Inter-connectedness of Banks and NBFCs in India: Issues and Policy Implications

The recent global financial crisis (2007-09) has clearly highlighted the gravity of high financial inter-connectedness within the financial system. In the Indian context, this brief study attempts to explore the financial inter-connectedness between NBFCs (both deposit taking and non-deposit taking) with banking system. The study found that both NBFCs-D and NBFCs-ND-SI are highly dependent on the banking system for their funding, though there are regulatory limits at the individual bank’s level to lend to NBFCs. NBFCs’ exposures to banks in the form of deposits are however, very limited. The discouragement of NBFCs from raising public deposits has resulted in substitution of public deposits with borrowings from the banking system. The high dependency of NBFCs on banks as a whole makes the financial system vulnerable in a stressful situation. [RBI W P S (DEPR) : 21 / 2011]. URL:[http://rbidocs.rbi.org.in/rdocs/Publications/PDFs/21WPN020112.pdf].