Shadow banking exist in india
The shadow banking system is a term for the collection of non-bank financial intermediaries that provide services similar to traditional commercial banks. Federal Reserve Chair Ben Bernanke provided a definition in April 2012: "Shadow banking, as usually defined, comprises a diverse set of institutions and markets that, collectively, carry out traditional banking functions--but do so outside, or in ways only loosely linked to, the traditional system of regulated depository institutions. Examples of important components of the shadow banking system include securitization vehicles, asset-backed commercial paper (ABCP) conduits, money market mutual funds, markets for repurchase agreements (repos), investment banks, and mortgage companies." Shadow banking has grown in importance to rival traditional depository banking and was a primary factor in the subprime mortgage crisis of 2007-2008 and global recession that followed
Emergence of some fly‐by‐night NBFCs in this early period (Deosthalee, 2010)
created concerns among the regulators and the NBFC regulation in India began in
1963 with the insertion of a new chapter, IIIB, in the RBI Act, 1934 to enable the
central bank to effectively supervise, regulate and control these institutions (Nizar
and Aziz, 2004). The initial focus was on moderating the deposit mobilization of the
NBFCs to safeguard depositors’ interest and ensure healthy functioning of the NBFC
sector. Since then, many attempts have been made to enhance the extant regulatory
framework and several amendments to the RBI Act, 1934 had been made until 1998
(see, Deosthalee, 2010, Nizar and Aziz, 2004 and the references therein for detailed
historical accounts).
In 1998, the RBI introduced an entirely new set of NBFC regulations and
supervision (announced in January and further amended in December). In this new
set of regulations, the NBFCs were broadly classified into three categories:
1) Deposit taking NBFCs;
2) Non‐deposit taking NBFCs;
3) Core Investment Companies.
The new regulatory framework involved a prescription of prudential norms for
deposit taking NBFCs to ensure that these NBFCs function on sound and healthy
lines. However, the regulatory and supervisory attention was focused mainly on the
deposit taking NBFCs to protect the interests of the depositors. The non‐deposit
taking NBFCs were kept subject to minimal regulation and, practically, Core
Investment Companies were left out altogether.
Nevertheless, the 1998 NBFC regulations made a major impact on the growth
of the NBFCs, and the number of NBFCs dropped to 7,855 in March 1999 from
55,995 in March 1995 (Nizar and Aziz, 2004). For the deposit taking NBFCs, the
number of companies dropped from 1,429 in March 1998 to 624 in March 1999 in a
single year, and although the number of deposit taking NBFCs increased gradually
from 624 in March 1999 to a peak of 784 in March 2001, it started to decline
thereafter and stood at 297 in March 2011. As for the deposits held by these
companies, the deposits decreased from 237.7 billion rupees, comprising 52.3
percent of their total assets, in March 1998 to 172,7 billion rupees, comprising 15.7
percent of their total assets, in March 2010. The table below compares the deposit
taking NBFC deposits to the bank deposits for the fiscal years 2006, 2010 and 2011,
highlighting the substantial decline of NBFC deposits.
The shadow banking system is a term for the collection of non-bank financial intermediaries that provide services similar to traditional commercial banks. Federal Reserve Chair Ben Bernanke provided a definition in April 2012: "Shadow banking, as usually defined, comprises a diverse set of institutions and markets that, collectively, carry out traditional banking functions--but do so outside, or in ways only loosely linked to, the traditional system of regulated depository institutions. Examples of important components of the shadow banking system include securitization vehicles, asset-backed commercial paper (ABCP) conduits, money market mutual funds, markets for repurchase agreements (repos), investment banks, and mortgage companies." Shadow banking has grown in importance to rival traditional depository banking and was a primary factor in the subprime mortgage crisis of 2007-2008 and global recession that followed
Emergence of some fly‐by‐night NBFCs in this early period (Deosthalee, 2010)
created concerns among the regulators and the NBFC regulation in India began in
1963 with the insertion of a new chapter, IIIB, in the RBI Act, 1934 to enable the
central bank to effectively supervise, regulate and control these institutions (Nizar
and Aziz, 2004). The initial focus was on moderating the deposit mobilization of the
NBFCs to safeguard depositors’ interest and ensure healthy functioning of the NBFC
sector. Since then, many attempts have been made to enhance the extant regulatory
framework and several amendments to the RBI Act, 1934 had been made until 1998
(see, Deosthalee, 2010, Nizar and Aziz, 2004 and the references therein for detailed
historical accounts).
In 1998, the RBI introduced an entirely new set of NBFC regulations and
supervision (announced in January and further amended in December). In this new
set of regulations, the NBFCs were broadly classified into three categories:
1) Deposit taking NBFCs;
2) Non‐deposit taking NBFCs;
3) Core Investment Companies.
The new regulatory framework involved a prescription of prudential norms for
deposit taking NBFCs to ensure that these NBFCs function on sound and healthy
lines. However, the regulatory and supervisory attention was focused mainly on the
deposit taking NBFCs to protect the interests of the depositors. The non‐deposit
taking NBFCs were kept subject to minimal regulation and, practically, Core
Investment Companies were left out altogether.
Nevertheless, the 1998 NBFC regulations made a major impact on the growth
of the NBFCs, and the number of NBFCs dropped to 7,855 in March 1999 from
55,995 in March 1995 (Nizar and Aziz, 2004). For the deposit taking NBFCs, the
number of companies dropped from 1,429 in March 1998 to 624 in March 1999 in a
single year, and although the number of deposit taking NBFCs increased gradually
from 624 in March 1999 to a peak of 784 in March 2001, it started to decline
thereafter and stood at 297 in March 2011. As for the deposits held by these
companies, the deposits decreased from 237.7 billion rupees, comprising 52.3
percent of their total assets, in March 1998 to 172,7 billion rupees, comprising 15.7
percent of their total assets, in March 2010. The table below compares the deposit
taking NBFC deposits to the bank deposits for the fiscal years 2006, 2010 and 2011,
highlighting the substantial decline of NBFC deposits.
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