Liquidity Shock Transmission in Industrial NBFCs: Modelling Balance-Sheet Fragility

Non-Banking Financial Companies (NBFCs) have become integral components of modern financial systems by providing credit to industries, small businesses, and underserved sectors. However, their increasing dependence on short-term market borrowings and wholesale funding has made them particularly vulnerable to liquidity shocks that can rapidly propagate across interconnected financial institutions. Episodes such as the IL&FS default and subsequent market disruptions have highlighted the systemic importance of understanding liquidity transmission mechanisms within industrial NBFCs. This study proposes a comprehensive balance-sheet fragility model for analyzing the transmission of liquidity shocks through industrial NBFCs under varying financial stress conditions. The proposed framework integrates liquidity mismatch analysis, funding concentration assessment, leverage dynamics, asset quality evaluation, and stress-testing mechanisms to quantify institutional vulnerability and identify contagion pathways. Multiple financial indicators are incorporated to evaluate liquidity resilience, solvency capacity, and shock absorption efficiency under adverse market scenarios. The framework further investigates the relationship between funding structures, maturity mismatches, and balance-sheet deterioration during periods of financial instability. The findings indicate that excessive reliance on short-term liabilities, declining liquid asset buffers, and increasing leverage significantly amplify liquidity shock transmission across the NBFC sector. The proposed model provides valuable insights for regulators, policymakers, financial institutions, and risk managers seeking to strengthen financial stability through proactive liquidity risk management, enhanced supervisory monitoring, and improved macroprudential policy design.