Why non-banks have begun to haunt financial stability again

That may explain why its latest crisis, this time in the US subprime market for auto loans, has not led to a larger meltdown—so far. Sure, Jamie Dimon, CEO of JP Morgan, an investment bank that had to write off $170 million in bad debt to a car-loan company, Tricolor, has warned that “if you see one cockroach, there are probably more.”

But after the initial panic following the disclosure by US lenders Western Alliance Bank and Zions Bank that they had been hit by bad or fraudulent loans, sparking fears of problems in the wider financial sector, no new bugs have been sighted.

For now, the hope is that these may turn out to be isolated incidents. But memories of the 2023 collapse of California-based Silicon Valley Bank have 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 one hand, they help channel credit to borrowers, and on the other, their expansion increases risk-taking and interconnectedness in the financial system when a large part of their funding comes from banks.

The rising exposure of traditional banks to non-bank lenders means that the latter’s vulnerabilities can quickly transmit to the banking industry, amplifying shocks and complicating crisis management.

Presciently, the International Monetary Fund (IMF) has cautioned against risks arising from the growing links between banks and non-banks in its Global Financial Stability Report for October 2025. Non-banks now hold around half of the world’s financial assets, it notes, with the exposure of many banks in the US and Eurozone to non-banks now exceeding their Tier 1 capital cushion that lets them absorb losses during repayment 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 harder to gauge. As a result, trouble in private credit markets could unexpectedly spill over into the broader financial system. It is no surprise, therefore, 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 heightened concerns about hidden frailties in the financial sector, especially after defaults by two large 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 stricter regulation of bigger players) that RBI introduced in October 2022 is in consonance with this. In addition, RBI has periodically fine-tuned risk weights for bank lending to NBFCs. In November 2023, for instance, the central bank hiked them to restrain loans to the sector. However, concerns about the slow growth of credit in recent times have made RBI relax its vigil somewhat.

In February this year, it lowered 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 links between banks and NBFCs.