Shadow Banking: Strategies Uncovered, Risks Mitigated and Lessons Learned for the Future

Abstract

Non-banking finance companies (NBFCs) have had a rather unpredictable presence, survival and growth in the Indian financial markets. It is rather well known by now that the risk-borne activities undertaken by a few NBFCs raised a few red flags and brought many stable heavyweight organizations in the finance sector to a screeching halt in their tracks. Due to the recent IL&FS and the DHFL crises, one might easily conclude to restrict, restrain and rein in the NBFC sector with increased regulations. Clamping down on the NBFC sector would not work, as they reach out to the nook and corner of the country, with many citizens seeking services from the NBFC sector, especially when they do not find a suitable solution to their credit needs from the formal banking sector. The authors find that some of the basic challenges for the NBFC sector have always been, and shall always remain, to find an ideal mix of capital from varied sources to fund the growing credit demand while being devoid of excessive risk from any one set of lenders. Towards the end of this paper, upcoming challenges for the NBFC sector domestically as well as globally along with its most suitable solutions from a practical implementation perspective have been suggested.