regulations and the financial safety net to cover these new institutions. influential figures should have proclaimed a simple rule : anything that does what a bank does, anything that has to be rescued in crises the way banks are, should be regulated like a bank. ” 12. the international monetary fund ( imf ) also voiced that the spillover effects of the shadow banking system onto systemic risk needs to be contained. the g - 20, duly prodded by the fsb declared that the shadow banking system should be regulated. the usa brought them under regulation in 2010 under the dodd frank act. the uk goes further to even accord them central bank liquidity. shadow banks in india 13. do we have shadow banks in india? the answer is yes. it is yes, because we have financial institutions which accept deposits and extend credit like banks, but we do not call them shadow banks ; we call them the non - banking finance companies ( nbfcs ). are they in fact shadow banks? no, because these institutions have been under the regulatory structure of the reserve bank of india, right from 1963 i. e. 50 full years before the developed west is doing so. evolution of regulation of nbfcs in india 14. in the wake of failure of several banks in the late 1950s and early 1960s in india, large number of ordinary depositors lost their money. this led to the formation of the deposit insurance corporation by the reserve bank, to provide guarantee to the depositors. ( later by adding a credit guarantee element, it became the dicgc ). while this provided the necessary safety net for the bank depositors, the reserve bank did note that there were deposit taking activities undertaken by non - banking companies. though they were not systemically as important as the banks, the reserve bank initiated regulating them, as they had the potential to cause pain to their depositors. 15. later in 1996, in the wake of the failure of a big nbfc, the reserve bank tightened the regulatory structure over the nbfcs, with rigorous registration requirements, enhanced reporting and supervision. reserve bank also decided that no more nbfc will be permitted to raise deposits from the public. later when the nbfcs sourced their funding heavily from the banking system, it raised systemic risk issues. sensing that it can cause financial instability, the reserve bank brought asset side prudential regulations onto the nbfcs. bis central bankers ’ speeches nbfcs of india 16. the definition of the term “

poor borrowers to gain access to essential financial services. 27. while the new banks that are being envisaged would definitely give fillip to the country ’ s financial inclusion initiatives, juxtaposing the humungous task of complete financial inclusion against it also brings to focus the need for exploring alternative ways to achieve the goal. the mor committee has observed that each of the channels, be they large national banks, regional cooperative banks, or non - banking financial companies ( nbfcs ) have a great deal of continuing value to add by focusing on its own differentiated capabilities and accomplish the national goals of financial inclusion by partnering with others that bring complementary capabilities to bear on the problem. role of nbfcs in capital market 28. investment activity of nbfc sector comprises around 16 % of their total assets. these constitute mainly investments in capital market. there are specialized nbfcs that are exclusively engaged in capital market investment i. e. trading in securities. these nbfcs therefore help in giving liquidity to the capital market. further, nbfcs also lend to investors for investing in capital market. regulatory challenges in this regard might come in the form of probable overheating of the market, which could be addressed through appropriate regulatory measures including enhanced disclosures. role of nbfcs in factoring 29. factoring as defined in the factoring regulation act, 2011 involves acquisition of receivables ( by a factor ) thereby getting entitled to undivided interest on the receivables or financing against the security interest over any receivables but does not include credit facilities provided by a bank in its ordinary course of business against security of receivables. subsequent to the notification of the factoring regulation act by the government, reserve bank formed a new category of nbfcs called nbfc - factors and issued directions to them. nbfc - factors are almost exclusively engaged in providing factoring service. factoring service which is perceived as complimentary to bank finance is expected to enable the availability of much needed working capital finance for the small and medium scale industries especially those that have good quality receivables but may not be in a position to obtain enough bank finance due to lack of collateral or credit profile. by having a continuous business relationship with the factor in place, small traders, industries and exporters get the advantage of improving the cash flow and liquidity of their business as also availing ancillary services like sales ledger accounting, collection of