Former SEBI Chief U K Sinha Warns Against Unchecked Growth in Private Credit
Former SEBI chairman U K Sinha has sounded a warning against the unchecked growth in private credit, reminding the alternatives sector that the lending is being made to a set of borrowers who are deemed to be unfit by banks.
The Risks of Private Credit
Sinha, who demitted SEBI office in 2017 after an over six-year stint at the helm, said there is also a need to increase the support given by the venture capital funds to the growing startup ecosystem, underscoring that an economy like ours requires the support. Making it clear that he has nothing against private credit, Sinha said he would like to advice some caution given the ‘rush’ towards it.
‘Whom are you (the industry) providing the private credit? You are providing it to people who have for some reason not been able to get the bank credit, who for some reason have been found not to be fit, to be worthy of the bank credit,’ Sinha said, addressing a CII event on Alternative Investment Funds. The career bureaucrat-turned-regulator who is now involved with the corporate sector said some non-banking finance companies (NBFCs) have faced problems with their private credit exposures recently.
Systemic Risk Concerns
In the US, there have been flags on the contagion from the private credit market flowing into the banking sector as well, he said. ‘This (private credit) is an area of business which can provide you some early returns, some quicker returns. I am sure the government and the regulator would be conscious of the fact that it should not reach a level, it should not grow in a manner that it creates a systemic risk,’ Sinha hoped.
Sinha was quick to add that he is not in the camp which feels that a systemic issue is brewing or has arrived, but added that the remarks are aimed at creating awareness of potential problems that may arise if the sector grows rapidly. For more information on Systemic Risk, you can visit our website.
Job Creation and Alternative Investment Funds
Meanwhile, he said that the government is very aware about the need to create jobs and hinted that cash transfers to women, old people and matriculates by all political parties are driven by the same. However, the government cannot even provide 5 per cent of the jobs in an economy like ours and the private sector will have to take the lead on the same, he added.
He said only 15 per cent of AIFs’ funding comes from domestic sources and the same needs to increase going ahead, just like it has in the case of Mutual Funds. Speaking at the same event, Sebi’s executive director Ruchi Chojer said AIFs are emerging as a key pillar of India’s economic growth and added that purpose, trust and patient capital will be defining aspects for us going ahead.
Mentioning the move to allow PF funds to invest in AIFs, Chojer promised all the help from Sebi to facilitate the same. You can also learn more about Alternative Investment Funds and their role in the Indian economy.
Conclusion
In conclusion, the growth in private credit is a trend that needs to be watched carefully, and regulators and investors must be aware of the potential risks involved. As the Indian economy continues to grow, it is essential to ensure that the growth is sustainable and does not create systemic risks. You can stay updated on the latest news and trends in the Indian financial market by visiting our website and learning more about Indian Stock Market and Investing in India.