Originally at MarketExpress by Meeta Ganguly – reposted with permission
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CHAPTER 1 – CHINESE SHADOW BANKING SYSTEM
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The island of Caofeidian is located 200 kms from Beijing and is a land reclaimed from the sea and converted into an economic development zone in Tangshen district, China.
The port of Caofeidian was promoted as the world’s first fully realised eco-city in 2003. Today unfortunately, it has joined the growing list of ghost cities in China highlighted by vast stretches of deserted industrial townships, empty residential, half constructed tourist resorts, incomplete and abandoned infrastructure projects and a very small number of residential inhabitants who moved to the city.
Ironically amongst this gloomy picture of poor economic performance, the only organisation which seems to be portraying healthy financial numbers is “Bank of Tangshan”. This bank has its asset portfolio heavily concentrated in the sick port town of Caofeidian. The quality of its asset book is heavily influenced by shadow banking products (which are mostly off the balance sheet), thus making it difficult to judge the true quality of its loan book.
WHAT IS SHADOW BANKING?
The Financial Stability Board (FSB) in its 2013 annual report on Shadow Banking titled, ”Strengthening Oversight and Regulation of Shadow Banking”, defined shadow banking as “credit intermediation involving entities and activities (fully or partially) outside the regular banking system” or “non-bank credit intermediation in short”.
Shadow banking means banking equivalent activities conducted by firms, who are not banks as defined by the banking act of the respective sovereign; nor do they fall within the regulatory jurisprudence of its respective central bank or regulatory authority by whatever name called. These firms are characterised by absence or lesser level of “regulatory oversight” and “safety net” like government funded deposit guarantee and lender of last resort facilities. However, the risks faced by these shadow banks are similar to banks, namely, counterparty default risk, maturity mismatch and liquidity freeze.
In China, shadow banking products which are commonly used are loans and leases by trust companies, entrusted loans, loans from micro finance companies, trust beneficiary rights, wealth and asset management products, special purpose finance companies associated with e-commerce, inter-bank market (even corporations participate in this market), pawn shops, guarantees, unofficial lenders, financial leasing to name a few.
Shadow banking size comparison between China and other economies
|Shadow banking assets as % of 2013 GDP|
(Reproduced from the paper, “Shadow Banking in China: A primer” by Douglas Elliott, Arthur Kroeber, Yu Qiao, March, 2015)
AN OVERVIEW OF THE CHINESE FINANCIAL SYSTEM
The formal banking system completely dominated the Chinese financial system from 1978 onwards right until early 2000s. The year 1978 is considered a benchmark year as in December of that year, the policy “gaige kaifang” (meaning reform and opening up) was promulgated by the Communist Party of China led by Deng Xiaoping.
The People’s Bank of China (PBoC) is the central bank of the People’s Republic of China with the mandate to conduct monetary policy and regulate financial institutions in Mainland China. The China Banking Regulatory Commission (CBRC) was established in April 2003 with the mandate to take over the regulatory function of the banking sector of the PBoC. CBRC oversees the regulation and supervision of banking institutions, asset management companies, trust and investment companies and other depository financial institutions.
The big four banks of China, i.e. Bank of China (BOC), China Construction Bank (CCB), Agricultural Bank of China (ABC) and Industrial and Commercial Bank of China (ICBC) are state owned commercial banks which are at the core of the Chinese financial system. Bank of Communications is the latest entrant in 1987 which now forms the “Big Five” of Chinese Banking. Alternative banking set up in China like Joint Stock Commercial Banks (12 nos.), City Commercial Banks (133 nos.), Policy Banks (3 nos.), Asset Management Companies (4 nos), have been set up over the last 3 decades to bring in an element of competition, diversification and reform in the banking system. Newly set up city commercial banks and joint stock commercial banks have been able to gradually increase its asset base. There are some 35,000 banking institutions in China of which around 34000 are rural credit co-operatives and 1000 city credit co-operatives. As of end of 2015, the “big 5 commercial banks”, “joint stock commercial banks” and “city commercial banks” constituted around 40%, 20% and 12% respectively of total assets of the banking system.
