InvestorQ : I hear a lot about shadow banks in India these days. What exactly are these shadow banks and why are markets worried about shadow banks?
Dawn Cherian made post

I hear a lot about shadow banks in India these days. What exactly are these shadow banks and why are markets worried about shadow banks?

Answer
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Dilmini Mercia answered.
1 year ago


Shadow bank was a term used first in China. Most Chinese do not have access to the large banks and hence they had to make do with small and medium sized money lenders. Over time these money lenders became so big that they almost became like banks but catered to small and medium sized borrowers. These shadow banks in China are not regulated and they had helped create a huge equity mark bubble in China by funding such equity purchases. The Chinese government has already moved in rapidly to curb such practices and that is one of the factors that is slowing growth in China.

In the Indian context, a lot of newspapers and TV channels have used the term Shadow Banks to refer to NBFCs. That is not an appropriate usage because NBFCs are regulated by the RBI. But in the recent past, the usage of Shadow Banks in India has also moved to include mutual funds that have been using structures to fund companies by purchasing bonds of subsidiaries against hypothecation of shares by the promoter in the parent company. That has been the cause of a lot of problems in the debt markets these days. This Union Budget is expected to regulate these type of shadow banking activities.