ISSN (Print) - 0012-9976 | ISSN (Online) - 2349-8846

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A Comment on RBI’s ‘Discussion Paper’

Reimagining Development Banks

The RBI’s “Discussion Paper on Wholesale and Long-term Finance Banks” is a welcome initiative for its familial resemblance to development banks—an indispensable institution in most late-industrialising economies. The success of development banks critically hinges on: (i) access to assured sources of low-cost, long-term funds; (ii) public ownership and/or management; and (iii) the quality of institutional governance. As development banks invariably incur quasi-fiscal costs with potential social benefits, their operations often are kept off-budget, insulating the investments from short-term budgetary negotiations.

The Reserve Bank of India’s (RBI 2017) “Discussion Paper on Wholesale and Long-term Finance Banks” needs to be seen in the current macro­economic context, summarised in the following four trends: (i) deceleration in annual economic growth from 8%–9% until 2011–12, to around 7% last year (2016–17), accepting the official gross domestic product (GDP) estimates to be true; (ii) a nearly 10 percentage point decline in the rate of domestic capital formation, to about 29% of GDP, from its peak in 2008–09; (iii) declining capacity utilisation in manufacturing and electricity generation since 2011–12, and an unprecedented fall in bank credit growth, especially for industry; and (iv) a surge in corporate bad debts, raising the banking sector’s non-performing assets (NPAs), and thereby undermining its ­financial viability.

Reasons and Antecedents

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Updated On : 19th Sep, 2017

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