BANKING IN INDIA – PART 1 1.HISTORY AND EVOLUTION OF BANKING IN INDIA The term Banking originated in the western world. In the Indian financial arena, shadow banks are known as Non-Banking Finance Companies (NBFCs). However, it is yet to address the issues of unregulated chit funds or small investment funds that proliferate at the regional level. Best current affairs & GK article on Shadow Banks What we typically call “a bank” is technically a commercial bank and insured by the FDIC. © Copyright 2009-2019 GKToday | All Rights Reserved, Differences between Shadow Banks and Banks, Challenges faced by regulating agencies in monitoring of shadow banks, Challenges posed by shadow banks/NBFCs in the Indian context, Current Affairs [PDF] - March 16-31, 2021, Credit intermediation – Any kind of lending activity including at least one intermediary between the saver and the borrower. Familiar examples of shadow institutions included Bear Stearns and Lehman Brothers. The term “shadow bank” was coined by economist Paul McCulley in 2007.. A shadow banking system is the term used for the non-banking financial companies (NBFCs) which perform similar roles as commercial banks but are not under any control. Explain – Clarify the topic by giving a detailed account as to how and why it occurred, or what is the particular context. Though the disadvantages and risks of shadow banks have been highlighted here, it is undeniable that shadow banks, including NBFCs and other service a need of the population that is left unaddressed by the mainstream banks. Current Affairs, GK & News related notes on Shadow Banks topic for UPSC, Civil Services, Banking and other Competitive Examinations of India. A 2017 report by the RBI said that 99.7% of shadow banking … An RBI report showed that 7% of shadow banking in India makes long-term loans against short-term funding, primarily carried out by NBFCs and housing finance companies. Banks accept deposits and give out loans. In truth, many people have mortgages that originated through shadow banking and they don’t even know it. These agencies have to share information and coordinate and cooperate to bring in an effective, timely and unified enforcement of the law. An RBI report showed that 7% of shadow banking in India makes long-term loans against short-term funding, primarily carried out by NBFCs and housing finance companies. This course is primarily targeted for UPSC Civil Services Exam (CSE) IAS/IPS Prelims 2021’s General Studies Paper - I. The course talks about the Evolution of Banking over the years in India. There is a multiplicity of agencies involved in regulating the non-banking financial activities of entities leading to major overlap. The term ‘shadow bank’ was coined by Paul McCulley in 2007, with specific reference to American non-bank financial institutions that used short-term deposits to finance long-term loans. India is struggling to plug a hole in its shadow banking industry that gorged on lending to the real estate sector. Ever since the IL&FS crisis erupted, banks have been averse to lending to the sector, which has put them in a tight spot. Supply and demand shock: When there is a supply … They have become the major financial intermediaries. As seen in the note on NBFCS elsewhere, shadow institutions don not accept demand deposits and therefore are not subject to the same regulations. Shadow Banking Sector Other features of NBFCs Importance of NBFCs Reforms taken by RBI so far Banking Sector: Important Terms Asset Reconstruction Company Asset Quality Review Prompt Corrective Action Bank Mergers and Consolidation Define what shadow banking is – The shadow banking system is a term for the collection of non-bank financial intermediaries that provide services similar to traditional commercial banks but have different regulatory guidelines. In 2012, the Usha Thorat committee had highlighted the risks that NBFCs carry by being dependent on money market instruments like CD and CP, having little flexibility covering for their long-term assets under situations of stress. Technically, a bad bank is an Asset Reconstruction Company (ARC) or an Asset Management Company (AMC) that takes over the bad loans of commercial banks, manages them and finally recovers the money over a period of time. In India’s case, shadow banking primarily consists of NBFCs and housing finance companies (HFCs). Large banks due to their reluctance to enter into less profitable areas, have left 41% of Indian households without bank accounts, thus making them an easy target for chit funds. The classes are at night from 9 PM onwards, so even working professionals and … There is a stark differences in the way the shadow banks operate as compared to other traditional banks. Shadow banking is that part of the financial system where ‘credit intermediation involving entities and activities remains outside the regular banking system’. The NBFC Ombudsman is a senior official appointed by the RBI to redress customer complaints against NBFCs for deficiency in certain services covered under the grounds of complaint specified under Clause 8 of the Scheme. These unregulated entities are called as shadow banks. The term “shadow bank” was coined by economist Paul McCulley in 2007.. A shadow banking system is the term used for the non-banking financial companies (NBFCs) which perform similar roles as commercial banks but are not under any control. REUTERS/Himanshu Sharma. Bad Bank UPSC . This term came after “subprime crisis” in USA, 2007. Other strict norms are also detailed by the RBI. Enumerate the challenges faced by it in India. Enumerate the challenges faced by it in India. Shadow Banking is found in all economies across the world, be it in developed countries or developing countries, or countries with mature financial markets or those without. Explain. Context: A village volunteer from Gharabari village near Siliguri in West Bengal alerted the police of a child marriage in the first week of July. The term refers to the practice of banking like activities performed by non-banking finance companies, which are not subject to strict regulation. Online