projects

In a move that would see a revival of the dismantled development finance institutions like the IDBI and the IFCI, the Reserve Bank of India (RBI) today released on its website a discussion paper on 'wholesale and long-term finance banks'.

The proposed wholesale and long-term finance (WLTF) banks would fund long-term high-value projects.

The discussion paper explores the scope for setting up more differentiated banks, specifically wholesale and long-term finance banks, after having issued in-principle approvals and licences to set up differentiated banks, such as payment banks and small finance banks.

''Going forward, considering the existing landscape of banking and non-banking services in the country, it is felt that there is a need to explore the possibilities of permitting other types of differentiated banks to facilitate progression to a more mature and deeper financial sector,'' the central bank said in a draft discussion paper on WLTF banks.

The minimum capital required for the bank would be Rs1,000 crore, considering these banks would be ''very large institutions ab initio to take on large exposure to industrial, commercial and infrastructure sector''. Therefore, they have to invest heavily in information technology and skill building to mitigate the risks.

The wholesale and long-term finance banks will focus primarily on lending to infrastructure sector and small, medium and corporate businesses. They will also mobilise liquidity for banks and financial institutions directly originating priority sector assets, through securitisation of such assets and actively dealing in them as market makers.

They may also act as market-makers in securities, such as, corporate bonds, credit derivatives, warehouse receipts, and take-out financing, etc.

These banks will provide refinance to lending institutions and will be present in capital markets in the form of aggregators. They may have negligible retail sector exposure on asset side. The primary sources of funds for these banks could be a combination of wholesale and long-term deposits (above a large threshold), debt/equity capital raised from primary market issues or private placement, and term borrowings from banks and other financial institutions.

The bank would be on-tap and the eligible promoters could be anyone who satisfies the fit-and-proper guidelines on floating a regular commercial bank, which means industrial groups and corporate houses will not be eligible to float these banks.

These banks should not accept savings deposits, the RBI said. Only current account and term deposits of at least Rs10 crore would be allowed, with ''reasonable restrictions'' on premature withdrawal of these deposits, the discussion paper said. Besides, the banks can issue bonds, locally or abroad, in rupee denomination.

The banks will have to maintain the cash reserve ratio, but would be exempted from the statutory liquidity ratio, or mandatory bond holding. There could also be relaxation regarding liquidity risk and compliance with liquidity ratios such as liquidity coverage ratio.

The primary sources of funds for WLTF banks could be a combination of term deposits, debt and equity capital raised from primary market issues or private placement, and term borrowings from banks and other financial institutions.

The retail presence, if at all, would be negligible.

These would help take out pressures from existing commercial banks that are averse to fund long-term projects due to heavy bad debts in their books. Also, niche banks can bring expertise to the banking system that could lead to enhanced efficiency ''in terms of reduced intermediation cost, better price and improved allocation of capital,'' said RBI.

The creation of specialised wholesale vehicles was proposed by the Report of the Committee on Financial Sector Reforms, chaired by former RBI governor Raghuram Rajan. Later, the Nachiket Mor committee suggested creation of specialised wholesale banks.