Why Regulators Fail To Tame ‘Shadowy’ Banking Players
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The recent arrest of Subrata Roy—who transformed himself from a lesser-known employee of Despite consistent efforts by Reserve Bank of India (
The recent decision of RBI to give in-principal nod for banking licences to Kolkata-based micro-lender Bandhan Financial Services—along with Mumbai-based non-banking financial company
What gave Bandhan (set up in 2001 by Chandra Shekhar Ghosh) an edge when it came to bagging preliminary baking licence is that it focuses on working with ‘socially disadvantaged and economically exploited women’ and has a strong presence in the under-banked eastern and north eastern regions of India. Despite a litany of players in India’s banking space—there are 27 state-run banks and 22 private sector ones in the country—RBI has apprehensions if the so-called corporate banks are serious about penetrating into India's hinterland and enhancing lending to farmers and small traders who comprise a major chunk of the unbanked population.
Shadow banking, which typically comprises a diverse set of institutions and markets that carry out traditional banking functions but do so outside the traditional system of regulated depository institutions, has flourished world over. A recent report by Financial Stability Board pegged its size at around $67 trillion globally, representing a little more than 30 per cent of the total financial system. Shadow banking institutions—hedge funds, securitisation vehicles, asset-backed commercial paper conduits, money market mutual funds, investment banks and mortgage companies—prospered by playing the role of intermediaries between investors and borrowers—a space that is yet to be fully tapped into by traditional banking players—profiting from fees or the difference in interest rates between what they pay the investors and what they receive from borrowers, besides offering exotic financial products such as asset-backed commercial paper programmes and off-balance sheet credit default swaps.
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The picture is no different in India. In fact, recently, while regulators were chasing a seemingly unperturbed Subrata Roy—who managed to amass immense wealth including ownership of some of the most luxurious hotels in the world including New York's Plaza Hotel, Dream Hotel and London's Grosvenor House hotel, over his 35-year-long ‘shadowy banking career’—said that Sahara will be among the top firms in the world in five years in terms of assets and profits. His optimism is not fully unfounded. Despite SEBI’s claim that he owes more than Rs 20,000 crore to investors who were sold various unregulated banking products, there has been very little sign of a mutiny from the investors whom he cheated. This is surprising in a country where collapse of financial schemes has historically elicited a violent reaction. This means that as long as the elite corporate banking system fails to reach out to unbanked population, shadowy banking players will flourish in India and elsewhere.
Image: Thinkstock
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