Wholesale and Long-term Finance (WLTF) Banks

In April 2017, RBI has proposed to float a new type of differentiated banks called wholesale and long-term finance (WLTF) banks. The WLTF banks would fund the long term high value projects very much similar to the Development Finance Institutions.

What is Differentiated Banking?

Differentiated bank in simple words is a bank which provides financial services to a specific sector of industry or segment of people in contrast with the traditional commercial banks. Traditionally, RBI used to provide only one kind of license (commercial bank) and banks established on such license would take all kinds of financial services. However, in 2013 the Nachiket Mor committee recommended issuing differentiated bank licenses; and banks established on such licenses would work within a specific vertical. Thus, the payment banks and small finance banks are basically differentiated banks.

The rationale behind differentiated banks is thus to cater to needs of the specific segment such as rural markets, corporate clients, development industry, governments and so on.

WLTF Banks: Salient Features

The RBI in its draft discussion paper mentioned that considering the existing financial landscape, there was a need for differentiated banks that would cater to long term and high value projects. On the basis of the info in RBI paper, the key features of WLTF banks are as follows:

Basic features

WLTF banks will be very large institutions to take on large exposure to industrial, commercial and infrastructure sector right from their beginning. Due to such requirements, it is expected that they will invest heavy amounts initially on IT and security infrastructure and skill building. They shall have almost negligible retail presence.

Minimum Capital Requirement

The minimum capital requirement for such bank would be Rs. 1000 Crore.

Primary Focus Areas

The banks will focus primarily on lending to the infrastructure; and small , medium and large business. 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 WLTF banks could also act like market makers in corporate bonds, credit derivatives, warehouse receipts, and take-out financing, etc.
• These banks will provide refinance to lending institutions and shall be present in capital markets in the form of aggregators.
• WLTF banks could be allowed to take part in investment banking activities as an ancillary of its primary duty of providing “deposits and loan products for wholesale clients and financing of infrastructure sector and core industries”.

On Tap licensing for WLTF Banks

RBI has proposed the on-tap licensing (on tap means issuing license as and when needed). The eligible promoters would be anyone who would satisfy the fit and proper guidelines of RBI (to be released later).

Accounts

The WLTF banks will open only current accounts and term deposits of at least Rs. 10 Crore would be allowed. There shall be reasonable restrictions on premature withdrawal of the deposits.

Statutory Ratios

The WLTF banks will have to maintain a Cash Reserve Ratio but they will be exempted from SLR (statutory liquidity ratio) and this will not be required to hold mandatory government bonds.

Source of Funds

The primary sources of funds for WLTF banks will be a combination of term deposits, debt and equity capital raised from primary market issues (share issues) and / or term borrowings from other banks and financial institutions.

Exected Benefits

The primary advantage of WLTF banks is that they shall take off some pressure from the existing commercial banks which find themselves in dock over long term projects due to heavy bad debts in their books. Secondly, such niche banking may bring expertise to the banking system leading enhanced efficiency of the overall banking system in the country.