What Is A Shadow Bank?
What do you do when you need money? The straightforward answer is to go to a bank and take a loan. Is this it? Usually, people follow this method. But sometimes due to some reason, you don’t have time to complete the loan process. Do you have any other option at such a time? So the answer is yes, the other option is shadow bank. Today we will see in this article what is a shadow bank.
What Is A Shadow Bank?
What is a shadow bank?
If we look at what a shadow bank is, the name of the bank means it. In simple terms, a shadow bank is the shadow of the bank. It is not a bank of any kind, but it acts like a bank. Acting like a bank Just as banks provide loans, funds, and services, so do shadow banks.
A shadow bank works just like in the olden days or even today where there are people who are moneylenders and who meet other people’s need for money. The only difference from other banks is that the interests of shadow banks are higher.
The interest rate of normal banks maybe five to six percent, but the same interest rate of shadow banks may be up to 11 or 12 percent. But in shadow banks, your loan gets cleared instantly and you don’t have to wait for a month or even months.
Definition –
Just like banks take money from people as deposits this money is given as a loan to other people or government or a big organization. Banks charge interest on such loans. And keep your profit aside and pay interest to the depositors at a low rate of interest. This is how banks work and make profits.
There are two types of financial intermediaries. One is a bank and the other is a nonbank. Shadow Bank comes under the heading of non-bank.
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History of shadow banks
Call McCullough coined the term in 2007. When the global financial process came about, the bank was considered one of the reasons for it.
What Is A Shadow Bank?
Difference between bank and NBFC
| Bank | NBFC |
| 1. The bank was established under the Banking Regulation Act 1949. | NBFC is established under the Companies Act 1956 or as amended by the Companies Act 2013. |
| 2. All types of deposits are accepted in the bank. | Does not accept any kind of deposit. ( Some Exceptional NBAFC ) |
| 3. This insurance is provided to every deposit in the bank. This insurance is provided as per DICGC( Deposit Insurance and Credit Guaranty). | No deposit insurance is provided in MBFC. |
| 4. The bank can make payment and settlement through a clearing house. | NBFC has not allowed it. |
| 5. Foreign investment in the bank is allowed up to 74 percent. | Foreign investment in NBFCs can be up to a hundred percent. |
| 6. Banks are regulated by RBI. | NBFCs are regulated by individual regulators. |
Is shadow banking legal?
Many people think that shadow banking can be illegal, but these banks are legal. Shadow banks are legally established.
Importance of Shadow Bank
Shadow banks are an important factor in this economy. Many people do not take loans from banks even today. So in such times, MBFC or shadow banking is considered as the best option for such people.
Types of Shadow Banks
As we have seen shadow banks also have financial institutions. which provides credit to customers, and is not subject to any type of regulation like other banks. The lack of RBI control over them makes them more dangerous.
See Also – Which of The Following is Not a Type of Bank? and 7 Non Bank Organizations
However, these shadow banks are becoming an attraction to many people because of the high interest rates. Hence shadow banks are seen playing an important role in the economy. Let us see the different types of shadow banks.
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Investment Banks-
Investment banks are also a part of banking. Investment banks provide services such as issuing securities, underwriting, advising on mergers and acquisitions, advising corporate clients on various types of investments, and providing investment guidance. Investment banks are not subject to the same regulations as other banks. So they become more dangerous. But they have become more popular due to the services they provide.
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Hedge funds
Investments are made in hedge funds. In which people are trying to get higher returns. However, investing in these funds is considered risky. Hedge funds are not as regulated as banks, so they are risky.
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Money Market Fund
Money market funds are less risky than hedge funds but are considered riskier than traditional banks. People invest in these funds and get high returns.
What Is A Shadow Bank?
Benefits of Shadow Bank
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Grant of credit –
Shadow banks play an important role in providing credit to businessmen and consumers. Availability of money to businessmen as well as customers helps them and their business progress.
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Easy loan
Shadow banks do not operate like other traditional banks. In other banks, it may take months or years before the loan is available. However after the loan application in Savli Bank, the loan is available as soon as possible.
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Creating new financial products
Compared to shadow banks and other conventional banks, shadow banks offer various attractive financial products to the customers and strategize that they will get more profit. Thus new economic products are created in the economy.
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Increasing competition
New banks and other financial institutions are being formed in the economy day by day, and the entry of shadow banks has further increased the competition in the economy. Increasing competition helps consumers to look for attractive plans and the economy grows.
