RBI releases discussion paper for wholesale, long-term finance banks

The concept of differentiated banks was first discussed in 2007 and later introduced by the Nachiket Mor Committee.

At present, banks account for 67 percent of the total financial sector assets. As some of them are moving to retail, the central bank in April 2016 said it would explore possibility of setting up more differentiated and niche banks, including those concentrating on wholesale and long-term financing.

RBI has already set the ball rolling by giving licences to small finance and payment banks.

WLTF banks may also offer services related to equity/debt investments, and forex / trade finance to their clients, however their primary offering would be deposits / loan products for wholesale clients and financing of infrastructure sector and core industries.

With superior expertise, such banks will provide refinance to lending institutions and be present in capital markets in the form of aggregators.

The RBI said, "The 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."

Further following Mor Committee’s recommendations — since the primary role of WLTF banks is lending and not the provision of retail deposit services — they may be permitted to accept deposits only above a large threshold amount.

Therefore, retail segment exposure on their balance sheet would be negligible. Because of this, the minimum capital requirement could be lower at Rs 50 crore and higher level of initial minimum paid-up equity capital of Rs 1,000 crore or more.

Highlighting the disadvantages, RBI said lack of retail exposure may increase costs and also be impacted by the cyclical nature of industrial businesses. It could face financing issues because of lower interest in long-term funds.