In a bid to strengthen the solvency and sustainability of the banking sector that has been showing signs of stress in recent years, the Reserve Bank of India (RBI)  is likely to propose tightening rules on "shadow banks", as per multiple sources report.

The shadow banking system is a term for the collection of non-bank financial intermediaries that provide services similar to traditional commercial banks but outside normal banking regulations. 

The Central Bank has been trying to tighten regulatory norms on the sector since Infrastructure Leasing & Financial Services, the largest non-bank financial company, went bankrupt in 2018, and Dewan Housing Finance Corp and Altico Capital defaulted on payments in 2019.

The RBI is expected to set out proposals in a discussion paper next week, recommending that bigger shadow banks maintain a statutory liquidity ratio, the sources said. The officials asked not to be named as the discussions on the proposals are not public.

The RBI could also suggest large nonbanks be required to maintain a cash reserve ratio. For banks, this ratio is 3 percent, reduced from 4 percent in a measure the central bank imposed that is to be reversed after March 31.

India's banks must maintain at least 18 percent worth of deposits that they must hold in cash, gold, or government securities.

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