Taming Shadow Banks

Just about a year ago, the non banking financial sector (NBFC) was on a tear. It was also the darling of stock markets. NBFCs were growing rapidly in many cases faster than banks and their chiefs were feted like star bankers. A year later, things couldn't be more different. As the IL&FS scandal brought things to a head, banks, mutual funds and others who had been happily subscribing to NBFC commercial paper and other debt realised there was something rotten in the sector. Since then, the troubles have been multiplying.

Some of the biggest names in the NBFC universe, including Dewan Housing Finance Ltd. and Reliance Capital, have seen their reputations getting hit after debt defaults. The reason is simple. NBFCs depend on short term funding sources such as commercial paper to raise funds that they then lend for longer term projects. The trick is to keep rolling