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Shadow Banking: Why and how to strengthen NBFCs

21 3 11

-Anjalee S Tarapore

The spectre of shadow banking has once again reared its ugly head. The outcome has been a stock market rout, adversely impacting non-banking finance companies (NBFCs). Shadow banking is a wide-sweeping term used to describe any financial activity outside of the banking system. Globally, the Financial Stability Board estimates shadow banking to be worth $45 trillion, representing 13% of the world’s financial assets.

Shadow banking is often construed as dodgy or toxic assets which are out of the purview of regulators. NBFCs, too, get clubbed under shadow banking, despite being well under the regulatory ambit. Perhaps a more drill-down definition of shadow banking is needed. NBFCs do not have privileges of lender of last resort or of deposit insurance. Yet, it would be erroneous to deduce that NBFCs in India have light-touch regulation and are therefore riskier than banks. NBFCs largely perform the role of credit intermediation in spaces where bank funding has been lacking or absent. The financial needs of the Indian economy are diverse and cannot be fulfilled by the banking sector alone.

Despite various safeguards, globally, it is not unusual for a financial institution to go belly up. It is in these times that the strength of the sector gets best tested. Regulators and other mandarins of the Indian financial sector are already at work on the beleaguered........

© The Financial Express