An international body of financial authorities today highlighted the urgent need to monitor the "shadow banking" activities in India, given a sharp annual growth of over 20 per cent in such businesses over the recent years.
The "shadow banking system" refers to credit intermediation involving entities and activities (fully or partially) outside the regular banking system and is estimated to have reached a size of nearly Rs 37 lakh crore in India.
As per a report released today by the Switzerland-based Financial Stability Board (FSB), shadow banking business in India is estimated to be worth over USD 670 billion (nearly Rs 37 lakh crore) and accounts for about one per cent of the worldwide total.
"India and Indonesia stand out with annual growth rates of above 20 per cent since 2007 which may require closer monitoring," FSB said.
The size of global shadow banking system, on a conservative basis, has grown to over USD 67 trillion from close to USD 26 trillion about ten years ago and accounts for nearly half the size of the worldwide financial system.
FSB said these activities provide a valuable alternative to bank funding, if appropriately conducted, but past experience has shown large-scale risks for the economy.
FSB was set up to coordinate at the international level the work of national financial authorities and international standard setting bodies and to develop and promote the
implementation of effective regulatory, supervisory and other financial sector policies in the interest of financial stability.
In its report, FSB said that a total of 17 jurisdictions have seen a continuing growth in shadow banking business in the recent years had half of them are emerging economies.
However, partly this growth can be due to an increase in the number of reporting financial companies in India, where regulatory framework requires all non-deposit taking companies with an asset base of USD 10 million and above to submit monthly returns. The number of companies reporting data to the Reserve Bank of India has increased sharply over time, FSB said.
India is one of the few jurisdictions where certain types of non-banking finance companies are allowed to accept deposits, it noted.
As per a case study on financial companies in India, which forms part of FSB report, the focus of NBFC regulation in India has "shifted to include systemically important non-deposit taking NBFCs in recognition of the fact that their inter-linkages with the broader financial system could pose increasing systemic concerns."
"Admittedly, there are data gaps regarding the small non-deposit taking NBFCs, but these affect an insignificant share of the sector.
"Requiring detailed disclosures by small NBFCs similar to the ones provided by the larger NBFCs would be too onerous for them and not commensurate with their size," said the case study, prepared on te basis of presentation by RBI.
"The NBFC sector is within a well-defined regulatory perimeter and not perceived to pose significant systemic risks at present. However, there are aspects which could pose systemic risks or give raise to regulatory arbitrage concerns," it added.
Globally, the shadow banking system represents an average 25 per cent of financial system assets and 111 per cent of the aggregated GDP.
FSB said that the size of global shadow banking system, on a conservative basis, grew rapidly before the crisis, rising from USD 26 trillion in 2002 to USD 62 trillion in 2007.
The size of the total system declined slightly in 2008 but increased subsequently to reach USD 67 trillion in 2011 (equivalent to 111 per cent of the aggregated GDP of all jurisdictions).
GLobally, the US has the largest shadow banking system (USD 23 trillion), followed by the Euro area (USD 22 trillion) and the UK (USD nine trillion).
Compared to last yearŅs estimate, expanding the coverage of the monitoring exercise has increased the global estimate for the size of the shadow banking system by some USD 5 to USD 6 trillion.
On an worldwide basis, the aggregate size of the shadow banking system is around half the size of banking system assets.