RBI Seeks To Bridge Infrastructure Funding Gap With New ‘Wholesale’ Banks
Traffic and pedestrians cross a bridge over the Gomti river in Lucknow, Uttar Pradesh. (Photograph: Prashanth Vishwanathan)

RBI Seeks To Bridge Infrastructure Funding Gap With New ‘Wholesale’ Banks

After introducing small finance banks and payments banks to cater to retail financial services customers, the Reserve Bank of India (RBI) has floated the idea of wholesale and long-term finance banks (WLTF) that will primarily disburse large-ticket loans to corporates.

In a discussion paper released on Friday, the central bank proposed the creation of these wholesale banks, partly as a way to help fund long gestation projects, like those in the infrastructure sector.

The proposal is part of a larger plan to create a more diversified banking sector. The RBI had, in August and September of 2015, issued 10 small finance bank and 11 payments bank licences. Some of these entities have already begun operations. The next step in this process is to create entities that specialize in wholesale finance.

The argument in favour of creating wholesale banks is that there is an unmet need for credit in certain areas of the economy, possibly on account of the constraints that universal banks are currently contending with.

In the recent times, due to asset quality impacts on the banks’ balance sheets, there is an overall declining trend in bank credit, primarily towards services sector, industrial segment, and small and medium enterprises.
RBI Discussion Paper

Indeed, RBI data showed that the share of large corporates in gross bank credit fell to 31.8 percent as on January 20 this year from 36.1 percent at the end of March 2014.

A 2008 report by The Committee on Financial Sector Reforms, chaired by former RBI governor Raghuram Rajan, also found that the financial sector has been unable to meet the scale of the needs of large corporates as well as of public infrastructure.

In a bid to bridge this gap, the RBI has suggested that a target percentage of the total credit portfolio of wholesale and long-term credit banks be prescribed for infrastructure and long-term projects. To avoid an overlap with existing banks, these banks are not expected to have significant retail exposure.

Additionally, these banks will not have to comply with norms on priority sector lending and opening of rural and semi-urban branches.

RBI Seeks To Bridge Infrastructure Funding Gap With New ‘Wholesale’ Banks

Minimum Capital Requirements

Since the proposed wholesale and long-term finance banks are expected to be very large institutions that will take on exposure to the industrial, commercial, and infrastructure sectors, the risks they take are consequently expected to be higher than universal banks.

The RBI has therefore proposed that these banks have an initial minimum paid-up equity capital of Rs 1,000 crore or more, which is higher than the requirement of Rs 500 crore for universal banks.

Source of Funds

Unlike the incumbent universal banks, and the newly created small finance and payments banks, the wholesale banks are not expected to accept savings deposits.

Instead, current account deposits, term deposits, and the bond market are proposed to be the major sources of funds for these banks. The bond issuances can be both in the domestic and in the overseas markets.

The RBI has also suggested that a higher threshold of Rs 10 crore be set for term deposits. Restrictions on premature withdrawal of term deposits may also be stipulated.

Apart from this, the wholesale banks can access other funding sources, like commercial bank borrowing, certificates of deposits, and securitisation of assets.

The success of these institutions would ultimately depend on their ability to raise funds, said a former banker. Organisations like IDBI Bank Ltd., ICICI Bank Ltd., and IDFC Ltd. were all created with the intention of providing infrastructure credit, but were later converted into universal banks in order to give them access to low-cost credit.

The erstwhile infrastructure-lending organisations were primarily borrowing from the banking sector, and then competing with banks to lend to infrastructure companies, said the former banker.

However, with the deepening of the bond markets, these institutions will have greater access to funds, assuming that they are financially sound, he said.

Norms On Regulatory Reserves

Wholesale banks, the RBI has proposed, will have to maintain a cash reserve ratio (CRR) similar to other banks. At present, universal banks must maintain 4 percent of their aggregate deposits with the RBI as a cash reserve ratio. This reserve is meant as a contingency, and the central bank does not pay interest on it.

The RBI has, however, stated that the wholesale banks will be eligible for exemption from CRR requirement for liabilities under infrastructure bonds.

These banks will also be exempt from maintaining a statutory liquidity ratio (SLR), the RBI said. Under SLR, universal banks are required to maintain a minimum of 20.5 percent of their liabilities as government bonds.

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