Despite this diversification, what has not changed is the state ownership and control of the banking system. Government directed lending by banks has been a significantly known feature of Chinese banking. Politically directed lending has led to “zombie like non viable enterprises” and “ghost cities real estate properties” to be funded by loans thereby crowding out genuinely capital starved small and medium scale private businesses.
Here is the funding gap where shadow banking has stepped in to fill up the vacuum. The presence of shadow banking has economic benefits as it facilitates cheaper funds being made available to small, medium sized credit starved section of the Chinese economy and fuelled economic growth.
WHAT LED TO THE RISE OF SHADOW BANKING IN CHINA?
The financial backdrop against which the phenomenal rise of shadow banking played out was that of a ceiling on deposit rates, low return on sovereign treasury bills and papers, lack of alternative savings and investment instruments for investors, need for profitable avenue for banks to deploy, credit tightening towards risky sectors like real estate and post crisis stimulus. The stimulus package after the crisis of 2008 ($586 billion) was funded 30% by the central government. Rest was mandated to be funded by local government borrowing. As local governments are restricted from taking on debt on its own books, local government financial vehicles (LGFV)  were deployed to borrow from banks and shadow banks to provide funds for the stimulus package. This measure provided a significant impetus to the growth of shadow banking in China from 2008 onward. Real estate developers and infrastructure construction companies borrowed majorly from shadow banks and invested in fixed assets which boosted GDP during this period. Refer chart no.1. In 2009, inorder to boost lending volumes of banks after announcing the stimulus package, loan quotas were relaxed to generous levels. It will be apt to say that significant quantum of the shadow banking business in China is actually “bank loans in disguise” most of which may have been transacted during the post crisis stimulus period.
Depositors, particularly corporate depositors, prefer to route their funds in the inter-bank market or buy wealth management product of banks (where the returns are unconstrained by any deposit ceiling), rather than invest them in traditional deposits.
Certain industries like local government finance vehicles, real estate property developers, ship builders and coal miners are a few sectors deemed risky or speculative in nature and authorities urge the banks to undertake limited lending to these sectors. If banks do lend to them significantly as it is also lucrative as high risk attacts high returns for the bank, it is compelled to take these loans off the balance sheet in order to appear to have adhered to the regulatory diktat. These off balance sheets loans constitute shadow banking. The year 2011 and 2012 saw significant drop in volume of loans to real estate in response to tightening the reins on this sector by the regulator. As real estate industry desparetely scouted for funding which the formal sector failed to provide, shadow banking filled in this void and this (circumventing regulation) has been one of the most important driving force for the growth in shadow banking from 2010 onwards.
As banking is highly regulated and ownership vests strongly with the government, it appears highly unlikely that authorities were unaware of the presence or practice of shadow banking activities by banks. It could be so that the Chinese leadership were supportive of shadow banking activities of banks so as to enable them to make profit and also channel liquidity to where it was needed and fuel economic growth. It seemed to serve both the borrower and provider of funds. Shadow banking products provided a source of making profit in an industry that lacked avenues for generating higher returns from its investments. It is ironical but a way of life for the big five Chinese banks that they are not allowed to lend to the private corporate sector and the SMEs. They majorly fund the State Owned Enterprises (SOE) only.
TYPE OF SHADOW BANKING PRODUCTS AND ITS SOURCE OF ORIGINATION
Shadow credit in China originates from three sources:
- Wealth and Asset management products. This includes Wealth Management Producgts (WMPs) and Asset Management Products (AMPs), worth $15 trillion. Funds raised by banks through these products are deployed in the interbank market, bond and stock market.
