We need a bank just for long-term credit

We need a bank just for long-term credit: Constrained by NPAs, banks are unable to extend long-term loans. It now seems that shutting pre-reform DFIs was premature...



The Hindu Business Line, April 9, 2017



WE NEED A BANK FOR LONG TERM CREDIT

C Rangarajan and R Sridhar



Excerpts:

"Long-term credit bank

The LTCB will need to be fully or substantially owned by GOI, but should be bestowed with full operational autonomy. LTCB may finance green field and brown field projects across manufacturing, infrastructure and other areas as may be considered fit.


Three distinct advantages may be identified for the LTCB. First, it is a response to the gap that has emerged in institutional financing structure and would thus have a ready market. Second, as a specialised institution with expertise in project finance LTCB will be able to better evaluate the loan proposals. It will also be able to attract suitable talent on ongoing basis which the banks may not be able to do. Third, LTCB can assist the faster development of the corporate bond market through credit enhancement, and partial credit guarantees.
A key element in the new scheme is that LTCB must be provided with low cost resources to enable it to lend to enterprises at reasonable rates. The model will not work otherwise. The DFIs currently in operation do enjoy such an advantage albeit, in a different way such as NABARD through Rural Infrastructure Development Fund, NHB — Rural Housing Fund — both of which are funded by penalties on non-achievement of certain Priority Sector targets by banks. LTCB must be permitted to avail of ECB and assistance from multilateral and bilateral agencies such as World Bank, ADB, JICA, KFW. Thus the LTCB will have a mix of funds, some raised at the market rate and some provided at a concessional rate. The new institution should be able to raise funds from the market on its own strength.
The current situation demands not only finding a solution to the high level of NPAs in banks but also to revive long term lending to industry. The latter needs an approach different from dealing with accumulated NPAs. Sharpening focus on investment-led growth is the need of the hour. It is time to rewind and set up term lending institutions with specialist skills dedicated to financing projects in manufacturing, infrastructure, and services sectors."

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