Survey investigates the key drivers of Rollover Risk of the shadow banking system in India in light of the current liquidity crunch in the sector.
Key drivers of Rollover Risk:
Asset Liability Management (ALM) Risk.
Interconnectedness Risk.
Financial and Operating Resilience of an NBFC.
Over-dependence on short-term wholesale funding.
Survey computes a diagnostic (Health Score) by quantifying the Rollover risk for a sample of HFCs and Retail-NBFCs (which are representative of their respective sectors).
The analysis of the Health Score has the following findings:
The HFC sector exhibited a declining trend post 2014 and overall health of the sector worsened considerably by the end of FY2019.
The Score of the Retail-NBFC sector was consistently below par for the period 2014 -19.
Larger Retail-NBFCs had higher Health Scores but among medium and small Retail- NBFCs, the medium size ones had a lower score for the entire period of 2014-19.
Survey suggests that the Health Score provides an early warning signal of impending liquidity problems.
Equity markets react favourably to increase in Health Score of individual HFCs and Retail-NBFCs.
The Survey prescribes this analysis to efficiently allocate liquidity enhancements across firms (with different Health Scores) in the NBFC sector, thereby arresting financial fragility in a capital-efficient manner.
