In a financial system network, the component financial institutions have bilateral links amongst themselves in the form of loans to, investments in, or deposits with each other. The total outstanding bilateral exposures among the entities in the financial system have been on an upswing since H1:2020-21. This was primarily due to increased exposures of SCBs to NBFCs and HFCs and of asset management companies – mutual funds (AMC-MFs) to the financial system. SCBs had the largest share of bilateral exposures though it remained lower than pre-pandemic levels. The shares of NBFCs and HFCs slipped marginally from their March 2021 levels, as per ‘Financial Institutions: Soundness and Resilience’, part of Financial Stability Report December 2021, released by the RBI.
In terms of inter-sectoral exposures, AMC-MFs maintained their position as the largest net providers of funds to the financial system as of end-September 2021. Their gross receivables stood at Rs10.63 trillion (around 29% of their average AUM) whereas their gross payables were Rs1.01 trillion as at end-September 2021.
The major recipients of their funding were SCBs, followed by NBFCs, HFCs and AIFIs. Their exposure to banking sector stocks continued its upward momentum since September 2020 and reached pre-pandemic levels. Receivables from other sectors of the financial system, however, declined.
Instrument-wise, the share of equity holdings in AMC-MFs’ receivables continued its upward trajectory since March 2020 as equity markets remained buoyant; while long-term (LT) debt, CPs and CDs declined in absolute and percentage terms.
SCBs largest recipients of insurance funds
Insurance companies were the second largest net providers of funds to the financial system (gross receivables were at Rs6.95 trillion and gross payables at Rs0.45 trillion in September 2021). SCBs were the largest recipients of their funds, followed by NBFCs and HFCs, mainly in the form of LT debt and equity. LT debt mostly comprised of subscription to debt issued by NBFCs and HFCs.
AIFIs net borrowers from financial system
All India Financial Institutions (AIFIs), were the net borrowers from the financial system, with their gross payables and gross receivables having increased to Rs4.05 trillion and Rs3.45 trillion, respectively, in September 2021. They raised funds mainly from SCBs (primarily PVBs, although share of PSBs also grew), AMC-MFs and insurance companies. While LT debt remained the preferred instrument for raising funds, LT deposits declined on a sequential basis. CPs which had registered a sharp uptick as a source of AIFIs’ funding in H2:2020:21, saw an equally sharp decline in H1:2021-22.
Funding by SCBs highest to NBFCs
NBFCs were the largest net borrowers of funds from the financial system, with gross payables of Rs12.06 trillion and gross receivables of Rs1.65 trillion as at end-September 2021. The share of funding by SCBs remained the highest, though it decelerated in Q2:2021-22. The share of AMC-MFs increased relative to March 2021 while that of insurance companies dipped. During the half-year ended September 2021, the NBFC funding mix saw a decline in the share of long-term debt instruments while that of long-term loans increased.
HFCs’ borrowing profile change
HFCs were the second largest net borrowers of funds from the financial system, with gross payables of Rs7.38 trillion and gross receivables of Rs0.61 trillion as at end-September 2021. As at the end of FY:2020-21 and H1:2021-22, their borrowing profile was marked by a higher share of funding from SCBs and fall in that of AMC-MFs. The proportion of fund mobilisation through long-term loans, long-term debt instruments and Commercial Papers contracted since March 2021, while that through ST loans grew.
Inter-bank Market: Network Structure and Connectivity
Inter-bank exposures accounted for 3% of the total assets of the banking system as of September 2021. PSBs continued to maintain their dominant position in the inter-bank market and their share increased sequentially. The share of PVBs declined over the March 2021 level, whereas that of FBs grew. The inter-bank market typically has a core-periphery network structure. 77 SCBs,11 SFBs and 20 SUCBs were considered for this analysis. As of end-September 2021, there were four banks in the inner-most core and six banks in the mid-core circle. The four banks in the inner-most core included large public and private sector banks. The banks in the mid-core were large PSBs and PVBs while most of the old private sector banks, foreign banks, SUCBs and SFBs formed the outer core.