Corporate borrowing exuberance and credit cycles- some insights from an emerging economy, India

ABSTRACT

By developing a novel measure of corporate borrowing exuberance the study finds that such a phenomenon is not only higher but also is pro-cyclical with the periods of credit booms in the Indian economy. The study provides initial evidence on the quality of loans against the quantum of loans made available during credit growth cycles. Our research points towards using a unified framework to identify ex-ante misallocation in bank credit, which eventually appears as non-performing assets ex-post.

KEYWORDS:

• Borrowing exuberance
• credit growth
• bank credit
• India

JEL classification:

• G21
• G28

Acknowledgments

Indian Council of Social Science Research for providing financial support. Bipin Sony and Anindita Chakraborty for excellent research assistance. The referee for the constructive feedback. Participants of the Money and Finance Conference at IGIDR, Bombay and seminar series at the Madras School of Economics where earlier version of this paper was presented.

Disclosure statement

No potential conflict of interest was reported by the author(s).

Notes

1. See https://www.thehindubusinessline.com/money-and-banking/rajan-traces-npa-mess-to-banks-excesses-in-2006-08/article24928727.ece, https://www.thehindu.com/opinion/lead/resolving-indias-banking-crisis/article27097047.ece

2. The definition and computing of the total factor productivity is a vigorously debated topic in the financial literature making it a non-reliable measure to derive marginal productivity of capital.

3. In order to address the scale effect, we take BB as a ratio of the total debt.

4. We distinguish between borrowing as a flow while debt as a stock measure.

5. The minor episode between 2000–02 is marked by privatization of banks, entry of foreign banks and privatization of development financial institutions (DFIs). This period was also the beginning of corporate sector reforms by institutionalizing norms for corporate governance and regulation of market for corporate control.

6. Attribute measures the percentage contribution of BE in a particular time window proportional to the total BE over the total study period.

7. For better comparison we have normalized both the time series.

Additional information

Funding

This work was supported by the Indian Council of Social Science Research [G-39/2017-18/ICSSR/RPS].

Notes on contributors

Saumitra Bhaduri

Saumitra Bhaduri is a Professor at Madras School of Economics, Gandhi Mandapam Road, Behind Government Data Center, Kottur, Chennai 600025 (India).

Ekta Selarka

Ekta Selarka is an Associate Professor at Madras School of Economics, Gandhi Mandapam Road, Behind Government Data Center, Kottur, Chennai 600025 (India).