Former RBI Governor Rajan warns of rising private credit risks

Former RBI Governor Warns of Rising Risks in Private Credit

Former Reserve Bank of India Governor Raghuram Rajan has sounded a warning about excess liquidity building up in private credit globally, adding to growing concerns about the asset class.

• Private sector profitability and the success of AI have created a sense of market optimism that the lending boom will continue.
• Rajan cautioned that the current period of ample credit and central bank easing is when risks build up more.
• The finance professor at the University of Chicago urged investors to be more careful in their lending decisions.

Industry Executives Share Concerns

Finance industry executives have also voiced concerns following recent high-profile bankruptcies in the US, sparking fears of widespread credit issues.

• Jeffrey Gundlach, founder of DoubleLine Capital, warned that private credit could trigger the next financial crisis due to "garbage lending."
• JPMorgan Chase & Co. Chief Executive Officer Jamie Dimon also expressed concern, saying "when you see one cockroach, there are probably more."

Rajan's Key Points

Rajan highlighted the following points:

• The private credit sector is not subjected to stress tests and is less regulated than traditional bank lending.
• Lenders in the private credit sector do not have direct lines to the central bank when leverage and liquidity dry up.
• When lenders are free with their checkbooks, risks build up, and investors should be cautious.

Key Statistics

The $1.7 trillion private credit industry is introducing new layers of complexity and risk into the financial system.