Appendixes These appendixes, which depict graphically the processes described in the article, offer a comprehensive look at the shadow banking system and its many components. The Ombudsman Scheme for Non-Banking Financial Companies, 2018 (the Scheme), is an expeditious and cost-free apex level … UPSC Economics Banking System Banking System in India ... Ans. Renowned UPSC Faculty Mrunal Patel will be teaching Economy including its theory, Contemporary Issues & Current Affairs, including the latest Budget and Economic Survey of 2021. The Deposit Insurance Corporation was formed by RBI to provide the necessary safety net for the bank depositors. We would like to show you a description here but the site won’t allow us. (250 words). Mains level : DHFL crisis; Resolution. From UPSC perspective, the following things are important : Prelims level : FRDI Bill. During those days, loan deeds called rnapatra or rnalekhya were prevalent. India is struggling to plug a hole in its shadow banking industry that gorged on lending to the real estate sector. It can be composed of a single entity that intermediates between end-suppliers and end-users of funds, or it could involve multiple entities forming a chain. Inside the ticking time bomb called Indian shadow banking. | EduRev UPSC Question is disucussed on EduRev Study Group by 106 UPSC Students. Suggest ways to address these challenges. How does the crisis in the shadow banking industry affect the common man? India’s $42 billion shadow-banking system has been creaking since one of the country’s biggest infrastructure lenders unexpectedly halted debt repayments in … The term “shadow bank” was coined by economist Paul McCulley in 2007. The concept of banking Brief history of banking in India Types of banks in India Various important terms associated with banking Shadow banking system / Non-Banking Finance Companies (NBFCs) Define what shadow banking is – The shadow banking system is a term for the collection of non-bank financial intermediaries that provide services similar to traditional commercial banks but have different regulatory guidelines. The crisis and the recession that followed it provoked a call for increased regulation of the markets globally. Feb 14, 2021 - PPT: Shadow Banks - Economy Lecture 5(3) UPSC Notes | EduRev is made by best teachers of UPSC. NBFCS are largely referred to as shadow banking system or the shadow financial system. It is the term prevalent more in advanced countries. Another course on enhancing your Economics Knowledge and it is all about the Banking Sector in India. Amidst all this, there were downgrades by credit rating agencies. A bad bank conveys the impression that it will function as a bank but has bad assets to start with. NBFCs are largely referred to as shadow banking system or the shadow financial system. Reason in news: Recently, the Reserve Bank of India (RBI) Governor has agreed to look at a proposal for creating a Bad Bank. By Nupur Anand. The term shadow banking as we use it today was coined by PIMCO’s Paul McCulley in 2007 after the global financial crisis, as it highlighted the bank-like functions performed by entities outside the regular banking system. Since then, and until the global financial crisis, shadow banking has grown twice as fast as traditional banking de spite its more cyclical nature. Nowhere to go. Register or Login | ₹ 0.00. The shadow banking system also refers to unregulated activities by regulated institutions. In advanced economies, shadow banking institutions perform the function of risk transformation through securitization. The Scheme is being introduced under Section 45 L of the Reserve Bank of India Act, 1934, with effect from February 23, 2018. Context. However, in certain instances there is only a thin line separating the two. There are no composite statistics on the quantum of money raises by such funds, but the recent scam run by the Saradha Group in West Bengal has wiped out as much as $3.7 billion in deposits. Shadow banking has grown in importance in the last decade or so and was one of the primary factors in the sub-prime mortgage crisis of 2007-2008 and the global recession that followed it. The Reserve Bank of India has introduced an Ombudsman Scheme for customers of Non-Banking Financial Companies (NBFCs). However, this led the NBFCs to source their funding from the banking system, thereby raising systemic risk issues. However, NBFCs in India have been regulated by the RBI (Reserve Bank of India) since 1963. In India’s case, shadow banking primarily consists of NBFCs and housing finance companies (HFCs). USA passed the Dodd-Frank Act in 2010 to strengthen the arms of the Federal Reserve to regulate all institutions of systemic importance. BANKING SECTOR OF INDIA India has 12 Public sector banks, 21 private banks in India, 45 Foreign Banks in India (as of 27 November 2020), and RBI is the central authority that manages all India’s banking operations MONEY FUNCTIONS PRIMARY FUNCTION It is … The Economic Survey 2017, suggested Public Sector Asset Rehabilitation Agency or PARA, to buy out the NPAs of high value from Indian banks. As seen in the note on NBFCS elsewhere, shadow institutions don not accept demand deposits and therefore are not subject to the same regulations. RBI faces various law related challenges such as dealing with differing entities that are:-, registered as finance companies, but do not come under the regulatory supervision of the RBI, unincorporated bodies who undertake financial activities and remain unregulated, incorporated companies and unincorporated entities illegally accepting deposits, entities camouflaging deposits in some other names and thus illegally accepting deposits. RBI also prohibited NBFCs from raising deposits from the public. It is difficult for regulating agencies to exactly determine the magnitude of shadow banking as they are continually evolving to find loopholes in the regulatory framework. Further in the course you will gain an understanding of Functions of Banks along with the different types of bank. 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