Sun | Oct 21, 2018

A warning for bullish BRIC

Published:Wednesday | August 13, 2014 | 12:00 AM

While noting that low levels of credit in the G7 economies was a primary contributor to the stifling of business, a recent review of global credit availability is also warning of too much money being poured into ventures in BRIC nations, leading to the possibility of high levels of uncollectible debt.

The August 2014 study, Trends in Global Lending in the Post Financial Crisis Era, done by international accounting network UHY, finds that the BRIC economies - Brazil, Russia, India, China - have all seen significant increases in lending since the financial crash. Brazil has seen a jump in bank lending to the private sector of 115 per cent since 2009, while lending in China has risen by 112 per cent.

"While this means that businesses have seen a bigger improvement to access to credit compared to most Western economies, the worry now is that bank lending has expanded too much," the UHY report said.

Comparatively, the study reveals that bank lending to the private sector in the G7 - Canada, France, Germany, Italy, Japan, the United Kingdom and the United States - has stagnated in the last year, increasing by just 0.1 per cent in real terms.

UHY notes that the continued slump in lending in developed economies has hit smaller businesses the hardest, as bigger companies have been able to access the bond markets to fill the gap in funding.

"In the UK, lending through corporate bonds has increased by 35 per cent over the last four years, while in the US it has increased by 44 per cent, and in France by 35 per cent. This leaves small businesses in many countries still in the grips of a 'hidden credit crunch,'," the report noted.

Among BRIC nations, the average lending growth across all four countries in 2013 was 18.7 per cent, it said, while in China, lending expanded by 21 per cent in 2013, with moderate inflation of 2.6 per cent.

UHY notes that China's shadow banking system has also expanded significantly, "providing huge volumes of credit, frequently outside the supervision of the central bank."

The study also describes a "two-speed world, with too little credit in the West, condemning some parts of the economy, such as small companies, to below trend growth" and an "excessively fast expansion of credit in parts of the emerging markets - which could result in increase in non-performing loans and a subsequent downturn in credit availability."

And it notes that while the vast majority of businesses are looking to use bank lending to deal with cash flow problems, a growing proportion also want to use it for acquisitions or to make capital investments.

At the same time, concerns over the sustainability of debt levels building up in some emerging markets - notably China - are growing, "particularly since the fall-out from any downturn in the credit cycle there could have far reaching consequences," the report said.