RBI says that, as of March 2021, India had 10,000 shadow banks.
The assets are worth 54 trillion rupees = one-fourth that of the banking sector.
What are these Shadow Banks?
– In 2007, PIMCO’s Paul McCulley coined “shadow banks” for off-balance-sheet loans repackaged by banks as bonds.
– The term “shadow banking” refers to activities that are similar to traditional banking (primarily lending).
– Nowadays, the term refers to any financial intermediary that performs bank-like activities without being regulated like a bank. (NBFCs)
– Several financial institutions operate as shadow banks, transforming credit, maturity, and liquidity without direct, explicit recourse to the public.
Which institutes count as shadow banks?
– Mortgage lenders
– Bond funds
– Investment banks
– Finance companies
– Money market funds
– Special purpose entities
– Insurance/re-insurance companies
The benefits –
– Shadow banking reduces the need for traditional banks as credit sources.
– Economically speaking, it acts as an additional lending source
– Facilitates diversification in the financial system.
– Economic overlending can be caused by shadow banking.
– There is a risk of a harmful downturn as a result of this.
What are some interesting facts that you know about shadow banks?
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