MUMBAI: The Reserve Bank has warned of the rapid growth of private credit, which has jumped over four-fold in the past decade, due to their growing interconnectedness with banks and non-banking lenders, which can create vulnerabilities.
The report said private credit is essentially provided by non-bank lenders to businesses on a bilateral basis and has grown four-fold over the past 10 years, emerging as a major source of corporate financing among middle-market firms that have low or negative earnings, high leverage, and lack of high quality collateral.
In the forward to the report, the governor Shaktikanta Das said balance of risks for global financial stability has improved since the past issue of the financial stability report in December 2023. The risks of a hard landing for the global economy have also abated, even though progress in disinflation has been slow and world trade continues to face fragmentation and realignment of supply chains.
The global financial system however faces major risks which include alarming levels of public debt, stretched asset valuations, increasing economic and financial fragmentation, frequent geopolitical conflicts, and risks associated with financial technologies and climate change, Das said.
However, despite all these headwinds, the domestic economy is exhibiting strength and resilience, with strong macroeconomic fundamentals and buffers. Economic activity is expanding at a steady pace, with the financial system being stronger and more vibrant than what it was before the onset of the recent period of crises.
And he credited the same for the approach of balancing growth and stability, with willingness to take proactive and prudent actions to prevent the accumulation of risks, is promoting long-term resilience and stability of the financial system.
“It is vital that we consolidate these gains and nurture a financial system that is future ready and supports the needs of our growing economy. Furthermore, as our contribution to global growth rises which was 18.5 percent in 2023. our financial system must also modernise and deepen as it prepares to go more global,” Das said.
The results of stress tests demonstrate that capital levels of banks and non-banks will remain above the regulatory minimum even under severe stress scenarios. Even in this stable environment, we are watchful of the emerging risks, including those from cyber hazards, climate change and global spillovers.