'Need to keep an eye on shadow banking entities'-Business Standard
In India, shadow banking entities essentially refer to the large number of unregulated companies that act as financial intermediaries, providing credit and generating liquidity in the system
The Reserve Bank of India (RBI) on Thursday said there was a need to monitor "shadow banking" entities, which were perceived to be regulated by the central bank, albeit inaccurately, to eliminate ambiguities related to legal, regulatory and administrative aspects of their functioning.
In India, shadow banking entities essentially refer to the large number of unregulated companies that act as financial intermediaries providing credit and generating liquidity in the system. For instance, companies engaged in multi-level marketing, offering prize chits and money circulation schemes are currently not regulated by RBI.
"(The shadow banking sector) raises concern partly because of the public perception that they are regulated," the central bank said in its financial stability report released on Thursday.
At a time when some developed economies have initiated efforts to mitigate systemic risks posed by shadow banking activities, India has witnessed a a significant increase in the exposure of its banks to shadow banking entities.
"The motivation for regulatory reforms in the shadow banking space in developed economies, especially in the US, emanated from certain dilemmas that, on the one hand, there was a need to de-risk the overgrown complex banking industry, which inevitably needs the presence of shadow banking entities to absorb those risks and the concerns over the role of shadow banking entities in consummating the financial crisis, on the other," RBI said.
The banking regulator, however, admitted that in developing markets such as India these concerns might not be entirely valid because of the low penetration of banking services, much less complex financial markets and level of regulatory oversight exercised over shadow banking activities. In fact, some shadow banking entities have been playing an important role in supporting efforts towards financial inclusion.
But with relatively lower levels of financial awareness and the misconception that all financial activities come under some regulatory framework, shadow banking entities in the country may assume systemic importance.
Hence, the central bank feels there is a need for clarity in the regulatory framework for shadow banking entities in India. "There is a need to assess the collective size and profile of activities of the large number of non-bank financial entities functioning in the organised as well as the unorganised sector (including unincorporated entities which are outside the purview of the regulatory perimeter)," RBI said.
The banking regulator is in the process of reviewing the regulatory framework for non-banking financial companies (NBFCs), based on the recent developments in the sector and also recommendations made by the Nachiket Mor committee.
"The proposed review will cover the legislative framework of the NBFC sector, asset classification and provisioning norms for NBFCs vis-a-vis that of banks - (including the need for raising tier-I capital requirement for NBFCs), corporate governance guidelines including 'fit and proper' criteria for their directors, regulation of deposit acceptance activity, consumer protection measures, present classification scheme of NBFCs and activity of lending against shares by NBFCs," RBI said.
In India, shadow banking entities essentially refer to the large number of unregulated companies that act as financial intermediaries providing credit and generating liquidity in the system. For instance, companies engaged in multi-level marketing, offering prize chits and money circulation schemes are currently not regulated by RBI.
"(The shadow banking sector) raises concern partly because of the public perception that they are regulated," the central bank said in its financial stability report released on Thursday.
At a time when some developed economies have initiated efforts to mitigate systemic risks posed by shadow banking activities, India has witnessed a a significant increase in the exposure of its banks to shadow banking entities.
"The motivation for regulatory reforms in the shadow banking space in developed economies, especially in the US, emanated from certain dilemmas that, on the one hand, there was a need to de-risk the overgrown complex banking industry, which inevitably needs the presence of shadow banking entities to absorb those risks and the concerns over the role of shadow banking entities in consummating the financial crisis, on the other," RBI said.
The banking regulator, however, admitted that in developing markets such as India these concerns might not be entirely valid because of the low penetration of banking services, much less complex financial markets and level of regulatory oversight exercised over shadow banking activities. In fact, some shadow banking entities have been playing an important role in supporting efforts towards financial inclusion.
But with relatively lower levels of financial awareness and the misconception that all financial activities come under some regulatory framework, shadow banking entities in the country may assume systemic importance.
Hence, the central bank feels there is a need for clarity in the regulatory framework for shadow banking entities in India. "There is a need to assess the collective size and profile of activities of the large number of non-bank financial entities functioning in the organised as well as the unorganised sector (including unincorporated entities which are outside the purview of the regulatory perimeter)," RBI said.
The banking regulator is in the process of reviewing the regulatory framework for non-banking financial companies (NBFCs), based on the recent developments in the sector and also recommendations made by the Nachiket Mor committee.
"The proposed review will cover the legislative framework of the NBFC sector, asset classification and provisioning norms for NBFCs vis-a-vis that of banks - (including the need for raising tier-I capital requirement for NBFCs), corporate governance guidelines including 'fit and proper' criteria for their directors, regulation of deposit acceptance activity, consumer protection measures, present classification scheme of NBFCs and activity of lending against shares by NBFCs," RBI said.
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