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Posted 22 Apr 2024

2 min read

  • IMF’s Global Financial Stability Report outlines the critical role of private credit in debt markets and points to possible risks arising out of it.

 

  • Private Credit (PC): It is non-bank corporate credit provided through bilateral agreements or small “club deals” outside the realm of public securities or commercial banks.
    • It excludes bank loans, and funding provided through publicly traded assets such as corporate bonds, etc.

 

  • Significance of PC
    • Access to credit: For companies deemed too risky/large for commercial banks and too small for public markets.
    • Customized lending terms: To provide flexibility in times of stress.

 

  • Threats to financial stability due to PC
    • Regulations: PC markets are comparatively less regulated and opaque to stakeholders.
    • Interconnectedness: The PC value chain is a complex network that includes leveraged players ranging from borrowers to funds to end investors posing the risk of spillovers.
    • Borrower’s vulnerabilities: PC caters to mostly small and mid-size borrowers with higher leverage, implying more risk, particularly in a stagflation scenario.

 

  • Policy Recommendations
    • Robust supervisory and regulatory approach to PC funds, institutional investors, and leverage providers.
    • Strengthen regulation on valuation independence, governance, and frequency.
    • Strengthen cross-sectoral and international regulatory cooperation.
  • Tags :
  • IMF
  • Private credit
  • Global Financial Stability Report
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