Corporate bonds not yet another lender

Corporate bonds not yet another lender

A Reserve Bank of India discussion paper has called for the setting up of wholesale banks that provide long-term finance for infrastructure and greenfield projects, with a minimum capital requirement of Rs 1,000 crore. The idea needs to be nipped in the bud. Instead of more bank finance for long-gestation projects, what we need is a thriving corporate bond market, arm’s-length financing and multiple vetting.
The paper has proposed that the eligibility criteria for promoters of wholesale and long-term finance banks be the same as those for a ‘universal banking licence’, which means that large industrial houses cannot take more than 10% stake in these new financial institutions. Also, the licences are to be available ‘on tap’, so as to boost supply of loanable funds.
The proposed banks would not need to open branches in rural and semi-urban areas, and may also be exempt from norms like the statutory liquidity ratio, as per which banks are required to invest 20.5% of their deposits in government securities. But the notion that banks are best placed to provide long-term funds needs to be contested. The idea is fundamentally flawed.
It would merely lead to more opacity, and almost certainly much more inefficiency, in providing long-term funding. Instead, we clearly need to develop an active bond market.
And it is far from clear what purpose one more layer of intermediation between the saver and the user of capital would achieve and how it would be cost-effective, without subsidies of some kind or the other. The point is that a thriving bond market, complete with secondary market trading, would lead to regular disclosure and oversight. And wholesale banks would be a very poor second-best solution, and one that runs the risk of promoting crony capitalism.