Private credit faces liquidity risks if stress rises, says IMF report | Current Affairs | Vision IAS
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    Private credit faces liquidity risks if stress rises, says IMF report

    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

    Articles Sources

    https://www.business-standard.com/world-news/private-credit-faces-liquidity-risks-if-stress-rises-sa
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