Shadow Banking in India: Do bank sponsored asset management companies (AMCs) perform liquidity transformation through exposure to non-banking finance companies (NBFC) in their debt oriented schemes and will this increase the systemic risk of a bank due to a possible joint exposure to NBFCs?
Description
This study examines the joint exposure of Indian banks through both on-balance-sheet and off-balance-sheet channels. Direct exposure arises through lending and investment activities, while off-balance-sheet exposure includes instruments such as standby letters of credit (SBLCs) issued on behalf of Indian non-banking financial companies (NBFCs) for their commercial paper. Additionally, banks may have indirect exposure to the same NBFCs through their asset management arms. Using data from the Reserve Bank of India, the Microfinance Institutions Network, monthly portfolio disclosures of asset management companies, annual reports of NBFCs and banks (2012–2018), Ministry of Corporate Affairs (MCA) charge indices, and company prospectuses, this paper addresses three key research questions. First, it examines whether joint exposure to specific NBFCs exists at both the bank level and the level of banks’ mutual fund or asset management arms. Second, it investigates whether the asset management arms of banks function as shadow banks by undertaking liquidity transformation, particularly through investments in debentures and commercial paper issued by NBFCs, and how this contributes to overall joint exposure. Third, it explores whether financial interdependencies between banks, NBFCs, and mutual funds influence systemic risk in the financial system. Methodologically, the study employs the Bai–Perron (1998) multiple structural break model to analyze liquidity transformation in debt schemes, and the Diebold–Yilmaz framework (2009, 2012, 2014) to estimate return spillovers and measure financial interconnectedness among institutions.
Copyright Date
January 2018
Publication Date
1-1-2018
Keywords
Asset management companies, AMCs), Non-banking finance companies, NBFC
Conference
VIII Congresso de investigacion financiera FIMEF, EGADE Business School, Monterrey, 31st Augsut, 2018, Mexico
