The Reserve Bank of India today came out with a discussion paper for a new set of 'differentiated banks' to promote wholesale and long-term funding of infrastructure projects and SMEs.
The Wholesale and Long-Term Finance (WLTF) banks, as proposed in the paper, will focus primarily on lending to infrastructure sector and small, medium and corporate businesses.
"They may also act as market-makers in securities, such as, corporate bonds, credit derivatives, warehouse receipts, and take-out financing," said the RBI paper, on which comments have been invited from stakholders by May 19.
The paper explores the scope for setting up more differentiated banks, specifically WLTF banks. The RBI has already given in-principle approvals and licences to set up differentiated banks, such as, payments banks and small finance banks, and several have started operations.
WLFT banks, the paper further said, will provide refinance to lending institutions and shall 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, debt/equity capital raised from primary market issues or private placement, and term borrowings from banks and other financial institutions," it said.
The paper comes in the backdrop of NPAs impacting banks' balance sheets, declining trend in bank credit, primarily towards services sector, industrial segment, and small and medium enterprises.
This is also reflected in the decline in the share of the long-term assets (assets with maturity more than three years), relative to total assets, on the banks' balance sheets, the RBI said.
"This scenario, thus, presents an opportunity for specialized banks to take up long-term financing of the corporate and refinancing of the MSME sector lenders within the existing banking structure," said the paper, which also talks about the pros and cons of such entities.
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.
"Accordingly, a higher level of initial minimum paid-up equity capital, say Rs 1,000 crore or more, may be considered for these banks," the paper added.
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