Shadow banking, as defined by the Financial Stability Board, refers to credit intermediation activities conducted by entities that fall outside the traditional banking system. Although this sector has long been a part of the financial ecosystem, it came under intense scrutiny following the 2008 global financial crisis. In India, the shadow banking industry predominantly consists of non-banking financial companies (“NBFCs”) and various money market funds. It is essential, however, to distinguish between the characteristics of Indian NBFCs and those of shadow banking entities in the United States. The 2018 IL&FS infrastructure collapse in India uncovered significant weaknesses within the NBFC sector, underscoring the urgent need for robust regulations to manage interconnectedness and mitigate risks. Additionally, the rapid expansion of certain NBFCs necessitates close surveillance to ensure their financial health and stability. This article explores the complex landscape of shadow banking in both the US and India, focusing on the unique challenges each faces and the regulatory frameworks required to sustain systemic stability and resilience in this crucial sector.
