Date-21-08-2017

RBI2017-15/122

To,

Chandana Sontyana, Principal Chief General Manager

Subject- Reply on the behalf of private Banks to the notification issued by RBI on 10-08-2017 on
Guidelines for Licensing WLTF Banks

Dear Ma’am,

The concept of WLTF is not new concept rather it is a refinement of DFIs. Way back to 1980s when
DFIs were created it suffered harshly and moved to form universal banks. At present there is no need
to introduce WLTF banks as the private sector banks are still capable enough to provide infrastructure
loans following some governmental securities and liabilities. And as various economists had said
when the economy will choke and liberalisation will take place and the wholesale funding will have
no option than to die. So there are certain difficulties faced by private banks in terms of
implementation wholesale banks which are discussed as under in various points:

1) Funding of long term and infrastructure projects at higher interest costs could
make the projects economically unviable and can result in NPAs of private
Banks

To be innovative and different from others every banker should invest huge amounts of
money and time for designing of new and unique financial products which may be considered
as a major limitation for the banks. Even if the banks invest time and money to develop the
new products and services with new technology if the banks are slow in adopting new
technology, it becomes difficult for the banks to retain the customers because these days’
customers prefer quick and easy banking rather than slow and traditional ways. These results
in banks failure to exploit the technological though huge amounts in are invested in it. To
monitoring and follow up of huge volume of loan accounts becomes a major disadvantage
because it induces banks to spend heavily in human resource department. Even the long-term
loans like housing loans may lead to non-performing assets because of its long repayment
period, without proper follow-up. It becomes a major limitation for the banks if proper follow
up is not there in these aspects. At present, the profits from the individual customer is
decreasing because the banks do not have the opportunity to exploit the advantage of earning
huge profits from a single customer as in the case of wholesale banking since the volume of
amount borrowed by a single customer is very low when compared to the wholesale customer
 and because of the cut throat competition in the banking sector the bankers are even
sacrificing their profits further.

2) More Risk Involved

 Commercial finance companies are not banks, and are often a higher-cost borrowing option
for the small business owner. This is because they are less conservative than traditional banks
and more willing to make riskier loans. As they are not banks, they are subject to less
regulation and can assume more risk. Less regulation and more risk can be a double-edged
sword in times of economic turbulence. Lack of enabling market infrastructure and issues
such as absence of secondary markets in securitized assets, low demand for long-tenor
instruments, and small investor base for such assets among others could be impediments for
the WLTF banks.
 Development Finance Institutions (DFIs) in the past had played a similar role in filling the
gap in meeting the financing needs of medium and large enterprises, industry and
infrastructure sector. However, due to change in the operating environment coupled with
dearth of low cost long term funds as a result of withdrawal of Government guarantee for
bond issuance and resultant non-SLR status of their bonds, high level of concentration risk
caused serious stress to their financial position.

3) Once the development finance institution like IFCI, IDBI was created, it came
out as a big failure and converted itself into universal bank model. Private Banks
nowadays are nowhere incapable of funding infrastructure. Then what is the
need of going back to DFIs?

When we moved to the idea of universal banks, the understanding or the implication was that
with a lowering of the cash reserve ratio (CRR) and statutory liquidity ratio (SLR), there will
be more funds available with the banks and therefore they will be able to meet both the short-
term and the long-term credit. Along with it, there was also the assumption that both the
equity market and the bond market will expand and that will provide the additional finance
required.
However, the situation now, is while the equity market is expanded, the bond market has not.
It is not vibrant enough. Second, we have reached a situation as far as the commercial banks
are concerned where the flow of credit, both short-term and long-term credit, has choked. The
major problem which everybody is addressing is how to take care of the stock of non-
performing assets (NPAs) and what can be done. Therefore, in this situation, a fresh look at
what can be done to provide long-term finance is very much needed.

4) No Regulatory Framework

The regulatory framework that they have is in relation to banks. The regulatory framework
that you might have to frame in relation to the DFI type institutions may have to be somewhat
different because the banks take money from innumerable number of depositors and so on
and therefore the safety becomes a major issue and therefore we have quite an intricate
framework for that. However, you need to evolve an alternative framework for that. You
need to go to a situation in which separate regulatory framework is adopted.