the boundary itself varies for different regulatory clusters – the focus of a banking regulator would be entirely different from that of a securities regulator, from that of an insurance regulator etc. and all of which may be different from the focus required for regulation of markets. if the entire financial system is looked as a single ecosystem, then inspite of the inherent differences between the various market players, it should be possible to identify the macro drivers of the whole system, the network flows. using this perspective, it becomes evident that just focusing only on the perimeter would be missing an integral component that may need regulatory attention. current crisis – perimeter issues as mentioned earlier, the origins of the current crisis lay within the heavily regulated institutions. the impact of the crisis, however, was exacerbated by dynamic interconnectedness between entities across regulated, unregulated and lightly regulated sectors. as some of the recent reports have pointed out, the two concerns relating to “ outside perimeter ” entities that contributed to the current crisis were : ( i ) maturity transformation being undertaken by these entities, which traditionally used to be a function of banks ; and ( ii ) the systemic leverage resulting out of the hugely leveraged positions of these entities, either through direct borrowing from banks or through the funding markets. the central issue in both the above is the interaction between the unregulated entities and the formal regulated funding channels, essentially banks and money markets. the maturity transformation primarily entailed heavy reliance by these entities on short term funds for funding long term assets. the prudential framework for banks placed a significant reliance on management of these alm mismatches but the unregulated entities, such as sivs didn ’ t have any oversight and as a business model, ran huge alm mismatches. the model just broke down when the funding markets started seizing. many of the entities, like hedge funds, were consciously left unregulated because of the fact that they managed only private capital pools where the issue of investor protection was not relevant. however, what was not appreciated was the systemic risks these entities were posing on account of the huge leverage positions these were carrying through either the formal banking channel or the funding markets, particularly repo markets. the seamless efficiency thought to be provided by close integration of the underlying asset markets and repo markets proved to be just a chimera. the disaggregated exposures of the regulated clusters at any point of time to the unregulated entities

were not available and as the markets collapsed, such exposures became evident. another critical aspect which was again brought forth during this crisis was the market behaviour and impact of entities, some of them unregulated, having huge trading books and dynamically hedging their huge portfolios. the market makers in the derivative and structured product markets need to normally hedge their portfolio risks, which has a direct impact on the underlying markets. in normal times, such individual action does not have a systemic impact. however, in times of crisis when the views become absolutely unidimensional, a large number of such big players tend to hit the market on the same side and the resultant impact on the underlying market is huge. it could, thus, be argued that the efficient markets enabled the unregulated cluster to acquire systemic proportions and reinforced its connectedness with the regulated cluster. the indian experience india is unique in this regard as it has a formalized structure for generic non bank finance sector with heterogeneous sub - segments. there some 13000 non banking finance companies ( nbfcs ) whose assets comprise around one - tenth of the banking sector. the nbfcs in india comprises heterogenous types of financial institutions including all - india financial institutions, development finance institutions, non banking finance companies, etc, with each one of them having its roots at a particular stage of development of the financial sector. all - india financial institutions ( aifis ), and development finance institutions ( dfis ), which were largely an offshoot of development planning in india, were created for long - term financing with some of them having sectoral / regional focus. non - banking financial companies ( nbfcs ), on the other hand, are mostly private sector institutions, which have carved their niche in the indian financial system. the basic regulatory framework the indian financial system is a predominantly bank intermediated system and accordingly regulation over banks has worked as the basic systemic lever. the non - banking space comprises of heterogeneous entities but not all are regulated by the rbi. broadly speaking, the rbi regulates all such companies taking public deposits and those non - deposit taking entities involved in asset financing, providing loans and investments. other non - banking entities such as housing finance companies, mutual funds, insurance companies, stock broking companies, merchant banking companies, venture capital funds etc. are regulated by the respective sectoral regulator and are exempted from the nbfc regulations. regulation of non -