RBI paper seeks views on wholesale, long-term finance banks

RBI has released a discussion paper on a proposal to set up ‘differentiated banks’ in the form of wholesale and long-term finance banks to fund large projects


The new banks—wholesale and long-term finance banks—will focus on lending long-term and cater to the funding needs of sectors such as infrastructure and core industries, RBI said in a discussion paper. Photo: Reuters
The new banks—wholesale and long-term finance banks—will focus on lending long-term and cater to the funding needs of sectors such as infrastructure and core industries, RBI said in a discussion paper. Photo: Reuters

Mumbai: The Reserve Bank of India (RBI) on Friday released a discussion paper seeking comments on a new category of banks—wholesale and long-term finance banks that will fund large projects.

The regulator has been trying to bring in new types of lenders into the banking system in an effort to introduce new ideas and develop niches to ensure that more segments are covered.

In 2015, RBI allowed 11 payments banks and 10 small-finance banks.

According to the discussion paper, these wholesale and long-term finance banks will focus primarily on lending to the infrastructure sector and small, medium and corporate businesses. They will also securitize assets for banks and financial institutions which do priority-sector lending.

RBI’s proposal comes at the time when the banking sector is saddled with stressed assets worth Rs7 trillion, overall credit growth is languishing at around 4.5% and bank credit to industry is shrinking at a rate of 5% year-on-year.

“Due to asset quality impacts on banks’ balance sheets, there is an overall declining trend in bank credit, primarily towards services sector, industrial segments, and small and medium enterprises,” the paper said.

The paper said loans to the infrastructure sector, at the end of the December quarter in FY15, accounted for 13% of non-performing assets in the banking sector.

“The concept of differentiated banking is very welcome. However, to put small and medium enterprises and infrastructure portfolios together, perhaps, is not a bright idea,” said Ashvin Parekh, managing partner, Ashvin Parekh Advisory Services Llp.

“The existing and established universal banks may not necessarily take the reform with excitement. They are presently evolving approaches to ensure payment banks do not run away with their fee income or customer base,” he added.

Since wholesale and long-term finance banks will not acquire savings deposits, they will focus on corporate bonds, credit derivatives, warehouse receipts and take-out financing, as sources of funds, the paper said.

They may also offer services related to equity or debt investments, and foreign exchange trade finance to their clients, similar in nature to investment banks. Term deposits above Rs10 crore might be considered for these banks with restrictions on premature withdrawals, the paper said.

Since these banks will have large credit exposure, a minimum equity capital of Rs1,000 crore might be required, according to the discussion paper.

For universal banks, the minimum equity capital stands at Rs500 crore while for differentiated banks such as payments banks and small finance banks, it is Rs100 crore.

The regulator has asked for comments to be sent in by 19 May.

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