Exploring the Performance Dimensions of Indian Shadow Banks Through the CAMELS Framework

Abstract

The role of shadow banks, otherwise known as nonbanking finance companies (NBFCs), in any financial system is well recognized. Since their failure has the potential spillover effect on other institutions creating vulnerability in the entire financial system, identifying key areas that require improvement will enable the firm to work at institutional level to prevent the same. Also this exercise provides crucial input to the regulator to initiate appropriate and timely policy interventions. In this article, the performance is explored by considering the relevant parameters of 100 systemically important nondeposit-taking NBFCs in India by using the CAMELS framework. As very few NBFCs are listed in the stock market, a comparative analysis is made to identify distinct characteristics of listed and nonlisted firms. From the analysis, antecedent profitability and management competencies emerged as main performance drivers across the firms. Further, the result shows that listed firms engaged in income diversification and disbursing credit by relying on internal sources able to reduce the risk and enhance their performance. But, in the case of nonlisted firms generating revenue only through their core financing activities is key to their financial health. At the firm level, emphasis on improving the competencies through capacity building that will help improve the quality of assets and revenue generation is suggested. Simultaneously, the regulator also needs to keep a strong vigil on the activities of nonlisted firms.