The Reserve Bank of India,after initiating the process of setting up payments banks and small finance banks as part 
of its plan to introduce a differentiated banking system in the country, is now toying with the idea of having what is described as wholesale and long-term finance (WLTF) banks. The central bank has already come out with a discussion paper on the topic suggesting that as the financial sector develops and matures there is need for such banks to take care of the needs of various other sectors. The discussion paper describes WLTF banks as those solely lending to the corporate sector, SMEs and the infrastructure sector. Apart from credit business, they could also have portfolios like forex and trade finance and involve themselves in areas like corporate bonds and credit derivatives. In short, these banks could cater to the specialized needs of the corporates. The discussion paper mentions that these banks may be allowed to raise funds through debt and equity and accept term deposits.
WLTF banks is an idea that is practical. These entities can attend to the corporate sector in a better and efficient manner compared with commercial banks. For example, they can offer long-term finance, which today is a tedious process for the corporates in view of the restraints imposed by the asset liability mismatch in the banking system and an underdeveloped bonds market. Added to this is hesitation on the part of the banks to offer funds to the corporates because of the never-ending problem of NPAs of the banks.
WLTF banks appear to be somewhat a replica of the earlier experiment of setting up of development finance institutions in the country – IFCI, ICICI and IDBI are examples. However, none of them were feasible in that format. ICICI and IDBI converted themselves into universal banks, while IFCI is wanting to be one. It would be beneficial to examine what went wrong in this case. It would also be a better proposition if a bar is placed on government owning stakes in these proposed institutions.
The consensus, however, would be that India needs such banks mainly because the existing banks cannot handle demand for long-term large funding. Commercial banks today prefer more to get into the safe confines of retail banking. The success of Indian Bank is an indication. Banks which focus exclusively on long-term lending can really fill up the gaps.
It is a long way before the issue can be formalized and the central bank can decide. Only then should we worry about regulations, about technology, about risk management and the like for the WLTF banks.
