Wholesale & Long-Term Finance Banks: An old wine in a new bottle?

Indian central bank recently released a discussion paper on whether India should establish some new financial entities termed as Wholesale & Long-Term Finance Banks.

…the Wholesale and Long-Term Finance (WLTF) banks will focus primarily on lending to infrastructure sector and small, medium & corporate businesses. 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.

They may also act as market-makers in securities such as 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 may also offer services related to equity / debt investments, and forex / trade finance to their clients. These services, although similar in nature to the services offered by financial institutions traditionally known as ‘Investment Banks’, would be ancillary to the primary activities of WLTF banks, which is deposits / loan products for wholesale clients and financing of infrastructure sector and core industries.

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.

Reading the paper, one wonders why we keep going in circles in finance. Just keep calling old institutions/policies/structures by a new name.

It is hardly the case that these WLTF are new entities. These similar objectives were served earlier by Development Financial Institutions as well. Thankfully, the paper  does acknowledge the same:

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.

We have converted most of the DFIs barring IFCI into banks. Just three years back, we converted an infrastructure DFI- IDFC into a bank. And now we want to create more IDFC kind of institutions. Why convert it into a bank at the first place?

Each time these DFIs were converted into a bank, a hype was generated saying DFIs no more serve the roles. The commercial banks can serve the same objectives and do a better job of the same. And now we are back to square one talking about similar objectives which were discussed when the DFI were established at the first place.

Same is the case with Differentiated Banks as well. It is hardly a new term. Historically, we have had many types of financial institutions/intermediaries: indigenous banks, Joint stock banks, nidhis, chit funds, cooperatives, loan offices (in Bengal) and so on. But as these institutions evolved during a time when banking regulation was either absent or weak (RBI became tough with regulation only post Banking Regulation Act 1949 ), not much attention was paid. Policymakers only looked at these institutions with suspicion and wanted to close them at the first chance it got. Yes it is true that quite a few such institutions ran problematic operations and had to be closed down. But not all eggs were bad.

What was needed was to understand the lessons of their evolution and different purposes they served. So much so, all these entities are now making a comeback in some form or the other with newer names and labels…

There is a reason why financial historians say that when financiers of yesteryears come back to today’s financial world, they will be confused and lost with the action and buzzwords. But the moment you explain them the crux behind the organisations and instruments, they will laugh and say we did most of these activities as well. But names and ideas were far simpler..


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