When Chinese banks internally off-load assets / loans into off-balance sheet products, they are referred to as “Wealth Management Products”. These products are then sold to depositors or investors as savings product. Thus banks can significantly escape quality assessments of the loan book that has been re-packaged and also deposit regulation. Banks are able to secure better volume of public savings as the wealthy investors including salaried professionals are attracted by the returns / rates offered by banks if they were to invest in its WMPs. This product has picked up particularly after 2011 in response to the stimulus measures initiated by the government in response to the financial crisis. As banks were flushed with funds, loan generation attained new scales, thus WMPs also took off simultaneously. WMPs are typically short tenured mostly mature in a quarter. It is interesting to note that at every quarter end CBRC calculates Loan to deposit ratio (LDR). When maturity amount of WMPs are credited to the investors (usually depositors) account, total deposit base goes up and subsequently the LDR comes down. Usually Banks with high LDR with low deposit rates tend to have higher volume of WMP generation. WMPs are investment products, returns on which are not guaranteed by the bank. However, customers investing in these products were apparently given the impression that the returns were guaranteed. Trust companies often create these WMP products and banks market it for them in exchange for a commission.
Banks sells its loans to external non bank entities, who then package these loans into Asset Management Plans and the originating bank “invests” in these AMPs (i.e. these AMPs are resold to the originating bank). So what was initially a loan (in all probability a stressed loan) is now converted into a investment.
This entire process of moving assets internally or externally is knows as channel business in China. The purpose behind shifting loans from the balance sheet is to meet the basic banking requirement; i.e. present a healthy balance sheet to stakeholders and regulators and significantly free up capital and escape additional scrutiny and charges for poor quality of the loan book.
- Non bank financial institutions like trusts, broker dealers and insurance companies. These entities can solicit funds from investors (individual and corporate savers) through banks who act as middlemen. Trusts are a significant player in the Chinese shadow banking system. By 2012, Trusts had overtaken insurance companies to become the 2nd biggest financial intermediary in China, worth approximately $3 trillion. Trust loans are mostly extended to riskier segments like real estate development, local government infrastructure projects, mining and small companies. Trust companies employ a complex array of financial structure to route liquidity to beneficiaries which makes untangling the transactions extremely difficult and places it beyond the scope of regulators to investigate. Such complicated and opaque transactions are often used to sidestep lending restrictions on banks. What is rather worrisome is that banks are often a counterparty in these transactions which makes its exposure to riskier portfolio go beyond the regulatory caps. Banks and trust companies are inter-connected. Banks moved loans off its balance sheet and resold to retail customers after designing it as a trust product. This practice was curbed by the CBRC in 2010. However, the bonding between the two institutions continued and banks continued to sell products of trust companies for a commission.
Entrusted loans are loans organised by an agent bank. The agent bank is called the trustee and the provider of funds is called the trustor. Entrusted loans are generally used by commercial enterprises which may have some idle funds to lend out and earn interest. They appoint an agent bank who gets a borrower for the funds. Banks, acting as agents or trustees do not disclose this credit risk and is kept off balance sheet.
- Informal lenders (non banks) who extend loans to those who do not have access to the formal banking system like pawn shops and unofficial lenders.
The design of the shadow banking product is very similar to Asset Backed Securities (ABS), Mortgage Backed Securities (MBS) and Collateralised Debt Obligation (CDOs) which were at the heart of the financial crisis of 2008.
WHY SHADOW BANKING IN CHINA NEEDS TO BE REINED IN?
The system of shadow banking seemed to be working fine as banks, other financial intermediaries, borrowers and investors were all happy in the pleasant game of musical chair. Shadow banking activities had provided ample funding to real estate and infrastructure developers which boosted the GDP significantly after the stimulus package.
Real estate and infrastructure has been used as a catalyst by the government to stimulate economic growth or deflate an over heated economy, as the case may be. Easy access to shadow funds have triggered short term spike in housing prices. The growth in Real (adjusted for inflation) and Nominal GDP between 2008 and 2010 is evident for the chart above.
