After the horrible experience of the great financial crisis of 2008, the world has now become more anxious and serious about the existence, contribution, magnitude, significance and risks of the non-banking financial sector (NBFS). The sector was neglected from the beginning either by default or by deliberate choice but now the sector has enhanced attention, monitoring and regulation as a post-crisis lesson. In this context, the raising of boundaries of non-banking financial companies (NBFCs) came up with the risk of evolution of shadow banking. However, the concept of ‘shadow banking’ came into existence in 2007; when Paul McCulley coined the term ‘shadow bank’. Shadow banking includes credit intermediation involving entities (NBFCs) and activities (fully or partially) outside the regulated banking system of any country.
In the developing economies like India, shadow banking plays a gainful role in credit delivery and financial inclusion. They play substitute as well as a complementary role for commercial banks as they able to fulfill the needs of borrowers outside the preview of the regulated banking system. However, shadow banking becomes very risky because it operates outside the regulated banking system and financial intermediation activities are undertaken with less transparency and regulation than the conventional banking. Up to certain level, it helps the financial system to grow; but beyond it, may prove dangerous. This paper focuses on the concept of shadow banking and its prevailing structure and effects in India.
Table of Contents
1. Introduction
2. The Concept of Shadow Banking
3. Global Perspective
4. Shadow Banking in India
5. Growth of NBFC Sector in India
6. Threats and Regulatory Challenges for Indian Economy
6.1 Financial Stability and Systemic Risk Threats
6.2 Regulatory Arbitrage Spread Globally
6.3 Affects the Monetary Policy
6.4 Pro-cyclicity and amplification of business cycles
7. Regulations by RBI
8. Conclusion
Research Objectives and Themes
This paper examines the evolution, structural characteristics, and socioeconomic implications of the shadow banking sector within the Indian economy, focusing on how Non-Banking Financial Companies (NBFCs) serve as both alternatives and complements to the regulated banking system.
- Evolution of the shadow banking concept since 2007.
- Comparative analysis of global shadow banking trends versus the Indian experience.
- Operational dynamics and growth patterns of the Indian NBFC sector.
- Identification of systemic risks and regulatory challenges posed by shadow financial entities.
- Evaluation of the Reserve Bank of India’s (RBI) regulatory framework for ensuring financial stability.
Excerpt from the Book
The Concept of Shadow Banking
The term “shadow bank” was coined in 2007 by Paul McCulley of PIMCO, a big bound fund to describe risky off-balance-sheet vehicles hatched by banks to sell loans repackaged as bonds. Today, the term is used more loosely to cover all financial intermediaries that perform bank like activities but are not regulated as banks. The shadow banking system consists of a web of specialized financial institutions that conduct credit, maturity and liquidity transformation without direct, explicit access to public backstops (Ashcraft, 2012). The first articles on shadow banking appeared in 2008 (Pozsar A, 2008). Activities of shadow banks includes a web of specialized financial institutions that channel funding from savers to investors through a range of securitization and secured funding techniques. Although a shadow banks (the institutions that constitute the shadow banking system) conduct credit and maturity transformation similar to that of traditional banks, they do so without the direct and explicit public sources of liquidity and tail risk insurance. Shadow banks are therefore inherently fragile, not unlike the commercial banking system prior to the creation of the public safety net (Pozsar Z, 2010). Many authors have given definitions of shadow banking in different context that can be separated as shadow banking activities, shadow banking entities and both. Following figure 1 presents the overview of definitions of shadow banking given by different authors
Summary of Chapters
1. Introduction: Provides an overview of the rise of shadow banking post-2008 crisis and its specific role in credit delivery and financial inclusion within developing economies like India.
2. The Concept of Shadow Banking: Defines the origin of the term "shadow bank" and explains the core activities of credit, maturity, and liquidity transformation conducted outside traditional banking.
3. Global Perspective: Analyzes the global size and upward growth trend of shadow banking assets across various jurisdictions.
4. Shadow Banking in India: Details the broad spectrum of Indian NBFCs and their role in providing diversity to the financial sector by fulfilling credit needs where traditional banks face restrictions.
5. Growth of NBFC Sector in India: Traces the significant expansion of NBFC asset sizes and their changing share in the total credit market between 1998 and 2015.
6. Threats and Regulatory Challenges for Indian Economy: Discusses the systemic risks inherent in shadow banking, including regulatory arbitrage and the potential for pro-cyclicality to destabilize the economy.
7. Regulations by RBI: Outlines how the Reserve Bank of India manages NBFCs to ensure stability and protect consumer interests.
8. Conclusion: Synthesizes the dual nature of shadow banking as a source of systemic risk and a necessary component for real economy financing, advocating for continued oversight.
Keywords
financial system, NBFCs, NBFS, shadow banking, shadow banks, credit intermediation, regulatory arbitrage, systemic risk, financial inclusion, monetary policy, liquidity transformation, RBI, economic growth
Frequently Asked Questions
What is the fundamental focus of this paper?
This paper focuses on the definition, structure, and economic effects of shadow banking in India, analyzing how non-banking financial entities operate and interact with the traditional banking sector.
What are the primary themes discussed in the work?
The core themes include the definition of shadow banking, its global and local growth, the operational role of NBFCs, systemic risks, and the regulatory environment maintained by the RBI.
What is the ultimate goal of this analytical study?
The goal is to evaluate how shadow banking serves the Indian economy while identifying the specific threats it poses, ultimately informing how better regulation can mitigate systemic instability.
What research methodology is employed?
The paper uses an analytical and descriptive approach, relying on secondary data from the Reserve Bank of India (RBI) and global financial reports to track trends in shadow banking assets and NBFC growth.
What content is covered in the main body of the work?
The main body covers the conceptualization of shadow banking, statistical growth trends of NBFCs in India, an examination of regulatory challenges, and a discussion of the impacts on monetary policy and financial stability.
Which keywords best characterize this research?
Key terms include shadow banking, NBFCs, systemic risk, regulatory arbitrage, financial inclusion, and liquidity transformation.
How does the author define the relationship between NBFCs and commercial banks in India?
The authors describe NBFCs as playing both a substitute and a complementary role, providing financial services to borrowers who fall outside the reach of the regulated commercial banking system.
What specific systemic risks does shadow banking introduce to the Indian economy?
The paper highlights risks such as lack of central bank funding/safety nets, the potential for regulatory arbitrage, and pro-cyclical behaviors that can amplify economic booms and busts.
How has the RBI adapted to the growth of the shadow banking sector?
The RBI has streamlined its regulations, classifying various types of NBFCs differently to monitor them effectively while addressing the need for consumer protection and overall financial stability.
- Quote paper
- Bhavik Panchasara (Author), Heena Bharadia (Author), 2018, Shadow Banking in India. An Analytical Study, Munich, GRIN Verlag, https://www.grin.com/document/425631
