Health score of shadow banks can give early warnings

Economic Survey: Health score of shadow banks can give early warnings

The Health Score proposed is based on the rollover risk which includes Asset Liquidity Management risk, interconnectedness risk and Financial and Operating Resilience of an NBFC.

The economic survey has said a health score for the shadow banks can help the sector, as the sector has been going through a prolonged cash crunch.

"A new diagnostic Health Score developed for the Non-Banking Financial Company (NBFC) and Housing Finance Company (HFC) sectors can help detect early warning signals of impending liquidity problems facing the companies in this sector," the survey said.

Till now, two companies, both fraud hit -- Infrastructure Leasing & Financial Services (IL&FS) defaulted on their payments in the period from June to September 2018, while Dewan
Housing Finance Limited (DHFL) did so in the period from June to August 2019. Both entities defaulted on non-convertible debentures and commercial paper obligations for amounts of approximately Rs 1,500-1,700 crore.

Using a novel scoring methodology, quantifiable Rollover risk is calculated for the HFCs and the retail NBFCs. The Economic Survey 2019-20 presented by Union Minister for Finance and Corporate Affairs, Smt Nirmala Sitharaman in Parliament today gives a detailed analysis of this new methodology including its reliability in predicting financial health of NBFC and HFC firms. The Health Score can be used as a valuable tool to introduce corrective measures to address unfavourablefinancial trends in a timely manner, says the Pre-Budget survey.

The Health Score proposed is based on the rollover risk which includes Asset Liquidity Management risk, interconnectedness risk and Financial and Operating Resilience of an NBFC.

The Economic Survey analysis further shows that the Health Score for the HFC sector exhibited a declining trend post 2014. By the end of FY 2019, the health of the overall sector had worsened considerably. Similarly, the Health Score of the Retail-NBFC sector was consistently below par for the period 2014 till 2019.

On one single day -- June 4, 2019 -- the net asset value of debt funds, which held debt instruments issued by the stressed NBFCs, fell by 53% in one day when news about its default became public.