A Simplified Stress Test Framework for Non-Bank Financial Institutions

A simplified stress testing framework for non-bank financial institutions (NBFIs) is increasingly essential as their role in credit intermediation, market-based finance and intermediation between banks, mutual funds and insurers expands in emerging markets. Building on the Reserve Bank of India's 2025 Financial Stability Report, this article distils the core building blocks of a proportionate, analytically robust framework for non-bank financial companies (NBFCs) that can be adapted by other jurisdictions. The framework rests on three pillars: (i) a solvency module that applies parametric shocks to GNPA ratios over a one-year horizon under static balance sheet assumptions, (ii) concentration risk tests focused on defaults of top individual and group borrowers, and (iii) a cash-flow-based liquidity module using symmetric shocks to inflows and outflows and cumulative mismatch thresholds. These elements are complemented by simple network and contagion overlays that use bilateral exposure data to trace how stressed NBFCs can transmit shocks to banks and other NBFIs. The article emphasises implementation practicality: standardised templates, long-run volatility-based calibration of GNPA shocks, and simple thresholds for capital ratios and liquidity mismatches that allow supervisors to rank entities by vulnerability and scale expectations with institutional size. It also highlights limitations arising from static balance sheets, simplified credit migration and basic funding shock design, and proposes incremental enhancements that preserve tractability. Overall, the paper offers a transferable stress testing architecture that supports forward-looking supervision of NBFIs while accommodating data and capacity constraints in emerging markets.