Letters: Avoid structural change

With reference to the report, “RBI proposes wholesale and long-term finance banks” (April 8) by Anup Roy and Abhijit Lele, the Reserve Bank of India discussion paper states that the cost of funds for these banks could be go up due to lack of access to savings and other retail deposits.

Raising long-term deposits and debt at competitive cost would not be easy and funding of long-term and infrastructure projects at higher interest costs could impact the economic viability of projects to be financed by the proposed banks. These banks could be subject to asset-liability mismatches, whereas commercial banks would have more flexibility in their asset-liability structure. Thus, the RBI discussion paper itself casts doubts on the viability of the proposed banks.

Such banks are operating in Europe, Brazil, Japan and South Korea, but their operations are restricted by the nature of their liabilities and assets created. Some of these institutions in the public sector have begun transitioning towards privatisation. Due to several constraints, the response of the private sector in India to the RBI’s proposal could be muted. 

Post demonetisation, commercial banks in India are flush with surplus liquidity and yet private investment is not forthcoming. The current situation is, therefore, not propitious to initiate the proposed structural change. Moreover, the proposal circumvents the issue of accumulation of non-performing assets, particularly in public sector banks. The focus should be on resolution of this issue rather than floating ideas of facile structural changes in the banking sector.

Pramod Patil   Nashik

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