The Handbook of Global Shadow Banking, Volume II by Luc Nijs

Author:Luc Nijs
Language: eng
Format: epub
ISBN: 9783030348175
Publisher: Springer International Publishing

So, other activities include infrastructure finance, factoring business and even micro-finance. There are slightly over 12,000 of them in India. Nevertheless, the interconnectedness between NBFCs and between NBFCs and the traditional banking sector is on the rise. The real risks are to be found elsewhere: (1) those companies that are registered a finance companies but not regulated by the Reserve Bank, (2) incorporated companies and unincorporated entities illegally accepting deposits, (3) there are entities who camouflage deposits in some other names and thus illegally accepting deposits, (4) unincorporated bodies who undertake financial activities and remain unregulated.80 Shadow banks fuel the economy by playing a complementary and supplementary role to mainstream banks and also in furthering financial inclusion. Their risk is not the one that the rest of the world is looking at. Yet, they do pose dangers, but of a different variety; it primarily relates to consumer protection, Gandhi adds.81 That is one side of the story. The other side recognizes more risk in the conduct of the NBFCs. Acharya et al.82 argue that bank lending to NBFCs (1) forms a significant proportion of the NBFC liabilities; (2) fluctuates in line with bank allocation to priority lending sectors; (3) decreases as the banks expand in the rural areas relative to urban areas; but (4) is virtually non-existent for the largest state-owned bank, namely, State Bank of India (SBI) and its affiliates which have significant rural branch network. In 2015, the Reserve Bank of India tightened the takeover rules for shadow banking institutions, in order to get a grip on the credit intermediation process, despite the fact that they are regulated as traditional banks.83 The NBFCs will continue to grow, however, as they are a direct replacement for a properly functioning credit market, as the current one is immature, shallow and lacking to provide long-term capital. The situation has evolved to create a situation where NBFCs go where others don’t dare to.84

The growth in non-deposit-taking NBFCs has been regarded by the Reserve Bank of India as being systemically important and NBFCs have grown substantially in India over the past decade. Less highlighted has been that bank lending to these NBFCs forms a significant proportion of their liabilities, and fluctuates in line with bank allocation to priority lending sectors. Bank lending to these NBFCs also appears to be greater for banks that have lower branching in semi-urban areas relative to metropolitan areas.

However, bank lending to these NBFCs is virtually non-existent for the largest state-owned bank, State Bank of India, and its affiliates. Although bank lending to these NBFCs has been heavily impacted by the 2008 crisis, it has become apparent that these NBFCs represent a completeness of credit allocation in non-metropolitan areas of the Indian economy by banks with less than fully developed branching networks, but that this role has been potentially constrained by distortions in bank deposit base arising from a lack of level playing field in the perceived government support of different banking groups.85 Their goal was to investigate (1)

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