Shadow Banking

As I write - Shanghai is going gung-ho on shadow banking via web, harnessing E-commerce to its best. A  significant chunk of unregulated $ 2.4 Trillion* market in China is eventually moving online.

 What specially caught my attention, when I researched further was, that this conduit of capital, is making up 25-30% of the World's Financial System. In 2010 itself, just before when governments world over started tightening their credit policies, the market was an estimated $ 60 trillion** , truly reflecting, the impact it has on the global economy.

To my thinking, China's spurt in such unorganized retail lending, points at 2 things for Asia:

 - First, it aptly validates the acuteness of credit shortage all across Asia. Post 2010, with an ever increasing tightening of credit, there has been a mass acceptance of such institutions primarily because of more hurdles and checks put by banks and at the same time, quick availability of desired credit from these shadow banks without any process hiccups.

- Second, it is a precursor to the future Asian Credit crisis. With the sudden surge of such institutions and hence, of such unorganized loans, the quantum of bad debts are bound to go up, as these institutions are not guided/governed or regulated by central bank. These toxic debts will eventually worsen the overall credit flow. That day may not be far then... when analysts and economists globe-over start envisaging Asian crisis, on the footprints of European or American credit defaults. 

However, shadow banking is not all that villainous... It offers customers a  wider array of choices, in terms of credit supply. These institutions can often provide credit, that is more cost-efficient than banks. And most importantly, to customer segment , who might not otherwise have such access, in a way, aiding respective governments, in their financial inclusion drive.

There are disadvantages though...  These institutions have the tendency to lure customers by doling out more rewards out of the investments, much more than banks, thereby increasing risks mounting in the financial system. On a more of illegal means of funding, these unregulated shadow institutions can be used to circumvent the strictly regulated mainstream banking system and therefore avoid rules designed to prevent financial crises. 

If we recall, it were these shadow banks sitting in tax havens, that created the real estate bubble during first few years of this millennium that jettisoned the world economy out of the safety zone and landing amidst the Financial Crisis which we are still struggling from...

 - Article written by Malay Ghosh, IPMX05 

*    Data picked from Economic Times, 25 July 2012.

 ** As reported by  Financial Stability Board  (a regulatory task force for the world's group of top 20 economies (G20).