However, it appears the music in the game might have stopped as authorities have started issuing warning signals about the risks emanating from shadow banking activities. Regulators are worried about the massive linkage between the banking sector and its shadow counterparts. There has been an uncomfortably swift increase in internet lending platform that are raising huge sums from the Chinese common man against a promise of returns much higher than market rates with low minimum contribution. There is no information available or disclosures made about how these funds so collected would be re-invested.
The biggest worry is the massive debt pile up in the system (260% of GDP) and significant interlinkages and systemic risk that have got interwoven into the system. Higher leverage and complex, opaque, derivative structures add up to the risk element incase of liquidity freeze.
The banking regulators have taken up the task seriously to curtail and control risk emanating from shadow banking activities. There was an enquiry made earlier this year by CBRC to determine whether banks have been extending loans through the shadow banking channel to “defunct zombie firms” or restricted real estate sector. Fines have been levied on banks as significant quantum of anomalies was revealed in the enquiry.
The authorities are also struggling to rein in the booming residential real estate prices. However, the regulator is caught in a trap as it can neither deflate the real estate balloon (as it can lead to a string of shocks or defaults) nor can it allow the prices to remain at sky rocket level (as it will wreck havoc with long term fundamentals of the economy). Either case public uproar is assured. Even local government finances are dependent on real estate values as they sell land parcels to generate revenue. Thus, short term gains and political incentives demand keeping a status quo on high real estate prices, albeit unsustainable in the long run.
The authorities are attempting to rein in trust companies who undertake unregulated lending. As already described, opaque and complex transactions are a kind of hallmark for trust loans. The regulators in Beijing are already conscious of this fact and CBRC is trying to regulate this segment through request for additional compliance, background checks, transparency and disclosures (eg. of counterparties involved). Certain product structures have been laid down by CBRC which trusts have been advised to not use. In 2014, trusts were advised to sell off holdings when faced with liquidity crunch and “cash pools” were banned which facilitated payout on existing funds by channelling revenue from new product sale.
The asset management industry too has come under regulatory scrutiny and fresh set of regulations have been issued in November, 2017 to curb risks emanating from this segment. Asset management companies have been advised to offer yields based on the net asset value of the underlying in order to reflect risk and returns instead of a guaranteed return plan. FIs acting as asset managers will also be required to set aside 10% of management fees towards risk provisioning. Concerned institutions who do not comply with this norm will be punished with a levy of additional reserve requirement.
- Lender extends loans / money to FIs like banks, MMMF, Hedge funds and FC&ONBL.
- Banks also lend directly to FC&ONBL.
- Banks and FC & ONBL securitise their assets through the securitisation vehicles.
- Dealer is at the hub of most shadow banking activity. He is the middleman who receives funding from hedge funds, banks and MMFs. Dealer also receives direct funding from lender in exchange for securities (a,b).
- The borrower receives his funds from three sources, i.e the banks and FC & ONBL in the form of loans and money from the dealer in exchange for securities.
The blue and black arrow lines represent the flow of securities and money respectively.
This flow chart is a simple representation of how funds flow from lender to borrower and also how securities and papers are traded between FIs which significantly comprise the shadow banking sector. This chart need not necessarily reflect shadow banking intermediation structure for China and is more relevant for advanced economies
US VS THE CHINESE SHADOW BANKING SYSTEM
While on the face of it, the US and Chinese shadow banking appear to have similar framework. Shadow banking in both the economies is driven by interest rate regulation. Risky real estate developers (in China) and risky subprime borrowers (in the US) get access to funding through the shadow banking channel. However, Dang, Wang and Yao in their paper, “Shadow Banking Modes: The Chinese versus US System” , dated December, 2015 argue that there are fundamental differences between the shadow banking structure of the two economies.
In China, shadow banking is actually an offshoot of various credit intermediation functions performed by banks. Thus shadow banking in China is actually a “shadow” of its banks (bank centric). Whereas in the US, shadow banking is significantly a function of the capital markets which is an integral part of the US financial system right from the 1970s. Capital markets have provided a platform for financial innovation in the US and shadow banking has thrived on the same. Shadow banking entitites in the US, like Money Market Mutual Funds are operating parallel to banks and are directly competing with banks for depositor’s money.
