The story begins with shadow banks or more precisely Non Banking Financial Companies (NBFCs). It is perhaps a bit disingenuous to brush aside all NBFCs as shadow banks. Shadow Banks are legally defined as entities that work with little to no regulation. NBFC’s, on the other hand, are well regulated, albeit not held to the same standards as private and public sector banks. But they are and continue to be an essential cog in the Indian economy. Over years, Indian NBFCs grew at a CAGR of 18.6% whereas it is 10.7% in case of banks.
Over the past two years, several non-banking financial companies (NBFC) in India have been dealing with bad news upon bad news, including a cash crunch, the high cost of capital, and burgeoning bad loans. NBFCs don’t take deposits and thus they are not subject to stringent RBI regulations which has given rise to concerns as they enjoy this regulation arbitrage and hence contribute to build systemic risks.
This week’s banking post will give you insights of the shadow banking sector and the need to its regulation.
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