RBI cautions against surge in private credit between corporates and non-banks
private credit with a potential interconnectedness between banks and non-banks could create systemic risk in the financial system. In the latest edition of the financial stability report, the regulator said that a downturn in the credit cycle could lead to sharp losses in such an asset class.
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“The rapid growth of private credit, increasing interconnectedness with banks and NBFIs and opacity can create vulnerabilities that could become systemic,” the RBI said. “Private credit is yet to be tested in a credit cycle downturn and sharp losses could lead to a loss of confidence in the asset class as a whole.”
Private credit is provided by non-bank lenders to corporates on a bilateral basis, has grown four-fold over the last ten years.
It has emerged as a major source of corporate financing among middle-market firms that have low or negative earnings, high leverage, and lack of high-quality collateral.
“Private credit offers flexibility, quick execution and greater confidentiality,” the regulator said. “From lender's perspective, returns on these investments, though riskier, are consistently superior during prolonged period of low interest rates, attracting investors to these types of investments.”
Private credit is not constrained by financing from banks that are subject to prudential regulation and supervisory oversight, or finance raised in capital markets subject to market discipline and price discovery, it
