What is the Big Challenge of Shadow Banking in India today?

November 27, 2018
investment

 

Any investor with a semblance of market awareness would know by now about the hits that the Banking Sector has received. The NPAs truly brought to light some deep fractures in the banking practices currently, and it resulted in a reduction in the value of the stocks of many prominent banks. However, owing to some corrective measures taken by the Reserve Bank and a change in the overarching structure, the banking sector has since been recovering from this fall.

However, these NPAs which are being addressed are only those that have been in possession of banks – the NBFCs are not included, in most cases. NBFC or Non-Banking Financial Companies are also in the same business of lending and borrowing, akin to banks in that respect. The NPAs in possession of these NBFCs also tend to have deep implications on market health and the economy.

Recently, the debt default by the IL&FS brought forth the depth of the financial risk that India’s NBFCs pose to the economy. IL&FS, or Infrastructure Leasing and Financial Services is actually a conglomerate which deals with financing and developing various infrastructure projects in the nation. This mini-crisis has worsened the capital adequacy and has contributed to the credit crunch happening today in India.

Many growing sectors were heavily dependent on NBFCs for credit, and these even include established sectors like Real Estate and the likes. Recently, a report by the Investment Banking Company Credit Suisse stated that the exposure of the NBFCs to an assortment of real estate companies could be as much as Rs. 20,000 Crores. This led to a downfall of the shares of Real Estate companies, and the economy was affected too.

The issue is that Banks is still reeling from the NPA issue that hit them head on, and are currently unable to neither increase the interest rates on their loans nor lend more to those real-estate companies that are looking for credit. This led to NBFCs taking the mantle, and this phenomenon is known as ‘shadow banking’. In India, the shadow banking sector of the lending agenies appears to be larger than that of the banks, which can have dire consequences in the economy of the nation too.

If you are interested in understanding more about the issue and about investment in general, take a look at the investment banking courses available on Imarticus Learning!

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