Clock Is Ticking as ASIC Warns Australian Private Credit Sector Over Poor Lending Standards

The Australian Securities and Investments Commission has intensified its scrutiny of the nation's rapidly expanding private credit sector, warning that a failure to improve lending standards could lead to significant investor fallout. ASIC commissioner Simone Constant delivered the warning, emphasizing that the clock is ticking on whether broader credit stress will emerge across Australia.

Private credit, which encompasses any lending conducted outside the traditional banking sector, has experienced substantial growth domestically, with estimates pointing to a 500 percent expansion over the past decade. However, Ms Constant stated that governance, controls, and underwriting standards have not kept pace with this rapid accumulation of assets.

Highlighting the growing vulnerabilities in the market, the recent collapse of New South Wales property developer Bathla exposed financial exposures among private lenders. CVS Lane First Mortgage Fund and CVS Lane Property Finance Fund had exposure to Bathla across nine separate loans, underscoring how private lenders can become deeply entangled with financially vulnerable construction and property companies.

ASIC has spent the past 18 months scrutinizing public and private markets through detailed reviews and discussion papers. According to findings from ASIC reviews of 28 funds, only four published information regarding the interest rates or ranges charged to borrowers. Furthermore, less than half maintained detailed, written credit, impairment, and default management policies.

The regulatory reviews also revealed that most funds lacked adequate separation between the personnel approving loans and those independently assessing their ongoing performance and value. Among wholesale funds, only two conducted stress testing as part of their liquidity risk management practices. Additionally, an assessment of global private market reporting practices found that Australia lags behind comparable international jurisdictions such as Singapore, the United States, the United Kingdom, and Switzerland.

Global pressures are also weighing on sentiment, particularly in the United States, where alternative investment markets face significant strain. Investment bank Morgan Stanley recently curbed redemptions at its nearly $US7 billion private credit fund after investors requested withdrawals exceeding double the amount the fund was willing to repurchase. Global funds under management have quadrupled over a similar timeframe.

Domestically, millions of Australians hold exposure to private credit either directly through fund investments, shares in credit fund managers, or via their superannuation funds. Christian Ryan, executive chairman of FinCap, told sources that a broad, rapid exit of cash from the sector remains possible, noting that some local funds have begun limiting redemptions preemptively to prevent investor panic and guard against negative market sentiment.

Despite these concerns, Reserve Bank governor Michele Bullock offered a measured perspective during a recent federal parliamentary hearing, indicating that Australian private credit risks are largely contained. Ms Bullock noted that non-bank lending activity plays a vital role in providing financing for greenfield construction and suggested that any deterioration in lending standards would primarily impact direct investors rather than signaling a broader systemic banking issue.

ASIC has previously challenged the private credit sector to elevate its standards ahead of a 2027 target, which is now just months away. With stress fractures beginning to emerge, Ms Constant signaled that the regulatory body is moving beyond warnings and that the sector should prepare for potential enforcement action.

Industry participants and associations are being urged to adopt compliant, good-practice standards and evaluate their operations against ASIC's established principles of private credit management. Ms Constant stressed that funds must proactively examine their practices before their investors decide to do so themselves.