Banking in shadows: evidence from emerging economies, China and India

Abstract

Recent years have seen the increasing concern for the flourish of shadow banking in China and India. In this paper, we aim to get a better understanding of the differences in trends and investigate the factors leading to the rise of shadow banking in these two major emerging economies. We find that financial exclusion is a common factor leading to the rise of shadow banking in China and India. While financial reform has taken place in India, financial repressive policies still prevail in China. Although several regulatory measures have been adopted in India and China, the size of the shadow banking in these two countries remains underestimated. Thus, streamlining and enhancing data collection is a key priority for both India and China. We also argue that the regulation in both countries should be more activity focused rather than sector or entity based, and it should be at par with banks. As shadow banks provide last mile connectivity and enhance financial inclusion, a balanced approach is required keeping in view both benefits and costs of the shadow banking system.