NBFCs and Gold Loans in India
Shadow Banking and Systemic Risk
Because NBFCs are linked to banks and markets, a failure can spread through the financial system, as the IL&FS crisis showed.
Non-bank lenders can affect the whole system.
IL&FS
In 2018, infrastructure lender IL&FS defaulted on its debts, shaking confidence in other NBFCs.
Liquidity squeeze
Investors pulled back from NBFC paper, and several firms struggled to raise money.
DHFL
Dewan Housing Finance collapsed in 2019 and went through insolvency, and Piramal acquired it.
Response
The RBI eased liquidity and tightened supervision.
A chain reaction
One firm's default makes lenders wary of all similar firms.
Assuming failures stay contained
Interconnections spread stress.
Key takeaways
- IL&FS defaulted in 2018.
- Funding dried up for others.
- DHFL went through insolvency.
- Supervision tightened.
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