A major current global risk is the rise in emerging market (EM) corporate dollar debt. This grew from $1.7 trillion in 2008 to $4.3 trillion in 2015 as quantitative easing pumped up global liquidity. This has made EM corporates vulnerable to rising international interest rates and dollar appreciation, with the US Fed beginning its exit from easing. Balance sheets could be adversely affected. If indebtedness is severe, bankruptcy-related spillovers could create financial instability.

Loose talk of an Indian balance sheet problem tends to put Indian firms in the same basket. But Indian private sector dollar debt is relatively low at $105 billion, although it did rise from 59 in 2008.

Rather than excessive credit growth in this period of excess global liquidity, India actually managed the opposite problem — too low a level and growth rate of credit. The Bank of International Settlements releases quarterly data on international core debt ratios to gross domestic product (GDP). A comparison of Indian ratios, and change in these ratios, with different regions is startling.

The Table shows the ratio of Indian total credit to the non-financial private sector was far below the average for all economies and for EMs. The Indian government borrows more, as a ratio to GDP, than other EMs, although much less than AEs. But overall Indian debt ratios are much lower than all other countries. Corporates and households borrow much less.

Moreover, the increase in Indian ratios of total debt, debt to government and to non-financial corporations over 2011-15, a period of high global liquidity, was below the global increase. The government was reducing its fiscal deficit and firms were borrowing little. For Indian non-financial corporations, the ratio increased only by 0.3 compared to 29.4 for other EMs.

While there was some de-leveraging by AE households and banks, household bank credit and market borrowings grew substantially in EMs. Non-bank financial intermediation (Column 3 – Column 6 for the term in brackets) increased by about 14 per cent of GDP since the crisis for EMs. In India this remained minuscule, and despite the slow growth of bank credit, banks remained the dominant source of credit.

But domestic data shows a steady fall in non-food bank credit growth since 2011. Growth in bank credit to industry and private investment growth actually became negative in 2017.

Non-performing assets (NPAs) were mostly in public sector banks (PSBs) and in large infrastructure firms. This increased concentration risk but also made focused resolution possible. It its absence corporate debt grew at double digits from 2012 as high interest rates added to the repayment burden. The share of chronically stressed firms rose while gross NPAs of public sector banks doubled from about ₹3-6 lakh crore over 2012-16. The official view is banks were not lending because of NPAs. This, however, encouraged a healthy growth of other market instruments. But the latter only grew in absolute numbers.

The Table shows hardly any market growth as a ratio to GDP. The IMF 2017 India country report also shows that corporate market borrowings (commercial paper, corporate bonds and syndicated loans) at 2 per cent of GDP were below a peak of almost 6 per cent in 2011. Another 2 per cent of corporate resources came from foreign direct investment and 2-4 per cent from bank credit. Net external commercial borrowing was negative. Slowdown in other sources of credit points to a generalised lack of demand rather than unwillingness of banks to lend. Industrial growth, employment, capacity utilisation and investment were all low since 2011, the period of policy demand compression.

Normally high credit growth is flagged as a source of risk. In India’s case the risk is from too low credit growth. So it cannot afford to neglect any source of credit. Diversity in banks’ asset portfolio is important. Private banks focus on retail credit and public banks are also trying to shift to it, leaving firms in the lurch.

Central banks around the world are now using macroprudential tools in response to financial stability risks indicated by changes in credit. These tools are designed to reduce systemic risk, and include a variety of measures that restrict credit growth.

Slow-moving stock variables and ratios, such as the credit-to-GDP ratios, are useful for detecting the build-up of risks. But rate of growth of credit is better at capturing turning points in the financial cycle and at predicting systemic risk.

Research on best practices suggests there should be gradual relaxation of macroprudential constraints when systemic risks recede. A prompt and decisive relaxation is certainly required when macroprudential measures constrain provision of credit to the economy, as in the current Indian case.

Moreover, macroprudential tools can be coordinated with macropolicy tools—for example, one can compensate for the tightness of the other.

The RBI, however, tightened both together in this period. It enforced greater provisioning requirements, as well as higher capital adequacy on the path to stricter Basel III norms. At the same time inflation targeting led to a sharp demand contraction. On its part the government did not infuse adequate capital in banks it owns and which it had earlier pushed in unsustainable directions.

No wonder credit growth has tanked. But the Table also points to underdevelopment of Indian credit culture, institutions, and instruments. In contrast to other countries, credit in India does not lead but normally follows a cyclical boom.

Globally, rise in credit is as much as in the pre-GFC period, but real growth is much lower, suggesting poor credit allocation and rising risks. In India the rise in credit is much lower, and has mostly gone to retail. Growth has also fallen. Credit and its allocation can be improved with PSB reform, where they use more of commercial guidelines, and market instruments, while developing their comparative advantage in lending to firms. Higher growth requires both revival of credit demand and reform in the credit infrastructure.

The writer is a professor at the Indira Gandhi Institute of Development Research in Mumbai