This paper tests the bank lending channel against the aggregate demand channel as an explanation for slow credit growth by estimating the determinants of credit and of non-performing assets (NPAs) using three types of data sets: a quarterly macroeconomic time series, a bank panel on advances and NPAs and a firm level panel. The results suggest demand was and remains the key constraint for credit. Only demand variables affected corporate credit for a broad set of firms-sales and inventory were the only significant variables. Only for a subset of indebted firms in a difference-indifference type analysis, did lagged credit and assets reduce credit, even so sales remained the dominant variable. From the bank panel gross NPAs did not have a negative effect on advances but the Asset Quality Review did have a strong negative effect. NPAs fell with growth, increased with repo rates and with past advances. Therefore, while high interest rates and low growth raised NPAs, so did past credit. If the priority is to revive assets and get credit flowing again, the valuable deadline imposed by the new bankruptcy code must be supported by flexibility in restructuring, funds infusion in PSBs, and easing of macroeconomic conditions.

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We examine the role of external debt financing (EDF) in shaping the credit cycle and output fluctuations in nine major emerging economies. We show that sharp fluctuations in EDF flows are significantly associated with credit surge and stop episodes in emerging market economies (EMEs). However the association is asymmetric in nature -a stop episode in EDF flows is more likely to bring about a credit stop episode compared to an EDF surge episode. We extend our framework to analyze the joint spillover of EDF flows and credit cycles on business cycle fluctuations in these EMEs. We find that EDF flows and credit together have a strong association with output growth. After dividing the sample into EDF surge and stop phases, we find evidence of asymmetric spillover of credit on output growth. Credit decline during EDF stop episode leads to a larger decline in GDP growth relative to the impact of an increase in credit growth during EDF surges. Our analysis points to the vulnerability of credit cycles of EMEs to the sharp movement in EDF flows which in turn is largely synchronized with external financing conditions. The strong negative spillover of EDF stop phases on the business cycle is a cause of concern for policymakers in EMEs who seek to insulate their economies from such external shocks

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The chapter examines progress as well as continuing concerns in G-20 led financial reforms, with particular emphasis on emerging markets (EMs). Although risks remain they are of a lower order of magnitude compared to those in the pre global crisis period. But progress is slowest in areas of concern to EMs. Question marks over liquidity in markets as quantitative easing is withdrawn are echoed in EMs, which also face risk-off outflows and volatile exchange rates in this period. Leverage is high in some EMs after a period of low global interest rates and risk-on inflows in search of yields. But EMs are largely left to handle volatility themselves. Even the advice given to them or its understanding in policy circles or markets is not sufficiently nuanced. There are arguments for and against financial tightening as the best response to achieve financial stability. These are examined in the context of experiences in some specific EMs. Implications are drawn for G-20 policies and for its advice to EMs. JEL Code: F42, F53, G15 Acknowledgements:Some of these ideas were presented at the 10th Annual International G20 Conference at ICRIER and are forthcoming in a conference volume to be published by Springer. We thank the participants for useful feedback and Reshma Aguiar for secretarial assistance.