Shadow Banking & Financial Inclusion: Scenario in India and China

Financial inclusion remains a distant dream

Shadow Banking & Financial Inclusion

Shadow banking refers to a non-banking system that supports the banking system without it being a regulated and full-fledged approved system. This parallel system exists in countries where financial inclusion has not been given priority. Developing countries where shadow banking and its accompanying problems have reared their ugly face are India and China. Understanding the shadow banking system holds as much significance as the actual banking system that is under the purview of a banking regulator such as the Central Bank, which in the Indian context is the Reserve Bank of India.

Now, since you have a fair idea about what shadow banking system is all about, let’s move on to the scenario in India and China.

Financial inclusion to evade the effects of Shadow Banking: India Story

The shadow banking system gets its depth and expanse from the lack of access to banking facilities in remote areas. Given that in this day and age, internet banking has allowed for ease of availability of banking services over the phone but this has not yet acted as a substitute for real banking channels in areas that are inaccessible. Bank Correspondents are trying to fill the gap but complete financial inclusion remains a distant dream. This is because whether it is borrowing from the local lender or from the bank, the harassment the small borrower faces often drives them to suicide, more so in the case of farmers. Therefore, shadow banking is a reality that is unlikely to be completely wiped off India’s borrowing or savings and money circulation cycle.

Financial Inclusion is at the core of Prime Minister Narendra Modi’s policies aimed at reaching out to the poor or making the benefits of the schemes being planned specifically for the masses available to them. Even in Rajiv Gandhi’s era, it was said and this example is quoted often that if the Government spends a Rupee for the poor, it is invariably only about 10 paisa that reaches them. The Prime Minister’s JAM – Jan Dhan, Aadhar, and Mobile Governance – initiative focuses on financial inclusion through banking and mobile telephony along with internet access as is evident from the Information Technology schemes. Crop insurance and accidental insurance schemes are an extension of the initiative and implementation of the policy that is focused on making loans and insurance easily available to each and every citizen of the country.

China and Shadow Banking

For all the brouhaha about the Haiku system and the problems that come with China’s one-child norm, China’s banking system to throws up multiple case studies or microsystems that are  intriguing and can serve as observable microcosms of real financial systems that can be studied closely with ease. The shadow banking system in China if accounted for would make the debt to GDP ratio of the country appear much worse. As the country looks at the rebalancing of the economy that goes beyond consumption by other countries and supports more of manufacturing than services, China’s multiple unique systems offer an insight into a society that is a paradox, has inconsistencies that are not observed in any other society.

China’s shadow banking system includes two major segments namely, the credit and currency segments. The credit segment of parallel or shadow banking generally involves lending at much higher rates than that would be possible from a regular banking channel. Usury is the term used for the stated act.

Shadow banking prevailing in China and India enable an understanding of the complicated yet unique nature of financial systems that suit a particular economy. Other economies try to build similar systems depending on the success of one in a country but invariably it is the detail wherein lies the real picture.

Hope the above read provided you enough information about Shadow Banking.