Instead of outright rejection of the Khan panel recommendations on universal banking, the RBI said banks and DFIs should continue with their respective roles in the medium term. "Drastic changes in their respective roles at this stage may have serious implications for financing requirements of funds of crucial sectors of the economy," the discussion paper said.

The thrust of the Khan panel report was on a progressive move towards universal banking and the development of an enabling regulatory framework for this purpose. The panel, which submitted its report in May last year, recommended that a full banking licence should eventually be granted to DFIs andin the interim the institutions should be permitted to have banking subsidiaries with holdings up to 100 per cent.

"Given the unique position of DFIs in relation to term lending at this stage, it is desirable that they remain engaged in term-lending activity even as they diversify into new opportunities opened to them by progressive desegmentation of the sector," the paper said.

Reacting to the RBI discussion paper, former Industrial Development Bank of India chairman SH Khan, who headed the working group for harmonising the role and operations of DFIs and banks, said: "If the RBI wants the DFIs to continue with their historical role, they should be given some special dispensations. They cannot work as DFIs unless they have access to long-term cheap funds."

According to Khan, the RBI should either give them access to long-term funds or let them convert into banks. "I do not think they require five years to transform themselves into banks. May be one or two years will be sufficient for them to adopt thenew role," Khan said. The RBI paper admitted that given the requirements of the industry for long-term financing and maintaining the profitability of DFIs, the institutions should have access to both long- and short-term funds. "It is necessary to have a framework for DFIs to access such funds. At the current juncture, a tentative framework is under consideration in consultation with DFIs," the RBI said.