Economic Survey investigates the key drivers of Rollover Risk of the shadow banking system in India in light of the current liquidity crunch in the sector. Key drivers of Rollover Risk:

• Asset Liability Management (ALM) Risk.
• Interconnectedness Risk.
• Financial and Operating Resilience of an NBFC.
• Over-dependence on short-term wholesale funding.

Survey computes a diagnostic (Health Score) by quantifying the Rollover risk for a sample of HFCs and Retail-NBFCs (which are representative of their respective sectors).  The analysis of the Health Score has the following findings:

• The HFC sector exhibited a declining trend post 2014 and overall health of the sector worsened considerably by the end of FY2019.
• The Score of the Retail-NBFC sector was consistently below par for the period 2014 -19.
• Larger Retail-NBFCs had higher Health Scores but among medium and small Retail- NBFCs, the medium size ones had a lower score for the entire period of 2014-19.

Survey suggests that the Health Score provides an early warning signal of impending liquidity problems. Equity markets react favourably to increase in Health Score of individual HFCs and Retail-NBFCs.  The Survey prescribes this analysis to efficiently allocate liquidity enhancements across firms (with different Health Scores) in the NBFC sector, thereby arresting financial fragility in a capital-efficient manner.