CHALLENGES

OF SHADOW
BANKING
Behavioural Finance and
Value Investing

Damandeep Singh 2019PGP149

Harsh Bhat 2019PGP153
Megha Rekhani 2019PGP175
Shiva Bahuguna 2019PGP113
Subhasisha Das 2019PGP187
 INTRODUCTION
• Financial intermediaries that conduct maturity, credit and liquidity
transformation without access to central liquidity or public sector credit
guarantees.
• Not regulated by monetary policies
• In shadow banking loans are not funded or serviced by deposits. Instead,
the loan originator sells the loans to another financial institution, which
pools the loans with many others. These loan pools are securitized in a
multistep process; that is, various financial instruments are created from
the underlying loan payments

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 US$57
03
trillion

Present worth of global

shadow bank assets
The actual size of all shadow banking entities, classified as "broad measure" of all NBFIs or "Monitoring Universe
of Non-bank Financial Intermediation" (MUNFI), is far bigger: $183.6 trillion in 2018 or 48.5% of financial assets of
all financial entities ($379 trillion).
Shadow Banking
Global
Perspective
● The term is used differently across
countries, which makes it harder to
relate theoretical discussions to
specific institutional contexts
● In Europe, lending by insurance
companies is sometimes called
shadow banking
● Wealth management products offered
by banks in China come under its ambit
● In India, lending by bank affiliated
finance companies are also considered
as shadow banks
● India was one of 9 nations recording
more than 10% growth in 2016.
 $42 billion
Shadow Banking in India (as of 2019)
GROSS REVENUES IN THIS YEAR
 Non-Banking Financial Sector (NBFC)

As on March 31,
2019, the total
assets of NBFCs
and HFCs was Rs
44.4 lakh crore
(NBFCs: 70 per
cent; HFCs: 30 per The opening line
cent), which is of India's banking
approximately one- regulator RBI's
fourth the size of Fiscal Stability
the assets of the Report, released
scheduled on July 24, 2020,
commercial banks reads:
(Rs 166 lakh crore). "NBFCs complement banks in extending credit in the
economy and they are a vital cog in the wheel for
extending last mile credit needs.”
 Financial Health of NBFCs in India
Asset quality
• Post July, liquidity and funding environment has improved for better rated NBFCs
• Asset quality issues will impact their overall profitability in FY21 and beyond Increased focus on
collections and tightened underwriting standards by NBFCs, will result in decreased portfolio growth
• Growth in assets under management is also expected to be flattish, as against an earlier estimate of 8-
10 % year-on-year (y-o-y) and in lower single digits for Housing finance companies (HFCs) in FY21

Capital Adequacy
• A Financial Stability Report (FSR) of December 2020 by the RBI states that, banks’ gross non-performing
assets (GNPAs) may rise sharply to 13.5 % by September 2021, and escalate to 14.8 % under severe
stress scenario
• Systemic cap-ad is projected to drop to 14 % in September 2021 from 15.6 % in September 2020 under
the baseline scenario and to 12.5 per cent under the severe stress scenario
• 4 banks may fail to meet the minimum capital level by September 2021 under the baseline scenario and
9 under severe stress scenario
 Forex Exposure of NBFCs

A strong rupee, low ECBs fell to a

interest rate and 11-quarter low of
abundant liquidity in $3.51 bn during
the overseas market Q1 of the current
should have resulted fiscal as
in strong overseas compared to $12
borrowing. This along
bn for the same
with growing risk
aversion among the
quarter last year.
domestic lenders This is a sharp
should have ideally drop from the
pushed more Indian quarterly high of
corporates to borrow $19 bn in Q4
abroad FY20
 Features And Benefits
• Improving Product Transparency – Managing systemic risk leans toward a more vigilant
monitoring of the global financial system and tighter supervision of institutions deemed
systemically important. It may well be that risk is caused as much by products as by
institutions, like it did in the case of the financial crisis of 2008. One of the ways to manage the
financial sector’s systemic risk is to put a brake on its carriers and require all products over a
certain volume to be traded on an exchange rather than over the counter or, to create a
mandatory central clearing house for them.

• Regulatory Norms – Regulatory guidelines for NBFCs and other such institutions should be
clear and leave no room for ambiguity. In addition to this, a standard procedure should be in
place to keep checks on the shadow banking institutions. While they are vital to the economic
growth of any country, if unchecked they have the potential of leading to crisis like that of
IL&FS in India.

• Restructuring – Restructuring the shadow banking system around regulations and guidelines
may be beneficial in ensuring the credit quality, lending and capital ratios for the shadow
banking institutions