A financial supply chain on corporate working capital and interbank lines of credit

Companies sign prior contracts for working capital demand loans with banks to mitigate their working capital shortfall. In order to honor the contract, banks also undertake lines of credit agreements in the interbank market to protect themselves from liquidity mismatch. The paper proposed a mathematical model to assess the performance of banks in a probabilistic environment, where corporates exercise their options for working capital loans and banks face liquidity problems, therefore resort to lines of credit in the interbank market. The paper through simulation examined the effect of expected income and expenses, at different probabilities for companies exercising their options for different quantities of working capital demand loans, and banks approaching the interbank market for lines of credit. It is found that as the probability of exercising working capital demand loans increases, the net-interest income for banks also increases. The model is further validated with unique primary data for a bank having overdraft contracts with 55 companies in an interbank market of 22 banks. The paper uses the network theory to examine the stability of banks in an interbank market. This model will help banks with policy formulations to maximize net-interest income by considering the number of corporates signing overdraft contracts, overdraft interest rate, the probability of corporates exercising overdraft contracts, and the number of banks to be considered in an inter-bank market.