Estimating the Factors Influencing Liquidity Risk: Empirical Analysis of Indian Non-Banking Financial Institutions

Abstract

Liquidity risk refers to NBFC’s ability to fund assets and meet obligations as they come due to reasonable costs. Technological advancements and financial innovations have significantly impacted liquidity management in NBFCs. The decreasing reliance on core deposits, increased dependence on capital markets, and recent financial market disruptions have introduced new challenges for NBFCs in managing liquidity. This study explores various theories, indicators, and factors influencing NBFC liquidity, as well as its implications for an NBFC's capital and profitability. Using Arellano-Bond estimates, the research empirically analyzes the determinants of liquidity and examines the interrelationship between liquidity, regulatory capital, and profitability through 2-SLS system equations. The findings highlight that NBFCs' size, profitability, leverage, net interest margin, gross non-performing loans, and the Central Bank Policy Rate are significant determinants of NBFC's liquidity.


Furthermore, the interaction between liquidity, profitability, and regulatory capital reveals that while NBFCs can enhance liquidity at the expense of profitability, greater liquidity also results in reduced risk. Non-traditional financial service providers use diverse business models, which leads to a variety of potential liquidity risks.

References

[1] Aramonte, Sirio and Schrimpf, Andreas and Shin, Hyun Song (2022). Non-Bank Financial Intermediaries and Financial Stability. DOI:http://dx.doi.org/10.2139/ssrn.3952551
[2] Bandyopadhyay, A., and Saxena, M. (2023) Interaction between credit risk, liquidity risk, and bank solvency performance: a panel study of Indian banks. Indian Economic Review, 58(2): 311–28. Available at: https://link.springer.com/10.1007/s41775-023-00202-y
[3] Brunnermeier, M.K., and Pedersen, L.H. (2009). Market Liquidity and Funding Liquidity. The Review of Financial Studies, 22(6): 2201–38. Available at: https://academic.oup.com/rfs/article-lookup/doi/10.1093/rfs/hhn098
[4] Chen WD, Chen Y, Huang SC. Liquidity risk and bank performance during financial crises. Journal of Financial Stability. Oct; 56: 100906. DOI: https://doi.org/10.1016/j.jfs.2021.100906
[5] Fassas, A.P., Siriopoulos, C. (2021). Implied volatility indices – A review. The Quarterly Review of Economics and Finance, 79: 303–29. Available at: https://linkinghub.elsevier.com/retrieve/pii/S1062976920300855
[6] Fuchs, F., Füss, R., Jenkinson T., and , S. (2021). Winning a deal in private equity: Do educational ties matter? Journal of Corporate Finance, 66: 101740. Available at: https://linkinghub.elsevier.com/retrieve/pii/S092911992030184X
[7] Ghosh, R., Latha, K., Gupta, S. (2018). Interest Rate Sensitivity of Non-banking Financial Sector in India. Vikalpa The Journal for Decision Makers, 43(3): 152–70. DOI: 10.1177/0256090918792803
[8] Ghosh, R., Latha, K., & Gupta, S. (2018). Interest Rate Sensitivity of Non-banking Financial Sector in India. Vikalpa: The Journal for Decision Makers, 43(3): 152–170. DOI: https://doi.org/10.1177/0256090918792803
[9] Kang, S.H., and Yoon, S. (2020). Dynamic correlation and volatility spillovers across Chinese stock and commodity futures markets. International Journal of Finance & Economics, 25(2): 261–73. Available at: https://onlinelibrary.wiley.com/doi/10.1002/ijfe.1750
[10] Kumar, G., Murty, A. V. N., and Srinivasa Rao, M. V. K. (2025). Investigation of Islamic Financing Institutions in Middle Eastern Banking. Theoretical and Practical Research in Economic Fields, 1(33): 78-88. DOI:https://doi.org/10.14505/tpref.v16.1(33).07
[11] Ladley, D. (2020). The high frequency trade off between speed and sophistication. Journal of Economic Dynamics and Control, 116: 103912. Available at: https://linkinghub.elsevier.com/retrieve/pii/S0165188920300804
[12] Liu, J., and Xie, J. (2024). The Effect of ESG Performance on Bank Liquidity Risk. Sustainability, 16(12): 4927. Available at: https://www.mdpi.com/2071-1050/16/12/4927
[13] Antony, M.T. (2023). Determinants of liquidity risk: Empirical evidence from Indian commercial banks. Banks and Bank Systems, 18(3): 101–111. DOI: https://doi.org/10.21511/bbs.18(3).2023.09
[14] Nam, N.H.P., and Tuyen, T.T.M. (2024). Impact of liquidity on capital structure and financial performance of non-financial-listed companies in the vietnam stock market. Future Business Journal, 10(1):126. Available at: https://fbj.springeropen.com/articles/10.1186/s43093-024-00412-7
[15] Nowicki, J., Ratajczak, P., and Szutowski, D. (2024). Impact of Macroeconomic Factors on Financial Liquidity of Companies: A Moderation Analysis. Sustainability, 16(11): 4483. Available at: https://www.mdpi.com/2071-1050/16/11/4483
[16] Oino I. (2021). Regulatory capital: Implications on credit creation and profitability. McMillan D, editor. Cogent Economics and Finance, 9(1). Available at: https://www.tandfonline.com/doi/full/10.1080/23322039.2021.1955470
[17] Pryshchepa, O. (2021). Disciplining entrenched managers through corporate governance reform: Implications for risk‐taking behavior. Corporate Governance: An International Review, 29(4), 328–351. https://doi.org/10.1111/corg.12370
[18] Saleh, I, and Abu Afifa, M. (2020). The effect of credit risk, liquidity risk and bank capital on bank profitability: Evidence from an emerging market. Murray L, editor. Cogent Economics and Finance, 8(1):1814509. Available at: https://www.tandfonline.com/doi/full/10.1080/23322039.2020.1814509
[19] Sarmiento, M. (2024). The transmission of non-banking liquidity shocks to the banking sector. Latin American Journal of Central Banking, Volume 6, Issue 2, DOI: https://doi.org/10.1016/j.latcb.2024.100139
[20] Tanha, H., and Dempsey, M. (2016). The evolving dynamics of the Australian SPI 200 implied volatility surface. Journal of International Financial Markets, Institutions and Money, 43: 44–57. Available at: https://linkinghub.elsevier.com/retrieve/pii/S1042443116300178
[21] Wang X, Wu Y, and Zhong Z (Ken). (2020). The comovements of stock, bond, and cds illiquidity before, during, and after the global financial crisis. The Journal of Financial Research, 43(4): DOI: 10.1111/jfir.12230
Published
2025-06-30
How to Cite
KUMAR, Gaurav et al. Estimating the Factors Influencing Liquidity Risk: Empirical Analysis of Indian Non-Banking Financial Institutions. Theoretical and Practical Research in Economic Fields, [S.l.], v. 16, n. 2, p. 521-531, june 2025. ISSN 2068-7710. Available at: <https://journals.aserspublishing.eu/tpref/article/view/8941>. Date accessed: 07 july 2025. doi: https://doi.org/10.14505/tpref.v16.2(34).20.