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"Shadow banks believe the new norms will hurt their operations.”


As far as the synopsis and general takeaways are concerned, the system of shadow banking consists of lenders, brokers, and other credit intermediaries who fall outside the realm of traditional regulated banking. These being the intermediaries between the borrowers and lenders,providing credit and generating liquidity in the system. Unlike commercial banks ,these entities don’t accept traditional demand deposits but they do provide some services similar to that of commercial banks being one of the reasons for escaping regulation abroad.The shadow banking system had overtaken the regular banking system in offering loans in US before the financial crisis erupted in 2008.This system played a major role in the expansion of housing credit in the run up to the 2008 financial crisis, but has grown in size and largely escaped government oversight even since then.


The 2008 financial crisis has shown that shadow banking can be a source of systematic risk to the banking system. The interconnectedness of partially-regulated entities with the banking system can basically lead to directly transmitting risks associated with that of shadow banking. 



The Reserve Bank of India has been trying to tighten regulatory norms on the sector since Infrastructure Leasing & Financial Services, the largest nonbank financial company, went bankrupt in 2018, and Dewan Housing Finance Corp and Altico Capital defaulted on payments in 2019.The Reserve Bank is simply following the trend of global central banks increasing surveillance on shadow banking. Basel III norms require central banks to tighten supervision on shadow banks across the globe through steps such as defining minimum capital.


Deputy governor Anand Sinha has expressed the need to tighten shadow banking rules on various forums. RBI’s focus is on regulating the informal lending and borrowing business. Its concern stems from the interconnectedness of financial institutions.

 

Now, in response to the claims and need of the regulation required, Usha Thorat committee has come out with draft regulations on NBFCs, such as increasing tier I capital and risk weight on certain assets. After the recommendations, smaller NBFCs with asset size of less than 25 crore are likely to go out of business.

 

Moreover, RBI is taking advisory steps which include advising banks to maintain an SLR of atleast 18% and the CRR is going to be reversed after March 31 which was earlier switched from being 4% to 3%.


With the global impact being that the size of shadow banking has reached a record $67 trillion in 2011, according to a report by the Finance Stability Board, a regulatory task force for the world's group of 20 economies . America has the biggest shadow banking system, followed by the Eurozone and the United Kingdom.



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