ABSTRACT
The role of the failure of the shadow banking system in the global financial crisis 2007 highlighted the importance of the regulation of shadow banking activities and instruments in maintaining overall financial stability in the economy. Shadow banks are interconnected and interdependent non-banking financial entities, which are highly leveraged, pro-cyclical and depend on volatile market-based wholesale funding. Their assets are risky and more illiquid than those of commercial banks. Shadow bank deposits lack a public backstop and are also denied central bank liquidity facility in times of severe distress. This chapter analyses the rise of shadow banks in India in the post liberalisation period with particular emphasis on gold loan Non-Banking Finance Companies (NBFCs), which are important shadow financial entities in India. The analysis shows that shadow financial institutions like gold loan NBFCs are vulnerable to funding shocks and liquidity shocks, and their asset quality has deteriorated over time, posing systemic risk concerns.