In the US, shadow banking entitites have designed products for investors which are deemed to be the result of financial engineering and innovations. They are deemed “safe” because of the complexity in the design. In contrast, Chinese shadow banking products are comparatively simpler in design and deemed safer as banks are are involved in structuring and distributing these products, particularly the WMPs. Even though banks are not responsible if the underlying borrowers default, it is expected that the banks (particularly the big 5 who are the major player in the shadow banking market) will invoke implicit government guarantees and not let the system collapse. In China, as it is said, money flows to problems and solves it, unlike in the West, where money flows away from problems.
The chart next explains the cash flow and the structure of the US shadow banking system.
Chinese authorities cannot deny the significance or omnipresence of shadow banking. Nor can it deny itself the risks associated with it. Shadow banking in China is obviously not as complicated as in the US. It was never viewed as much as a threat to the financial system. After the stimulus measures were implemented, the economy got heated up and regulators felt the need to cool down the same and hence regulatory guidances have started flowing in mainly to curb the easy flow of funds. Shadow banking is being used as a monitor to heat up or cool down the economy.
Authorities now have to look at the deeper picture and start work towards reforming the financial system. Shadow banking, though wide spread, does not necessarily represent adequate financial deepening. Policy change is needed as government policy of directed lending has pushed private commercial enterprises towards shadow banks. Deregulation of interest rates and free flow of capital, credit risk assessment coupled with a satisfactory risk management regime is being called for.
Finally, the authorities are not expected to put a brake on the shadows in one go. They are moving in slowly and with caution so as not to tilt the balance. Stability and reforms both have to move in tandem. Shadow banking is part of China’s dual track reform approach. This very approach has no doubt brought about the transformation from a poor nation to one of the leading economies of the world. Shadow banking should not be left by itself to operate as the market desires, rather it should operate to fulfil the socio economic objective of the government. Shadow banking should be so regulated as to compliment China’s growing economy’s funding needs.
CHAPTER 2 – SHADOW BANKING IN THE INDIAN CONTEXT
INTRODUCTION & TYPE OF SHADOW BANKING ENTITIES
Shadow banking in the Indian context refers to non-banking financial Institutions (NBFIs) which has emerged as an important source of finance for the commercial sector in India, with particularly strong presence in rural and semi urban areas. The three broad categories of NBFIs include:
- All India Financial Institutions (AIFIs)
- Primary Dealers (PDs)
- Non banking finance companies (NBFCs)
AIFIs are apex public entities which mostly provide long term financing / re-financing to specific sectors. PDs are an important player in the primary and secondary market, particularly in the context of government securities and help in “market making” activities.
NBFCs are at the heart of what is understood as shadow banking in the Indian context. They have played a critical role in providing finance to the underserved and underbanked sections of society. NBFCs have emerged as an important source of fund provider to small and proprietary businesses, unorganised sector and rural businesses. These are the typical segments characterised by absence of formal books of accounts and other financial statements, collaterals, etc which are a pre-requisite for securing bank funding. NBFCs have a distint advantage of the formal banking sector on account of factors like:
- Strong distribution network in lower tier cities.
- Better customer profiling
- Better financial metrics reported by NBFCs compared to banks.
