India converted the Development Financial Institutions into Banks or NBFC which was not a wise decision and former RBI governor long argued on the revival of these institutions.

1. Revival of Wholesale and Long
Term Finance Banks
Name- Divyanshu Kumar Singh
College- Amity Business School
Course- MBA (B&F)

2. • Indian economy is going through a financial reform where nationalized
banks are getting merged
• It Mooted the Idea of revival of WLTF banks in India
• In the early 2000s India had 3 DFIs namely ICICI, IDBI and IFCI
which were converted into banks or NBFC on the recommendation of M
Narasimham committee.
• Considering the existing landscape of Financial sector in the country,
RBI felt the need of DFIs so issued a discussion paper to explore the
possibilities of permitting the differentiated banks
• The RBI moved on the idea of universal banks, with the understanding
that with a lowering of the cash reserve ratio and statutory liquidity ratio,
there will be more funds available with the banks to lend

3. • RBI also had assumption that both the equity market and the bond market
will expand and that will provide the additional finance required
• Both the assumption of RBI proved wrong and Bond market did expand as
per expectations and NPA also increased a lot.
• NPA ratio in MSME segment rose to 12.8% in June 2020 from 11.4% in
June 2019, an increase of 10% Y-o-Y
• The performance of private banks are better than public banks as private
banks MSME NPA ratio is 5.8%, an increase from 4.6% in June 2019
where as the ratio is 18.6% for public banks which has increased from
17.5% in June 2019
• As of June 2015, 24% of the total advances made to the infrastructure was
classified as NPA, Infrastructure sector NPAs account for 13% of the total
NPA of banking sector

4. • The total turnover of secondary bond market is Rs. 183,191 billions till the
year 2014- 15 out of which the turnover of corporate bond is just Rs 2822
billion in the 2014-15 which is just 1.57% of total secondary bond market
turnover
• DFIs basically provide term finance to secondary sector
• Rapid growth of Secondary sector is very important for the fast economic
development as it has the potential to create high employment and income
in the country.
• RBI should establish DFIs/National development Banks as Public-Private
Partnership which will mitigate the risks of the mistakes done in the past.
• Because no single promoter will have a complete control on the decisions
of the bank.

5. Income source/Source of fund
• The initial funds for the bank should be provided by the RBI to protect it
from the complete control of any one party
• 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.
• Banks may also offer ancillary services related to equity / debt
investments, and Forex / trade finance to their clients which will be
another important source of income
• According to the Nachiket Mor Committee Report, they may be permitted
to accept deposits only above a large threshold amount.
• RBI should exempt only those DFIs that accept deposits would be
exempted from CRR but not from SLR as they should maintain some
liquidity to meet the withdrawal demand of depositors.

6. Pros and Cons of licensing differentiated banks on WLTF
banks
Pros
• Wholesale and long-term financing (WLTF) Banks could act as steady and
additional source of funding for small, medium and large businesses, and
infrastructure sector over a longer term.
• Entry of such banks as market makers in priority sector assets, through
securitization of assets (such as corporate bonds, credit derivatives,
warehouse receipts, and take-out financing etc.)
• WLTF banks may ease up the pressure of long maturity loan assets on the
books of commercial banks, and in turn, reduce their NPAs.

7. Cons
• Lack of access to savings and other retail deposits would push the cost of
funds for the WLTF banks upwards.
• Reputed and well-rated corporate would prefer to access the debt markets
directly at comparatively lower interest rates than those offered by WLTF
banks.
• WLTF banks could be subject to ALM mismatches, which may be difficult
to manage, whereas commercial banks would have more flexibility in their
asset liability structure. Cyclical nature of industrial activities /
performance could place enhanced risk of non-performing assets on the
books of WLTF banks, which may not have the cushion of sustained
earnings that retail credit portfolios normally provide, in times of economic
downturn