An Empirical Evaluation of the Effects of Credit Risk and Liquidity Shocks on Supply Chain Financing in Indian Banks

Abstract

The study uses an empirical analysis of how credit risk and liquidity shock affect Supply chain Financing (SCF) performance of Indian banks in the Delhi NCR area. The study is based on the banking risk interdependence and the financial intermediation theory, and the study design is descriptive and analytical due to 300 observations of the public, private, foreign and small finance banks. The secondary data were gathered based on annual reports, regulatory publications, and financial statements. The study uses paired sample t-tests and correlations between the differences in SCF performance in pre-shock, shock and recovery periods and the relationship between the main credit risk indicators (non-performing assets and loan loss provisions) and liquidity measures (liquidity coverage ratio, cash reserve ratio, and similar liquidity ratios) and SCF. The results show the statistically significant difference between the level of SCF before and after financial shock and the moderate and significant relationship between credit risk conditions and the performance of SCF. The phase-wise analysis reveals that financial shocks enhance the credit risks and undermine the liquidity positions, resulting in a transient reduction of SCF activities, yet the recovery trends indicate structural resilience and adaptive risk management of the banking system. This paper concludes that in spite of financial shocks causing short-term instability, Indian banks have cyclical recovery trends that recover supply chain financing performance, which further strengthens financial stability in the emerging market situation.