Economy / Banking System In India / Shadow Banks
Shadow Banks
- Definition: Shadow banks refer to financial institutions that perform functions similar to traditional banks, such as raising deposits, issuing equity, and lending to investors and consumers. However, they operate outside the stringent regulatory framework applied to traditional banks.
- Examples: Shadow banks can include entities like mutual funds, investment banks, and housing finance companies. Some shadow banks are established or affiliated with traditional banks.
- Role and Functions:
- Credit Delivery and Financial Inclusion: Shadow banks can play a crucial role in credit delivery and financial inclusion. They often facilitate credit availability to sectors that might face challenges in accessing credit through traditional banking channels.
- Mapping Financing Needs: Shadow banks, by operating more flexibly, can better map the financing needs of borrowers. For example, they may specialize in areas such as microfinance or housing finance.
- Substitute and Complementary Role: Shadow banks can both substitute and complement traditional commercial banks. They can provide alternatives to borrowers who may not fit traditional banking criteria, and at the same time, they can work alongside commercial banks to meet diverse financing needs.
