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The rise and risk of private credit – Opinion News
By Amol Agrawal
Financial systems around the world continue to find ways to create new types of financial intermediaries. The latest entry into this club of financial intermediaries is “private credit”.
What is private credit (CP)? Research by the International Monetary Fund (IMF) defines PC as “non-bank corporate credit provided through bilateral agreements or small ‘club deals’ outside the domain of government securities or commercial banks”. Finance buffs will immediately relate PC to private equity or PE, where similar “club deals” provide companies with equity capital. In fact, a non-bank company specializing in private finance can offer both PE and PC.
The PE and PC business started 30 years ago. However, PE recovered early as equity markets remained stable. After the global financial crisis (GFC), regulations began to become more stringent in public banking and equity markets also became unstable. Investors and recipients of funds began to gravitate towards private credit. Between 2008 and 2020, the PC Marketplace grew five times, from US$0.4 trillion to US$2 trillion.
An important lesson from the GFC is to be aware of all this exponential growth in financial market segments, especially in the non-banking category. There is a tendency in financial markets to migrate to the new idea, ignoring all the risks. Even more worrying is how risks from one segment spread to another in the blink of an eye. The GFC itself showed how fires in the housing finance market spread throughout the financial system. There’s a simple lesson for PC markets. Although the public credit (banking) system is designed to disclose information to regulators, CP, by definition, is a private matter. Information asymmetry is at the heart of all financial crises where the regulator and the public do not know what is happening behind the scenes.
The IMF investigation warned that PC has become the new public risk in the financial city. CP involves highly leveraged interconnected entities that may pose risks to financial stability. Banking regulators should pay attention to the growing risks of CP and review their regulatory systems to include such activities.
Where India Does it fit into the discussion? In India, we have had non-banking financial companies (NBFCs) that have provided a form of CP. However, the Reserve Bank of India (RBI) and other regulators have made constant efforts to regulate NBFCs. PC, as of now, is seen as a collection of unregulated pools of capital that provide credit to companies. In fact, PC exists due to regulatory arbitrage as it does not require NBFC license to extend credit to interested entities.
PC entered India economy through something called alternative investment funds (AIF). AIF is defined as a “private investment vehicle that collects funds from sophisticated investors, whether Indian or foreign, to invest them in accordance with a defined investment policy for the benefit of its investors”. AIFs come under the purview of the Securities and Exchange Board of India (Sebi).
In December 2023, the RBI issued a notification stating that entities regulated by it (banks and NBFCs) were investing in AIFs. These AIFs, in turn, provide private credit to companies, which have direct exposure to loans to regulated entities. The RBI has asked all its regulated entities to liquidate their AIF holdings. Entities that cannot liquidate will be required to make 100% provisions on any such investments.
The case of India shows how regulatory arbitration works even within regulated entities. Entities regulated by the RBI first invested in AIFs regulated by Sebi, which in turn invested the funds in the same companies that had lending exposure to the regulated banks. It is this very complex maze of interconnected transactions between financial entities that concerns regulators. A bad transaction has the potential to spread throughout the financial market. That said, the RBI and other regulators would have to be on constant vigil to understand the new forms of linked loans and the risks associated with them.
In addition to the RBI, we regularly see other central banks and regulators studying and regulating PC markets.
In short, CP has emerged as a new form of financial intermediation that has the potential to threaten financial stability. Although the PC looks new, in reality it is like old wine in a new bottle. Indian financial history has seen many intermediaries, from traditional moneylenders and Indian banks to Presidential Banks and Indian Equity Banks. Nationalization converted private banks into public sector banks that had different objectives. The 1991 reforms created new private sector banks and local banks. In 2013, the RBI licensed small finance banks and payment banks. Technology has led to the creation of several fintechs. The RBI classifies nearly 10,000 NBFCs into around 10 categories. Other countries will have their own history of financial intermediaries.
