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Understanding Systemic Symptoms of Non-banking Financial Companies
The riskiness of banks (public and private) and non-banking financial companies listed on the stock exchange is examined by measuring their extent of interconnectedness at the lowest tail (1%) quantile. Using the macro risk and balance sheet variables under the directional connectedness framework, this study finds the underperforming periods of Indian banks and NBFCs. The findings are consistent with the systemic risk rankings of the Reserve Bank of India for the domestic banks and systemically important NBFCs.
Since February 2016, the Indian financial system, most specifically banking, seems to be experiencing a rise in risk and uncertainty across its different spectrum. In the second week of February 2016, the State Bank of India (SBI) reported a loss of net profit of 62%, while the Bombay Stock Exchange (BSE) Sensex-30 simultaneously fell by 3,000 points, which had a ripple effect on other segments of the financial system.1 Again, in September 2018 the Indian financial system faced another shock on the back of default on the repayments by Infrastructure Leasing & Financial Services (IL&FS), and it accelerated further by the news of DSP Mutual Fund selling commercial papers of Dewan Housing Finance Corporation Limited (DHFL) on discount. Since then outlook of the non-banking financial companies (NBFCs) has been gloomy as the top 15 NBFCs estimated to have lost over ₹ 75,000 crore in the third week of September 2018. Some estimates suggest that the Housing Development Finance Corporation (HDFC) lost around ₹ 18,600 crore, Bajaj Finance around ₹ 13,800 crore and Bajaj Financial Services ₹ 4,200 crore.2
These developments have led to a ubiquitous concern about the systemic risk in the Indian financial system. The unfolding of banking and NBFC crises also opens new avenues to identify the possible symptoms of systemic risk by taking into account not only the banking sector but also the NBFCs.3 Given the nature of the IL&FS crisis, one may argue the crisis to be an outcome of the spiralling of the banking crisis to NBFCs. This can be justified in the light of higher dependence of NBFCs on banks. As of September 2018, NBFCs were the largest borrowers of about ₹ 7,458 billion from the scheduled commercial banks (SCBs) followed by the mutual funds and insurance companies (RBI 2018). In this context, the current article explores the nature and direction of interconnectedness between the banks and the NBFCs. The connectedness at the lowest tail could also help decipher the spillover risk from banks to NBFCs or otherwise.
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