The Reserve Bank of India (RBI) has proposed setting up wholesale and long-term finance (WLTF) banks to finance industrial and infrastructure projects with higher capital and non-reliance on savings deposits.
“These banks are expected to be very large institutions ab initio to take on large exposure to industrial, commercial and infrastructure sector. Further, they are expected to carry substantial credit-concentration and devise sophisticated financial products. Their risk perception may be thought of as higher than that of universal banks,” the RBI said in a discussion paper.
The RBI paper has proposed a higher level of initial minimum paid-up equity capital, say Rs 1,000 crore or more, for these banks. For universal banks, the initial minimum paid-up voting equity capital for a bank is fixed at Rs 500 crore. In the case of differentiated banks such as payments banks (PBs) and small finance banks (SFBs), the initial minimum paid-up equity capital is Rs 100 crore. They have to heavily invest in information technology and skill building to mitigate the risks, it said.
According to the RBI, WLTF banks are not expected to have significant retail exposure. “With regard to the sources of funding, WLTF banks are not expected to accept savings deposits. Current account and term deposits may be mobilized by these banks. A higher threshold for term deposits, say above Rs 10 crore, might be considered. There could be reasonable restrictions on premature withdrawal of these deposits,” the RBI said.
Another major source of funds for WLTF banks will be issuance of bonds. “These could be issued locally or abroad in rupee-denomination. Further, other funding sources such as commercial bank borrowing, certificate of deposits, securitization of assets etc. should be available for WLTF banks. Primary sources of funds for WLTF banks could be a combination of term deposits, debt / equity capital raised from primary market issues or private placement, and term borrowings from banks and other financial institutions,” it said.
According to the Nachiket Mor Committee Report, since the primary role of the wholesale banks is lending and not the provision of retail deposit services, they may be permitted to accept deposits only above a large threshold amount.
WLTF banks will focus primarily on lending to infrastructure sector and small, medium and corporate businesses. They will also mobilize liquidity for banks and financial institutions directly originating priority sector assets, through securitization of such assets and actively dealing in them as market makers, the RBI paper said.
The 12th Five Year Plan had projected the infrastructure financing requirement for the country at $ 1 trillion during the plan period and the funding gap is estimated to be above
Rs 500,000 crore. “Outside of budgetary support, which accounts for about 45 per cent of the total infrastructure spending, commercial banks are the second largest source of finance for infrastructure (about 24 per cent),” it said.
However, banks have since been saddled with non-performing and restructured assets in the infrastructure sector. As on June 2015, 24 per cent of the total advances to infrastructure sector were classified as ‘stressed assets’. As at end-December 2015, loans to the infrastructure sector accounted for 13 per cent of NPAs in the banking sector. About 34 per cent of restructured standard advances were in infrastructure sector, of which, three sectors viz., power, transport, and telecom constituted nearly 90 per cent. The RBI’s Financial Stability Report had stated that in view of the riskiness on account of the tenor of the loan, the banks’ current processes and business models may not yet be adequately prepared to make, monitor and manage long-term project loans.