Jagannath International Management School
The term ‘shadow banking’ is used differently in all countries, making it difficult to relate theoretical discussions to specific institutional contexts. In Europe, for example, lending to insurance companies is sometimes called shadow banking while the asset management products offered by Chinese banks fall short of its target. In India, loans to financial institutions linked to banks are also considered as shadow banks.
The “non-banking” aspect of reputable banking is highlighted by the Financial Stability Board (FSB) in its 2013 report as “debt consolidation involving businesses (in whole or in part) outside of the normal banking system or non-banking interventions briefly”. These definitions refer to shadow banking as an independent entity in the commercial banking system, instead referring to the shadow system as a consumer of informal financial systems and / or as a “black” entity, in particular, money laundering and tax evasion. However, shadow banking is not a deterrent to the healthy body of traditional banks. Rather, it is an important lending mechanism in our day, which needs to be understood in its own right.
Non-bank lenders provide companies with long-term loans and finance them by taking out short-term loans from banks and mutual funds. But many of those companies that borrowed money from shadow lenders failed to repay, leaving the NBFC unable to repay the loans they had taken from banks and mutual funds. Indian banks are also heavily burdened with debt and are said to have the highest interest rate. But the government has spent billions of dollars to help those who borrow money, in order to effect change.Put aside those shadow banks with weak financial profiles; even well-functioning and well-governed organizations face financial crisis. Most shadow banks have reduced loan repayments to save money.
Moreover, the Indian economy is not sufficiently complex or not fully trusted by large sections of society so many Indians with low savings and high and fast returns often turn to these firms. After a staggering three-year growth, lending by shadow banks has dropped by almost a third this year. As a result, mortgages on cars, cars, consumer goods and small businesses dropped dramatically. In sectors such as housing and cars, shadow banks play a key role in lending. The decline in revenue has contributed to the economic downturn in these sectors.
In India the shadow banking system operates as a non-bank financing company namely NBFC, which is a very complex structure with a high level of communication with traditional banks operating in India. Prominent authors have raised the issue that these evils are far from being a major part of shadow banking systems. Building on this concept of ideas, two broad categories of explanatory notes in the standard bank books exist. The first, called “market perception,” focuses on market-based security and investment. In this view the shadow banks are similar to the banks; both are simple intermediaries between investors and investors. The reputable banking system and its traditional counterparts are a separate web of specialized financial institutions and vehicles that deliver support from custodians to investors through security financing and secure financing strategies operating in less regulated or less regulated environments.
Another view, or “money perspective”, sees shadow banking as a (traditional) commercial banking system, which not only performs bank-like functions in maturity and debt conversion as market intermediaries, but also produces so-called “near-money” or liquid liquid stores.” Traditional banks and shadow banks operate concurrently; while the conventional banking system creates a new credit system, reputable banks do this (automatically created) credit to be extinguished when depositors exchange bank loans with shadow bank loans that serve as a “bank account, which exceeds traditional capacity of bank balances. ”
However, as history has it, including the US subprime mortgage crisis, the growing shadow sector could pose a problem to the financial system. Given that India’s banking sector is very weak in the G-20 after Russia in terms of financial adequacy, India will not be able to allow risks to accumulate in other parts of the financial system.
In China and elsewhere, authorities are trying to cut ties between shadow banks and banks to ensure that infectious risks arising from the failure of major banks in the banking industry are contained, and financial stability is maintained. The problem with the shadow business model of banks is their over-reliance on short-term financing to finance long-term assets. In order to support long-term infrastructure and industrial projects, New Delhi must establish specialized development finance institutions with clear public policy objectives and high levels of transparency and accountability.
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