Shadow Banks on the Rise: Evidence Across Market Segments

Abstract

This paper examines the comparative advantages of shadow banks using novel credit bureau data on 653 million formal retail loans in India. Proxying credit demand shocks with weather variation, we show that Fintechs respond more than other lenders in uncollateralized markets. Conversely, non-Fintech shadow banks are more responsive in collateralized markets. Both show stronger responses for borrowers with low credit scores or no credit history. Exploiting the geographic heterogeneity in the adoption of digital payments technology we document the importance of technology for Fintechs. Leveraging four natural experiments across lenders, time, and products, we establish the importance of lax regulation and physical presence for non-Fintech shadow banks. Our results suggest that the dominant comparative advantages of shadow banks differ across market segments.

Keywords: shadow banks, Fintech, technology, regulation, comparative advantage, digital transactions, climate