London Daily

Focus on the big picture.
Tuesday, Jul 22, 2025

Is India's Shadow Banking on the Road to Recovery?

Is India's Shadow Banking on the Road to Recovery?

Shadow banking in India has gained increasing popularity over the last 30 years or so, following the financial deregulation of the early 1990s that brought the growth of non-banking financial companies (NBFCs) across the country.
During this period, NBFCs have consistently managed to gain market share, often at the expense of the public-sector banking system; nonetheless, commercial banks have remained one of the most important funding sources for the sector. But a major crisis has emerged over the last few years that has led many to grow concerned about the risks that shadow banking poses to India’s broader financial system.

India’s NBFCs typically perform many of the tasks of a commercial bank, such as credit intermediation, liquidity transformation and maturity transformation. They can be viewed as a disaggregated network of financial institutions and vehicles that direct funds from savers to investors through a diverse range of securitisation and secured-funding methods, and they typically operate in an unregulated or under-regulated environment. Savers are often connected to investors via short-term borrowing facilities such as the issuance of commercial paper, which is used to finance longer-term infrastructure projects, such as roads, power plants and real estate. Much of the demand for such funds is driven by their cheaper borrowing costs compared to long-term bond issuances. And with interest rates on a downward trend over the last few years, savers have been more inclined to head towards shadow banking, specifically NBFCs, in search of higher returns.

But with the opportunity for higher returns comes higher risks, which has been the core problem for shadow banking in India in recent years. Indeed, the debate surrounding the country’s NBFCs has been stirring for some time, with calls for the sector to clean itself up, especially in terms of its shortages of cash, mounting levels of bad loans and high costs of capital. And with asset quality having deteriorated consistently since 2018, if not before, and the collapse of several systemically important NBFCs during this time, those calls are only growing louder in the midst of the tougher operating environment created by the coronavirus pandemic.

Concern over India’s shadow-banking sector first began gaining momentum in mid-2018, when a major financier of infrastructure business, IL&FS Group (Infrastructure Leasing & Financial Services Limited), ended up defaulting on its payment obligations for commercial paper and unsecured borrowing facilities worth around $60 million—before again defaulting later that year on a small short-term loan that triggered credit-rating downgrades from a number of agencies. News reports revealing that IL&FS Group’s sources of short-term liquidity, which it was using to finance long-term projects, had dried up triggered a broad investor sell-off that impacted a number of high-profile NBFCs, lowering their stock prices and pushing their costs of borrowing much higher.
Newsletter

Related Articles

0:00
0:00
Close
US Treasury Secretary Calls for Institutional Review of Federal Reserve Amid AI‑Driven Growth Expectations
UK Government Considers Dropping Demand for Apple Encryption Backdoor
Severe Flooding in South Korea Claims Lives Amid Ongoing Rescue Operations
Japanese Man Discovers Family Connection Through DNA Testing After Decades of Separation
Russia Signals Openness to Ukraine Peace Talks Amid Escalating Drone Warfare
Switzerland Implements Ban on Mammography Screening
Japanese Prime Minister Vows to Stay After Coalition Loses Upper House Majority
Pogacar Extends Dominance with Stage Fifteen Triumph at Tour de France
CEO Resigns Amid Controversy Over Relationship with HR Executive
Man Dies After Being Pulled Into MRI Machine Due to Metal Chain in New York Clinic
NVIDIA Achieves $4 Trillion Valuation Amid AI Demand
US Revokes Visas of Brazilian Corrupted Judges Amid Fake Bolsonaro Investigation
U.S. Congress Approves Rescissions Act Cutting Federal Funding for NPR and PBS
North Korea Restricts Foreign Tourist Access to New Seaside Resort
Brazil's Supreme Court Imposes Radical Restrictions on Former President Bolsonaro
Centrist Criticism of von der Leyen Resurfaces as she Survives EU Confidence Vote
Judge Criticizes DOJ Over Secrecy in Dropping Charges Against Gang Leader
Apple Closes $16.5 Billion Tax Dispute With Ireland
Von der Leyen Faces Setback Over €2 Trillion EU Budget Proposal
UK and Germany Collaborate on Global Military Equipment Sales
Trump Plans Over 10% Tariffs on African and Caribbean Nations
Flying Taxi CEO Reclaims Billionaire Status After Stock Surge
Epstein Files Deepen Republican Party Divide
Zuckerberg Faces $8 Billion Privacy Lawsuit From Meta Shareholders
FIFA Pressured to Rethink World Cup Calendar Due to Climate Change
SpaceX Nears $400 Billion Valuation With New Share Sale
Microsoft, US Lab to Use AI for Faster Nuclear Plant Licensing
Trump Walks Back Talk of Firing Fed Chair Jerome Powell
Zelensky Reshuffles Cabinet to Win Support at Home and in Washington
"Can You Hit Moscow?" Trump Asked Zelensky To Make Putin "Feel The Pain"
Irish Tech Worker Detained 100 days by US Authorities for Overstaying Visa
Dimon Warns on Fed Independence as Trump Administration Eyes Powell’s Succession
Church of England Removes 1991 Sexuality Guidelines from Clergy Selection
Superman Franchise Achieves Success with Latest Release
Hungary's Viktor Orban Rejects Agreements on Illegal Migration
Jeff Bezos Considers Purchasing Condé Nast as a Wedding Gift
Ghislaine Maxwell Says She’s Ready to Testify Before Congress on Epstein’s Criminal Empire
Bal des Pompiers: A Celebration of Community and Firefighter Culture in France
FBI Chief Kash Patel Denies Resignation Speculations Amid Epstein List Controversy
Air India Pilot’s Mental Health Records Under Scrutiny
Google Secures Windsurf AI Coding Team in $2.4 Billion Licence Deal
Jamie Dimon Warns Europe Is Losing Global Competitiveness and Flags Market Complacency
South African Police Minister Suspended Amid Organised Crime Allegations
Nvidia CEO Claims Chinese Military Reluctance to Use US AI Technology
Hong Kong Advances Digital Asset Strategy to Address Economic Challenges
Australia Rules Out Pre‑commitment of Troops, Reinforces Defence Posture Amid US‑China Tensions
Martha Wells Says Humanity Still Far from True Artificial Intelligence
Nvidia Becomes World’s First Four‑Trillion‑Dollar Company Amid AI Boom
U.S. Resumes Deportations to Third Countries After Supreme Court Ruling
Excavation Begins at Site of Mass Grave for Children at Former Irish Institution
×