- Former RBI Governor Raghuram Rajan warned of excess liquidity risks in global private credit markets
- He highlighted that ample credit and Fed rate cuts increase financial risk build-up
- Recent US bankruptcies have raised concerns about the $1.7 trillion private credit industry's risks
Former Reserve Bank of India Governor Raghuram Rajan warned about excess liquidity building up in private credit globally, the latest voice to weigh in on rising risks in the asset class.
Private sector profitability and a wave of AI success stories have created a sense in the market that the lending boom will continue for a long time, said Rajan, a finance professor at the University of Chicago.
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“We are in a period where there's ample credit, and the Fed is cutting,” he said, speaking at the Clifford Capital Investor Day event in Singapore on Tuesday. “That is the time when the risks build up more. So this is a time to be really more careful.”
Rajan's comments echo concerns from finance industry executives following recent high-profile bankruptcies in the US. Those collapses sparked fears of widespread credit issues and growing worry that the $1.7 trillion private credit industry could be introducing new layers of complexity and risk into the financial system.
Last month, Jeffrey Gundlach, founder of DoubleLine Capital, warned that the next financial crisis will be triggered by private credit as “garbage lending” renders many assets too toxic to touch. And JPMorgan Chase & Co. Chief Executive Officer Jamie Dimon has also voiced concern.“When you see one cockroach, there are probably more,” he said in October.
The private credit sector has not been subjected to stress tests and is less regulated than more traditional bank lending, Rajan said. “Unlike the banks, they don't have direct lines to the central bank” when leverage and liquidity dry up, he said.
“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,” Rajan said.
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