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Which of the following risks were responsible for NBFC liquidity crisis ?
(1) Higher Asset-Liability mismatch
(2) Contagion risk due to higher interconnectedness among various NBFCs
Choose the correct option from below :
  • a)
    Only 1
  • b)
    Only 2
  • c)
    Both 1 and 2
  • d)
    Neither 1 no 2
Correct answer is option 'C'. Can you explain this answer?
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Most Upvoted Answer
Which of the following risks were responsible for NBFC liquidity crisi...
Higher Asset-Liability Mismatch:
- One of the key risks responsible for the NBFC liquidity crisis was the higher asset-liability mismatch.
- Many NBFCs were borrowing short-term funds to finance long-term assets, leading to a liquidity crunch when they were unable to roll over their short-term debts.
- This mismatch made them vulnerable to market fluctuations and sudden liquidity demands, contributing to the crisis.

Contagion Risk due to Higher Interconnectedness:
- Another significant risk was the contagion effect due to higher interconnectedness among various NBFCs.
- When one NBFC faced liquidity issues, it had a domino effect on other NBFCs they were connected to through inter-bank borrowings or investments.
- This contagion risk amplified the liquidity crisis as it spread across the NBFC sector, leading to a systemic issue.

Conclusion:
- Both the higher asset-liability mismatch and contagion risk played a crucial role in the NBFC liquidity crisis.
- Addressing these risks through better risk management practices, diversification of funding sources, and improved regulatory oversight is essential to prevent such crises in the future.
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Financial markets in India have acquired greater depth and liquidity over the years. Steady reforms since 1991 have led to growing linkages and integration of the Indian economy and its financial system with the global economy. Weak global economic prospects and continuing uncertainties the in international financial markets therefore, have had their impact on the emerging market economies. Sovereign risk concerns, particularly in the Euro area, affected financial markets for the greater part of the year, with the contagion of Greeces sovereign debt problem spreading to India and other economies by way of higher-than-normal levels of volatility.The funding constraints in international financial markets could impact both the availability and cost of foreign funding for banks and corporates. Since the Indian financial system is bank dominated, banks ability to withstand stress is critical to overall financial stability. Indian banks, however, remain robust, notwithstanding a decline in capital to risk-weighted assets ratio and a rise in nonperforming asset levels in the recent past. Capital adequacy levels remain above the regulatory requirements. The financial market infrastructure continues to function without any major disruption. With further globalization, consolidation, deregulation, and diversification of the financial system, the banking business may become more complex and riskier. Issues like risk and liquidity management and enhancing skill therefore assume greater significance.Q.According to the passage, in the Indian financial system, banks ability to with stand stress is critical to ensure overall financial stability because Indian financial system is

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Which of the following risks were responsible for NBFC liquidity crisis ?(1) Higher Asset-Liability mismatch(2) Contagion risk due to higher interconnectedness among various NBFCsChoose the correct option from below :a)Only 1b)Only 2c)Both 1 and 2d)Neither 1 no 2Correct answer is option 'C'. Can you explain this answer?
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