‘Shadow Bank’ Lending in India Outpaces Traditional Banks

It’s reportedly a good time to be a “shadow bank” in India.

These nonbanks are seeing a flood of investor money amid rising credit demand by consumers, the Financial Times (FT) reported Monday (Aug. 7).

For example, Bain Capital last month bought a majority stake in Adani Capital and Adani Housing Finance, pledging $170 million to expand that operation, per the report.

And Reliance Industries, the largest company in India in terms of market value, announced plans earlier this year to take its digital financial services unit, Jio Financial Services, public on the Mumbai market this fall.

The company has plans beyond lending, teaming up with money management giant BlackRock in a partnership that saw both sides invest $150 million in an asset management project, the report stated.

Investors are responding to a rise in consumer borrowing, particularly from nonbank lenders. Data from India’s central bank cited by FT showed that personal loans made by traditional banks rose 19.2% between May 2022 and May 2023.

For shadow banks, personal lending rose 31.3% in March of this year versus March 2022. Lending by banks to shadow banks is also on the rise, up 27.6%, per the report.

The rise of these institutions has been noted in the U.S. as well. Earlier this year, U.S. Treasury Secretary Janet Yellen called for more oversight of the nonbank sector.

“We must also address vulnerabilities in the nonbank sector,” Yellen said during a conference in March. “Some nonbanks — or shadow banks — consist of financial companies that carry out traditional banking functions, but are outside of, or only loosely linked to, depository institutions.”

And in his annual letter to shareholders in April, J.P. Morgan Chase CEO Jamie Dimon said he sees giants like his bank playing a diminished role in the world financial system in the future due to the “increasing role and size of shadow banks,” a trend which Dimon said he expects to continue.

“The new reality is that some things — for example, holding certain types of credit — are more efficiently done by a nonbank,” he wrote, arguing that regional banks “simply cannot” handle the scale and complexity of certain transactions.

At the same time, Dimon stressed that many emergent shadow banks may not step in to help clients in challenging economic periods, going so far as to call them “fair-weather friends.”