It is extremely fascinating to observe how the financial system resembles a living world that continues to evolve and create new intermediaries. Despite a lot of financing and many financial intermediaries, there are still cases of financial exclusion and the search for cheaper financing, leading to the creation of new intermediaries. PC is the latest addition to the list.
Amol Agrawal, the author teaches at the University of Ahmedabad
Disclaimer: Opinions expressed are personal and do not reflect the official position or policy of FinancialExpress.com. Reproduction of this content without permission is prohibited.
The spotlight next week will shift somewhat to the Federal Reserve’s second-quarter earnings season and monetary policy. Market watchers will be treated to results from several major names, including Dow 30 components Goldman Sachs (GS), UnitedHealth (UNH), Johnson & Johnson (JNJ) and American Express (AXP), along with streaming giant Netflix (NFLX).
The Fed will still attract some attention as investors will be eager to hear from a packed lineup of central bank speakers just before the policy meeting lockout period.
In terms of the economic calendar, after fifteen days of labor market and inflation indicators, activity data will gain momentum in the form of the latest retail sales and industrial production reports.
Earnings Highlight: Monday, July 15 – Goldman Sachs (GS) and BlackRock (Black). See the full earnings calendar.
Earnings Highlight: Tuesday, July 16 – UnitedHealth (UNH), Bank of America (BAC), Progressive (PGR), Morgan Stanley (IN), PNC Financial (PNC) and JB Hunt Transport (JBHT). See the full earnings calendar.
Earnings Highlight: Wednesday, July 17 – Johnson & Johnson (JNJ), US Bancorp (USB), Morgan Children (KMI), United Airlines (UAL) and Ally Financial (ALLY). See the full earnings calendar.
Earnings Highlight: Thursday, July 18 – Netflix (NFLX), Abbott Laboratories (ABT), Black stone (BX), Domino’s pizza (ZDP) and Taiwan Semiconductor Manufacturing (TSM). See the full earnings calendar.
Earnings Highlight: Friday, July 19 – American Express (AXP), Halliburton (THANKS) and Travelers (VRT (return to recoverable value)) See the full earnings calendar.
IPO Observation: Hospital and healthcare clinic operator Ardent Health Partners (TARDT), insurance service provider Twfg (TWFG) and the biotechnology company Lirum Therapeutics (LRTX) are expected to price their IPOs and begin trading next week. The analyst quiet period ends at Rectitude (RECT) to free up analysts to publish ratings.
Police cars outside the residence of Thomas Matthew Crooks, the suspected shooter at a Trump rally on Saturday, investigate the area in Pennsylvania. Following the incident, one rally attendee was killed, two rally attendees are in critical condition and Donald Trump suffered a non-fatal gunshot wound. The shooter is dead after being shot dead by the United States Secret Service. (Photo by Kyle Mazza/Anadolu via Getty Images)
Investors will initially favor traditional safe-haven assets and may lean toward trades more closely tied to former President Donald Trump’s chances of winning the White House after he survived an assassination attempt, according to market watchers.
“There will undoubtedly be some protectionist or safe-haven flows into Asia early this morning,” said Nick Twidale, chief market analyst at ATFX Global Markets. “I suspect gold could test all-time highs, we’ll see the yen being bought and the dollar, and flows into Treasuries as well.”
Early market commentary suggested Trump’s shooting at a rally in Pennsylvania on Saturday could also prompt traders to increase his likelihood of success in the November election. His support for looser fiscal policy and higher tariffs is generally seen as likely to benefit the dollar and weaken Treasuries.
An indicator of market sentiment heading into the weekend: Bitcoin surged above $60,000, likely reflecting Trump’s pro-crypto stance.
Other assets positively linked to the so-called Trump trade include stocks of energy companies, private prisons, credit card companies and health insurers.
Traders will also be closely watching market measures of expected volatility on Monday, such as those in the tariff-sensitive Chinese yuan and Mexican peso, which have begun to price in the U.S. vote.
Trump said he was shot in the right ear after a shooting at his rally. His campaign said in a statement that he was “fine” after the incident, which prompted him to rush off the stage.
