Copyright © HT Digital Streams Limited All rights reserved. Systemic risk: Why non-banks have begun to haunt financial stability again Jamie Dimon, CEO of JP Morgan, an investment bank that had to write off $170 million in bad debt to an auto loan company. (Bloomberg) Summary Non-bank lenders struggling with bad loans can gouge the banks they borrow from, as seen in America’s latest subprime auto loan mini-crisis. Financial regulators from the US to India must remain vigilant. Given a web of links that can cause permutations, it’s better to be safe than sorry. Those who do not learn from history are doomed to repeat it, goes an old saying. Presumably the financial system of the West learned a thing or two from its 2007-08 crisis caused by defaults in the US subprime mortgage market. That may explain why its latest crisis, this time in the US subprime auto loan market, hasn’t led to a bigger collapse — so far. Certainly, Jamie Dimon, CEO of JP Morgan, an investment bank that had to write off $170 million in bad debt to an auto loan company, Tricolor, warned that “if you see one cockroach, there are probably more.” But after the initial panic following the revelation by US lenders Western Alliance Bank and Zions Bank that they had been hit by bad or fraudulent loans, which raised fears of problems in the wider financial sector, no new errors were seen. For now, the hope is that these may turn out to be isolated incidents. But memories of the collapse of California’s Silicon Valley Bank in 2023 made markets nervous. For financial sector regulators, non-banks – or non-depository financial institutions (NDFIs) in the US and non-banking financial companies (NBFCs) in India – have always been a mixed bag. On the one hand, they help to channel credit to borrowers, and on the other hand, their expansion increases risk-taking and interconnectedness in the financial system when a large part of their financing comes from banks. The increasing exposure of traditional banks to non-bank lenders means that the latter’s vulnerabilities can quickly spill over into the banking industry, amplifying shocks and complicating crisis management. In advance, the International Monetary Fund (IMF) warned in its Global Financial Stability Report for October 2025 against risks arising from the growing links between banks and non-banks. Non-banks now hold about half of the world’s financial assets, he notes, with the exposure of many banks in the US and the eurozone to their non-banks now exceeding their capital losses that are repaid 1 times crises. The fact that non-banks typically operate with less transparency and regulatory oversight than banks means their leverage levels and credit exposures are often more difficult to determine. As a result, trouble in private credit markets can spill over unexpectedly into the broader financial system. So it’s no surprise that regulators tend to keep a wary eye on non-banks. The Reserve Bank of India (RBI) is no exception. In India, the rapid expansion of NBFCs in recent years has raised concerns about hidden weaknesses in the financial sector, particularly following defaults by two major NBFCs, IL&FS in September 2018 and DHFL in June 2019. The net result has been a growing convergence of the regulatory framework governing NBFCs and banks. The scale-based regulatory framework for NBFCs (with tighter regulation of larger players) introduced by RBI in October 2022 is in line with this. In addition, RBI has periodically refined risk weights for bank loans to NBFCs. In November 2023, for example, the central bank increased them to limit lending to the sector. However, concerns over the slow growth of credit in recent times have made RBI relax its vigilance somewhat. In February this year, it reduced the risk weight for bank loans to NBFCs by 25 percentage points to 100% in a bid to spur lending. Yet, as events in the US show, ‘better safe than sorry’ should be the motto when it comes to complex and intricate linkages between banks and NBFCs. Get all the Business News, Market News, Breaking News Events and Latest News Updates on Live Mint. Download the Mint News app to get daily market updates. more topics #NBFC #USA economy #Indian economy Read next story
Why non-banks are making global markets nervous again
