The Shadow Banking Crisis

Presented By- Group 10

Anika
Ankita
Ashutosh

CBE- Group 10 22-Aug-19

Shadow Banking System
Shadow banking refers to all the non-bank financial intermediaries that provide
services similar to those of traditional commercial banks.

They generally carry out traditional banking functions but do so outside the
traditional system of regulated depository institutions.

Shadow banks include investment banks, mortgage lenders, money market funds,
insurance companies, hedge funds, private equity funds and payday lenders

Shadow banking has grown in importance in the last decade or so and was one of
the primary factors in the sub-prime mortgage crisis of 2007-2008 and the global
recession that followed it.
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Shadow and Commercial Banks
Shadow Banks Commercial Banks
Cannot create money Create money
Not that regulated Comprehensively and tightly regulated

Raise funds through market-based Raise funds through mobilisation of

instruments such as CPs, debentures etc. public deposits

Shadow banks have no such options During times of distress, banks have
access to multiple recourses
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Dangers of Shadow Banking

Financial Stability and Systemic Risk Concerns

Challenges in the conduct of Monetary Policy

Procyclicity and amplification of business cycles

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CRB Capital Market Limited
Non Banking Finance Company led by Mr. Chain Roop Bhansali.

Started making defaults in the year 1996.

Stakeholders lost Rs. 1200 crore in the CRB scam.

He borrowed more funds to pay back the old loans.

CRB collapsed

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Recent crisis and their impact
• Crisis triggered by bond defaults by the shadow banks
IL&FS
• Debt of Rs. 91000 crore

• Liquidity triggered when a fund house sold Rs. 300

DHFL
crore of its CP at a discount to raise funds.

• Facing a cash crunch and may have to delay some

Reliance capital
payments.

Zee group • Requires more time to pay investors back

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How the cookie crumbled
Around 2014, banks IL &FS defaults on series
DSP sells Rs. 300 crore
under NPA pressure, of payments in June
worth of CPs of DHFL.
start stepping back from 2018. Defaulted again in
Stock fell nearly 60%
lending September

Mututal funds trim

Panic sets in: cost of Crisis comes to Reliance
exposure to NBFCs from
short term funds which Group companies: ICRA
34% of AUM in August
is a major source of downgrades to junk
2019 to 27% face
capital for NBFCs rises grade ‘D’
redemption pressure
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Reasons to worry
In the next 3 months, Rs. 1 Lakh crore of CP raised by NBFCs comes up for
redemption
Any big failure to meet their payments or issue fresh paper to roll over that debt
can trigger off a crisis.
It would result in trouble for their lenders

It can create further negative segment making it difficult to raise money and
creating liquidity crunch for those who borrow from the NBFCs.
This would affect the real economy and lead to a vicious cycle.

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The Seed of real crisis
• GST And Demonetization
• Bear market from past 1 year.
• More than 20% fall in BSE listed stocks
• Case of IL & FS
• Asset and liability mismanagement

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How NBFC fell apart
• PSB held back lending due to NPA
• NBFC borrowed from mutual funds.
• Turning of the rate cycle
• Liquidity stretch
• Insolvency crisis

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Unrated Rating Agencies

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 Unrated Rating Agencies
Use of Historical Numbers- Balance Sheet, P&L Account,
Return Ratios
Credit rating is an
informed opinion of a
recognised entity on the Rating Downgrades- Last Stage of Defaults
relative creditworthiness
of an issuer or
instrument. Flaw in Revenue Model of Rating Agencies
PSBs- The Biggest Casualty?
More than ₹ 53,000 crore Bank loans to IL&FS added to PSBs book.

Previous Recapitalisation estimates will be Inadequate

PSBs have already written off ₹ 7 lakh crore in last ten years.

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PSBs- The Biggest Casualty?

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Doom and Gloom
Debt Market- More Gloomier- Because Micro Economic Indicators are in bad shape

Collection of Direct Taxes fell short of target by ₹ 50,000 crore in 2018/19

FDI contracted 7 percent to $ 33.49 billion in April-December 2018

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Doom and Gloom
Securitisation reached a 10 year high of ₹1.9 lakh crore in 2018-19

Securitisation helped NBFC’s free up cash flows creating immediate liquidity by

channelizing loan assets to new investors.

It will reduce the dependency of NBFC’s on short term funding Sources.

Still Unfolding
Where does it leave Companies or NBFCs?

Unable to get Funds

Fresh Rounds of NPAs

Distance from Bond

Market

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Solution
New revenue model for Credit Rating Agencies

Rating Agencies as Watch-dogs

Asset Quality Review of NBFCs

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