- Efficient delivery mechanism (well established online and offline models)
NBFCs contribution towards financial inclusion is commendable. They constitute almost 76% of total balance sheet size of NBFIs. By activity type, NBFCs may be classified as:
- Asset Finance Company
- Loan Company
- Investment Company
- Infrastructure Finance Company
- Systemically Important Core Imvestment Company
- Infrastructure Debt Fund
- Micro Finance Institution
- Non-Operative Financial Holding Company
- Mortgage Guarantee Company
- Account Aggregator
- Peer to Peer Lending Platform
NBFCs are regulated by the Reserve Bank of India (RBI) since 1963 as they have the potential to inflict pain on its depositors. RBI identified this as a source of systemic risk and thereafter brought in prudential regulation to govern NBFCs, almost 5 decades before the rest of the world woke up to the risk of shadow banking. NBFCs with total assets of Rs.500 crores and above are deemed systemically important (SI). RBI’s effective monitoring of this segment has enabled it flourish and genuine players have survived and are expanding its outreach across the length and breadth of the country. Tighter regulation has reduced the number of NBFCs from 51,929 in 1997 to 11,769 in September, 2015. The grant of Small Finance Bank (SFB) license by RBI is a vindication of the business model of NBFCs in India.
FINANCIAL PERFORMANCE OF NBFCS’s
The year 2017 saw a deteriotation in asset quality. This was most likely in the aftermath of the impact of demonetisation as the segment which primarily deals in cash and which was impacted the most by the government move against undisclosed income, is also the prime customer base of NBFCs, particularly the micro finance companies.
Capital levels can be termed as healthy, as they are much above the prescribed level of 15%.
NBFC & PRIVATE EQUITY FUNDS
Private Equity (PE) funds, having judged the long term sustainability of the NBFC model has been pumping monies into India’s NBFCs. This is mostly to capitalize on the credit fuelled consumer and credit boom which the NBFCs have been funding for years together now. Sound financial metrics by NBFCs and profitable exits by earlier investors provide additional impetus.
NBFC AND REAL ESTATE FUNDING
Like China, Indian shadow banks too are gradually emerging as a source of funding to the ever sensitive real estate sector. NBFCs have continued to lend aggresively to real estate and currently contribute around 18% of the total funding requirement by this sector. They have upped their contribution to this sector when banks and PEs have taken a cautious foot backward. NBFCs have ventured into construction finance, special situation funds, structured and mezzanine debt, acquisition finance to buy land parcels and funding for commercial office projects.
INTERCONNECTEDNESS & CONCERNS
Shadow banking’s exposure to real estate is always fraught with systemic risk. NBFCs of today are of the scale which can be termed as SI. These SIs are a major player in the real estate market who undertake big ticket deals. So is its exposure to sectors like agriculture and the “economically vulnerable” section of the Indian society who may be the profile of the ‘daily wage earner” and from whom the probability of default is the highest, incase of loss of employment. This sectoral concentration is a cause for risk and concern.
Concerns also emanates from the strong linkage between the formal banks and shadow banks. The former is an important provider of funding to the latter (almost 21%). Banks with a not-so–signficant-presence in rural areas have emerged as a strong source of funding to NBFCs that are in the line of activity to extend loans and asset financing. Mutual funds are a major subscriber to short term papers issued by NBFCs to raise funds. Any stress to the NBFC due to issues of liquidity freeze and credit quality deterioration will reflect on banks, mutual funds and the financial system at large. The 2008 global crisis is the case in point. When global markets froze, NBFCs in India faced the stress. The interlinkage between NBFCs, mutual funds and commercial banks came to the fore. NBFCs found investor appetite significantly dipped for its debentures, which is its crucial source of funding. The same concerns of liquidity freeze and maturity mismatch, which plauged the global markets during the Global Financial Crisis (GFC) came upon to play in the Indian NBFC sector too.
Many NBFCs are selling papers issued by real estate firms to high net worth individuals (HNIs). HNIs in anticipation of high yield are lapping up these papers. But the downfall would be severe should there be a kind of bursting of the real estate bubble.Some NBFCs are offering structured finance products like high yield papers, by leveraging its network with other NBFCs, Indian and foreign banks, domestic funds, hedge funds and real estate funds. The products are complex and it is hoped that the investor understands the risk he is getting invested into. It is still unclear to what extent the regulator is aware or monitoring this area and could be another subject for future research.
