Private credit: Are we prepared for a US-centric crisis that could put financial stability at risk in India?

There is usually a lull before a storm. Financial markets often mimic such natural phenomena, displaying blink-and-miss signs of disturbance before a full-blown crisis. In many advanced economies, nascent signals of trouble have arisen that could—if left unaddressed—hit global finance and send several players to the sick bay.

In the eye of the swirl lies the US market for private credit—in which private equity (PE) firms deploy private investor funds, leveraged with loans from various sources, to lend outside the formal banking system to sundry borrowers. Investors have been queuing up with redemption requests at the doors of PE funds—especially those feared to have overlent to AI-rattled software businesses. To honour these, firms need to run down their loan books, which may not always be possible; some players have resorted to extra borrowings to give investors their money back.

While this has compounded the crisis, many firms—such as Ares, Apollo and Blackrock—have been forced to limit redemptions.This has all the typical signs of a gathering maelstrom, especially the investor rush to withdraw funds and affected firms taking on fresh debt to repay what they owe. Things may reach a breaking point for many reasons, but the main issue for us is whether a similar crisis might afflict Indian financial markets. In India, annual PE deals are estimated in a range of $30-40 billion, while assets under PE management are thought to be thrice as much or more.

The local market is not huge, and may even seem tiny in contrast with America’s, but global PE firms operate in India and we must stay alert for potential contagion effects that may disturb financial stability here. Unfortunately, this risk is not trivial. The Reserve Bank