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The growth of a shadow banking system in emerging markets: Evidence from India


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  • Acharya, Viral V.
  • Khandwala, Hemal
  • Sabri Öncü, T.
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    We study the determinants of the growth of those non-deposit taking non-bank financial corporations (NBFCs) which are regarded by the Reserve Bank of India as being systemically important and have grown substantially in India over the past decade. We document that bank lending to NBFCs (i) forms a significant proportion of the NBFC liabilities; (ii) fluctuates in line with bank allocation to priority lending sectors; (iii) decreases as the banks expand in the rural areas relative to urban areas; but, (iv) is virtually non-existent for the largest state-owned bank, namely State Bank of India (SBI) and its affiliates which have significant rural branch network. Starting with the financial crisis of Fall 2008, bank lending to NBFCs experienced a permanent contraction shock related to the shift of term deposits toward SBI away from other banks. These bank-NBFC linkages are present primarily for, and affect the credit growth of, those NBFCs that do loans or asset financing but not the investment companies. Overall, the findings suggest that in contrast to the prevailing views of shadow banking in the Western economies, lending to NBFCs in India is viewed by banks as a substitute for direct lending in the non-urban areas of the Indian economy, but this substitution is constrained by distortions in bank deposit flows due to the perceived differential government support of different banking groups.

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    Article provided by Elsevier in its journal Journal of International Money and Finance.

    Volume (Year): 39 (2013)
    Issue (Month): C ()
    Pages: 207-230

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    Handle: RePEc:eee:jimfin:v:39:y:2013:i:c:p:207-230

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    Keywords: Shadow banking; Non-Bank financial corporations; Crisis; Systemic risk; Government guarantees;

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    1. Pozsar, Zoltan & Adrian, Tobias & Ashcraft, Adam B. & Boesky, Hayley, 2013. "Shadow banking," Economic Policy Review, Federal Reserve Bank of New York, issue Dec, pages 1-16.
      • Zoltan Pozsar & Tobias Adrian & Adam Ashcraft & Hayley Boesky, 2010. "Shadow banking," Staff Reports 458, Federal Reserve Bank of New York.
    2. Viral V. Acharya & Nirupama Kulkarni, 2012. "What Saved the Indian Banking System: State Ownership or State Guarantees?," The World Economy, Wiley Blackwell, vol. 35(1), pages 19-31, 01.
    3. Acharya, Viral V. & Schnabl, Philipp & Suarez, Gustavo, 2013. "Securitization without risk transfer," Journal of Financial Economics, Elsevier, vol. 107(3), pages 515-536.
    4. Ghosh, Swati & Gonzalez del Mazo, Ines & İnci Ötker-Robe, 2012. "Chasing the Shadows: How Significant Is Shadow Banking in Emerging Markets?," World Bank - Economic Premise, The World Bank, issue 88, pages 1-7, September.
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    Cited by:
    1. Stijn Claessens & Lev Ratnovski, 2014. "What is Shadow Banking?," IMF Working Papers 14/25, International Monetary Fund.


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