Non-Banks and Monetary Policy Transmission in India: An Exploration

This paper analyses the role of non-banking financial companies (NBFCs) - an increasingly important credit intermediary in India - in monetary policy transmission. Using balance sheet data for a representative panel of NBFCs uniquely matched with retail loan-level data, the paper finds evidence of monetary transmission by these institutions. A one-percentage point increase in weighted average call money rate (WACR), the operating target for India’s monetary policy, is associated with (a) a decline in NBFC credit growth by 3 per cent over a two-quarter period under the credit channel and (b) an increase of 0.17 percentage points in the lending rate of NBFCs over a one-quarter period under the interest rate channel. There is transmission in most segments of retail credit by NBFCs. The digitally-intermediated or FinTech retail loans by NBFCs are seen to be the most rate sensitive. In contrast to the global evidence of non-banks tempering monetary transmission, the Indian NBFCs support monetary transmission given the greater sensitivity of their cost of funds to policy rates through their interconnectedness with banks and lower regulatory arbitrage. JEL Classification : E51, E52, G23, G28