2.1.3.5. Wholesale and Long-Term Finance Bank

It will be a combination of long term-lending institution and an investment bank with proposed minimum capital of Rs 1,000 cr. They can’t accept savings deposits. They can raise money from current accounts, bulk fixed amounts and bonds. It will enable companies to get long-term financing easily. It may help in relieving banking system from increasing stressed assets due to infrastructure sector. As specialized institutions, they will be in a much better position compared with commercial banks in evaluating and funding long-term projects. It will further enhance competition, which will lead to more efficient allocation of financial resources.

However, consideration should be given that their operational autonomy is maintained and licenses are given on the basis of ability to build such a highly specialized bank.

Foreign banks – India opened the doors for foreign banks after 1991. They set up either branches or wholly owned subsidiaries. Some of the foreign banks operating in the country include Deustche Bank, Bank of America, Citibank, HSBC, Royal Bank of Scotland etc.

The framework for foreign banks latest issued by RBI stress upon — the formation of wholly- owned subsidiaries (WOS) for furthering their business in India. The RBI guidelines make it clear that the WOS model is what the regulator would prefer the foreign banks to have. Suitable incentives are being given to new as well as existing players operating through their branches in India to adopt the subsidiary route and incorporate locally. If foreign banks took this route, the regulator would treat them in a par with Indian banks. They would be given capital gains tax and stamp duty benefits and allowed to acquire local private banks.

However, changes in priority sector lending (PSL) norms that would follow such a move were a bone of contention. Before applying to RBI, some foreign lenders had urged that these norms be relaxed. The central bank said as was the case with their Indian counterparts, foreign banks would have to offer 40 per cent of their loans to priority sectors. Of this, 18 per cent have to be offered to the farm sector. Earlier, the cut-off for foreign lenders in the PSL segment was 32 per cent (for foreign banks with more than 20 branches, it was 40 per cent). But they would have to adhere to the 40 per cent norm within five years of setting up wholly-owned subsidiaries.

RBI had said foreign banks that entered India after August 2010 would have to mandatorily convert their branches into wholly-owned subsidiaries.