Shadow banks were identified as non-bank financial intermediaries that were key players in the flow of credit. These entities perform essential functions of lending and investing. In India, shadow banks not only survived the post-crisis impact but grew to become a pillar of the financial ecosystem.
Non-Banking Financial Intermediaries have played a transformative role in expanding the credit and supporting sectors that were reserved solely for the banking sector.
What are Shadow Banks
Shadow banks refer to financial intermediaries, such as NBFCs, housing finance companies, micro-lenders, fintech online loan providers, and others that function outside the core banking system but provide similar banking services. Unlike banks, these entities face fewer capital requirements and can easily tailor services to match borrowers’ needs.
According to Infomerics Ratings, between FY2022–23 and FY2023–24, NBFCs increased their share of total system credit from around one-sixth a decade ago to more than one-quarter, reflecting a growth of approximately 50% in their credit share over the last ten years.
Role in Growth and Inclusion
Shadow banks have played a major role in financial growth, especially for small-scale businesses, self-employed individuals, and rural borrowers. Many in these sectors struggle to access loans from traditional banks due to stricter documentation requirements, credit history, and formal income proofs.
Especially in tier-3 cities, these types of banks have been a core player in filling this gap. By offering easier loan processes and faster approvals, they have enabled small traders, local entrepreneurs, and emerging businesses to secure funding for expansion. Access to formal credit has reduced the reliance on the informal lending sector. The presence of shadow banks has helped promote economic inclusion, create jobs, and support entrepreneurship. In this way, shadow banking has contributed to the overall development of the economy by increasing access to credit.
Need for Regulations
However, with growth comes great scrutiny! Since these non-banking financial intermediaries are not as strictly regulated, there is a chance of poor lending practices and financial instability. To highlight this, the Reserve Bank of India intensified oversight. In 2024 four shadow banks were barred from issuing new loans due to violations of interest rate disclosures and microfinance norms. Stronger regulation is now being seen as necessary to ensure that shadow banks grow safely and responsibly.
Conclusion
The system has moved from being a shadow to the mainstream as it has helped deepen credit access, support economic growth, and promote inclusion. While risks prevail, regulatory efforts are helping to bring stability and accountability to the sector.
In fact, in a recent statement, India’s Finance Minister stated that the operations of NBFCs are no longer viewed as “shadow banks” and are recognized as an important partner in the formal financial system.