In the matured financial markets in advanced economies, shadow banking plays the role of maturity transformation and risk management. In emerging economies, it is tied to the broader objective of financial inclusion. “Over exuberance” and “excesses” in any system is non desirerable be it an advanced economy of US and UK or emerging economies like India and China.
India’s financial regulator has moved ahead of its times and has placed prudential regulations on its shadow banks.The concern for the Indian regulator of NBFCs is not how to bring them under the scanner. They all are already under the scanner. There are prudentail norms in place for each type of NBFC. The issue is how much to regulate and to what extent so as not to kill the organisation for reason on non-compliance. The Saradha group financial scandal was a huge blip in the NBFC story and this ponzi scheme was a kind of an eye opener for regulators and investigators across the financial system in India. Differentied banking license is a step in the right direction initiated by RBI and will enable specialialised banks with unique skill sets to set up operations across the length and breadth of the country.
So, why do shadow banks of the kind exist in India? Financial repression, lack of financial outreach by the existing banking system (State Bank of India being an exception), preference for investments in favour of physical assets compared to financial assets, low post tax returns on bank deposits, low real interest rates, savers seeking more profitable form of investments and most importantly illiteracy and lack of financial education among the masses are few macro and socio economic perils as to why NBFCs have been able to thrive. These perils will be wiped out gradually as the economy progress. We then hope to see a transition in both India and China from physical savings to dealing with genuine and regulated shadow banks (by whatever name called in the respective countries) and from shadow banks to the formal banking system.
 Douglas Elliott, Arthur Kroeber, Yu Qiao, paper titled “Shadow Banking in China: A primer”, published by “Economic Studies at Brookings, dated March 2015.
 C.P. Chandrasekhar and Jayati Ghosh, paper titled,” The State in Chinese Banking”, Business Line, April 10, 2017
 The Economist, “China seeks stimulation”, dated November 10, 2008
 LGFVs are entities set up by the local governments to secure funding for mega infrastructure and real estate projects. Historically, sale of land parcel has been a significant source of funding for the Chinese local governement. However, as real estate bubble burst after the financial crisis, this source of revenue diminished significantly. But local government’s continued to invest in mega infrastructure projects as part of Central Government’s policy direction. This funding was raised by LGFVs which were owned by the local governments but had access to tradional banking (loans, bonds etc.) as well as shadow banking (mainly trust loans) as source of funds.
 There was moral hazard implicit in this mechanism. Local government finance vehicles took loans based on its own credit worthiness rather than that of the local government who were the ultimate user of the fund. These funds were used to construct “ghost cities”. Thus funds were locked in unused phyical assets. This kind of wasteful expenditure which improved GDP nos attracted international media attention and criticism. Example, a replica of Manhattan was built in the Conch Bay district of Tianjin.
 Tri Vi Dang, Honglin Wang and Aidan Yao, “Shadow Banking Modes: The Chinese versus US System”, December, 2015
 Alok Sheel and Meeta Ganguly, “Rise and Fall of Securitised Structured Finance”, Economic & Political Weekly, April, 2008
 Report on “Trends & Progress of Banking in India”, 2016-17. Refer Chapter VII of the report on page no.137 for description of each type of NBFC https://www.rbi.org.in/scripts/PublicationsView.aspx?id=18063
 Economic Times, article, “Will ‘shadow banking’ in India be able to bury its dubious past & NBFCs flourish?”, dated July 20, 2016
- May, 2015 – TPG Capital sold 20.37% stake in Shriram City Union Finance for $387 million.
- September, 2015 – Apax Partners LLP sold its stake in Cholamandalam Investment & Finance Co. at a reported IRR of 50%
- 2009 – Chrys Capital made a successful exit on its investment in Shriram Transport Finance Co. Ltd. (Entry and exit value reported were Rs.120 crore and Rs.1,400 crore respectively).
 Article in Livemint,” PE funds face tough challenge from NBFCs in realty sector”, dated March 31,2017
 Wikipedia, https://en.wikipedia.org/wiki/Saradha_Group_financial_scandal