Former RBI Governor Raghuram Rajan warned of growing risks in the global private credit market, citing excess liquidity and a perception of an unending lending boom. He emphasised that periods of ample credit and potential Fed rate cuts are when risks accumulate, urging increased caution.

Raghuram Rajan, ex-RBI governor, warns of rising risks in global private credit market

Former RBI Governor Warns of Growing Risks in Global Private Credit Market

Former Reserve Bank of India Governor Raghuram Rajan has raised concerns over growing risks in the global private credit market, highlighting the potential dangers of excess liquidity.

Key Factors Contributing to Market Perception

Strong private sector profitability
Wave of AI success stories

Rajan pointed to these factors as contributing to a market perception that the lending boom will continue unabated, despite warnings from other finance executives.

Rajan's Warning: Risks Build Up During Excess Liquidity

“We are in a period where there’s ample credit, and the Fed is cutting,” Rajan said. “That is the time when the risks build up more. So this is a time to be really more careful.”

Broader Concerns in the Finance Industry

Rajan’s warnings mirror broader concerns among finance executives following several high-profile bankruptcies in the US, which have stoked fears of wider credit troubles.

The $1.7 Trillion Private Credit Industry

The private credit industry, less regulated than traditional banking and largely untested under stress scenarios, is increasingly being scrutinised for introducing new layers of complexity and risk into the financial system.

Expert Warnings and Concerns

Jeffrey Gundlach, founder of DoubleLine Capital, warned of the potential for private credit to trigger the next financial crisis.
JPMorgan CEO Jamie Dimon compared the industry to a potential infestation of cockroaches, saying “When you see one cockroach, there are probably more.”

Lack of Oversight and Access to Central Bank Support

Rajan noted that the private credit sector operates with less oversight than traditional banks and has not undergone formal stress tests.

“Unlike banks, they don’t have direct access to the central bank” during periods of high leverage or liquidity shortages, he added.

Conclusion

Rajan's warnings serve as a reminder to be cautious in times of excess liquidity, highlighting the potential dangers of the private credit market.

“It’s when lenders are free with their checkbooks that, as you know, all the risks build up, and that’s the time to be a little more cautious,” he said.

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