RBI CONCEPT:SHADOW BANKING#56

Oracle IAS, the best coaching institute for RBI grade B/NABARD/SEBI in Dehradun (Uttarakhand), brings to you views on important issues.

What is shadow banking?

  • Shadow banking is that part of the financial system where ‘credit intermediation involving entities and activities remains outside the regular banking system’.
  • The term “shadow bank” was coined by economist Paul McCulley in 2007.  After the financial crisis, central banks including the US, UK and EU have introduced many strong measures to control shadow banking. A global institution called Financial Stability Board is coordinating and designing these measures at the request of the G20.

Shadow banking sector in India

  • The shadow banking trend was very strong in advanced countries. But they are not that much pronounced in developing countries like India. Still, the risk related to the excessive risk-taking and failure probabilities of these institutions may create systemic crisis in India as well.
  • Hence, the RBI is implementing measure to control all financial institutions including the NBFCs (Non Banking Financial Companies).
  • In India, the NBFCs are sometimes categorized as the shadow banking sector, though they are well regulated now. The increasing regulatory measures for NBFCs are an instance for the RBI’s effort to make strong control over the sector.
  • It is to be noted that in the context of the developing countries, the shadow banking sector plays an important role in promoting financial inclusion. They are very customer friendly, market oriented, innovative and flexible.
  • The main advantages of shadow banks lie in their ability to reduce transaction costs, their quick decision making ability, and customer orientation and prompt delivery of services.
  • Similarly, in India, the NBFC sector performs an exceptional role in providing credit in the rural areas. Hence, the sector is carefully regulated by the RBI in recent years.

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