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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.
Following the usual disclaimer, the author gratefully thanks Madhav Datar and Partha Ray for their comments and suggestions on an earlier draft of the article. This is an edited version of the comment sent to the RBI.
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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