RETURNS AND SPILLOVER CONNECTEDNESS OF SI-NBFCS WITH MAJOR INDIAN EQUITY INDICES: A QUANTILE COVAR BASED APPROACH

Abstract

The role of Non-Banking Finance Companies (NBFCs) in systemic spill over came under spotlight in the aftermath of the global financial crisis (GFC). Its phenomenal growth as an alternative to conventional banking has further led to exponential interconnectedness with the other financial system participants. The study employs applicable risk methodologies such as quantile regression in the TENET framework and network analysis in the TVP-VAR framework to estimate the value at risk of systemically significant Indian capital market indices in the event of a tail risk in the NBFC sector index. This coupled with the granular analysis leads us to three significant findings: One, NIFTY EX BANK representing NBFC sector exhibits a lambda of 0.5 and greater across quantiles. Second, granular analysis reveals that in the Banking sector space NIFTY PVT BANK exhibits higher connectedness than NIFTY PSU BANK as depicted by average and total connectedness lambda over years. Third, NBFC sector commands highest HUB score based on the PAGERANK algorithm in the financial system network. The study concludes with evidence that global economic shocks have no significant impact on the ranks of Systemic Risk Emitter and Recipient as also corroborated in RBI FSR 2022 that capital adequacy of Indian Banks provides sufficient cushion in stress test scenarios.

Keywords: Systemic risk, NBFC, Shadow banking, VaR, CoVaR, Quantile Regression, TVP-VAR

JEL Classification:  C23, G12, G23