“Currencies will be the first major market on Monday in Asia to react to the weekend’s shots. There’s potential for extra volatility, and getting a clear reading could be especially difficult because liquidity will be hurt by Japan’s national holiday,” said Garfield Reynolds, Asia team leader for Bloomberg Markets Live.
Strategists had already expected a volatile run-up to the election, particularly as Democrats are still agonizing over President Joe Biden’s candidacy after his poor performance in last month’s debate raised questions about his age. Investors were also grappling with the possibility that the election could end in a drawn-out dispute or political violence.
But there is little precedent for events like those in Pennsylvania. When President Ronald Reagan was shot four decades ago, the stock market plunged before closing early. The next day, March 31, 1981, the S&P 500 rose more than 1% and benchmark 10-year Treasury yields fell 9 basis points to 13.13%, according to data compiled by Bloomberg.
Bond investors should pay particular attention as the attack is likely to boost Trump’s election chances and ultimately lead to concerns about the fiscal outlook, according to Marko Papic, chief strategist at California-based BCA Research Inc.
“The bond market must at some point become aware of President Trump’s greater chances of winning the White House than any of his rivals,” Papic wrote. “And I continue to believe that as his chances increase, so too must the likelihood of a bond market revolt.”
Kyle Rodda, senior financial markets analyst at Capital.com, said he was seeing client flows into Bitcoin and gold following the shooting.
“This news marks a turning point in American policy norms,” he said. “For markets, it means safe-haven trades, but more tilted toward non-traditional safe-havens.”
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Jio Financial share price: Should you buy this Reliance group stock on Monday ahead of Q1 FY2024 results?
Q1 2024 Results: Jio Financial Share Price will be in focus on Monday as the Reliance Group company has a fixed board meeting on July 15, 2024 to consider and approve the company’s unaudited standalone and consolidated financial results. Trust Group company informed about the Q1 2024 Results date on Wednesday last week via an exchange filing. According to stock market experts, Jio Financial Services Limited is poised to deliver impressive Q1 results for FY25 on solid operating income. They have forecast a healthy QoQ PAT for the company in Q1 FY25.
Jio Financial Services News
Speaking on the Jio Financial Services Q1 2024 results, Manish Chowdhury, Head of Research, StoxBox, said, “We believe Jio Financial Services is poised to deliver impressive results in Q1FY25 aided by its operating income, which is likely to show robust growth driven by strong investment income, which in turn should lead to healthy PAT growth on a sequential basis. Jio Financial Services continues to make strategic moves such as launching digital products and expanding its ecosystem, with a clear focus on future growth. The company has announced plans to introduce products for lending against stocks and mutual funds, leveraging Jio’s large user base, which could be a significant growth driver in the coming quarters.”
“Furthermore, with the NBFC receiving RBI approval to become a primary investment company, Jio Financial Services is well-positioned to unlock value from its investments. Overall, we expect the company to report robust numbers in the upcoming quarter,” the StoxBox expert added.
Jio Financial Stock Target Price
Speaking about the technical outlook of Jio Financial share price, Ganesh Dongre, Senior Manager, Technical Research at Anand Rathi, said, “Jio Financial Services share price is poised to make a fresh high at the ₹260 apiece level. If the stock breaks above this mark, the Reliance Group stock could make a fresh high by touching the ₹290-₹295 zone. Hence, those with Jio Finance stock in their portfolio are advised to stick to the script by keeping a stop loss at ₹205. If the stock breaks above ₹260 decisively, then one can upgrade the stop loss at ₹240 for the near-term target of ₹295.”
On the advice to new buyers regarding Jio Financial stock, Ganesh Dongre said, “New buyers are advised to wait for the breakout. Once the stock breaks above ₹260, one can buy this Reliance Group stock at the short term target of ₹295, keeping a stop loss of ₹240 apiece.”
Disclaimer: The views and recommendations made above are those of individual analysts or brokerage firms, and not of Mint. Investors are advised to consult with certified experts before making any investment decisions.
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