With reference to India, the components of Shadow Banking is / are?
1.Money Market Funds
2.Credit investment Fund
Choose the correct option:
|Shadow Banking in Indian Context
The term ’shadow banking system‘ was first used in 2007 and refers to the bank-like functions performed by entities outside the regular banking system.
The more comprehensive definition, as adopted by the Financial Stability Board (FSB), i.e., ‘credit intermediation involving entities and activities (fully or partially) outside the regular banking system’ has been globally accepted. This definition has two important components:
· Non bank financial entities or entities outside the banking system that engage in the ‘bank like’ activities of maturity transformation, undertaking credit risk transfer and using direct or indirect financial leverage.
· Activities such as securitization, securities lending and repo transactions that act as important sources of funding for non bank entities.
Thus, shadow banks comprise entities which conduct financial intermediation directly, such as finance companies or NBFCs, and entities which provide finance to such entities, such as mutual funds. Globally, shadow banking entities could be covered under the broad heads of
· Money Market Funds,
· Credit investment Fund
· Hedge Funds
· Finance Companies accepting deposits or deposit like funding
· Securities brokers dependent on wholesale funding
· Credit insurers, financial guarantee providers
· Securitisation vehicles.
The Shadow banking institutions function as intermediaries between the investors and the borrowers, providing credit and generating liquidity in the system. Although these entities do not accept traditional demand deposits offered by banks, they do provide services similar to what commercial banks offer. And this was one reason why they escaped regulation abroad. The shadow banking system had overtaken the regular banking system in offering loans in US before the financial crisis erupted in 2008.
This question is a part of GKToday's Integrated IAS General Studies Module