Shadow Banking in India in relation to the IL&FS Crisis

Abstract

The term “shadow banking” was used for the first time by Paul Mc Culley in 2007 while referring to non banking financial institutions. Unlike in the US and Europe where shadow banking is an option for safe transactions, in India the position of Non banking financial institutions (NBFCs) is more of an alternative available for banking transactions in semi urban areas and in smaller areas where the banking institutions do not have a good outreach. In addition to carrying out the basic functions of financing institutions, NBFCs also perform functions in the securities market in relation to mutual funds, unit funds, collective investment schemes, infrastructure schemes, real estate schemes, hedging etc. The recent IL&FS crisis has raised doubts and concerns about the viability of NBFCs and their regulation under Indian financial and legal systems. In light of the crisis, risks for lending institutions and the position of shadow banking in India, this paper will examine shadow banking/ NBFCs in India and outside India, financial and legal framework for regulating shadow banking in the US and Europe, financial and legal framework in India with reference to RBI and SEBI regulations and an analysis of the IL&FS crisis in relation to shadow banking in India.