Central bank reportedly concerned that booming private sector ill-prepared for creeping market downturn
The Reserve Bank of Australia (RBA) is preparing for a rise in defaults across the private credit sector, according to an AFR report citing documents obtained under Freedom of Information laws.
Australia's central bank is reportedly concerned about how concentrated some fund managers' property and construction loan books have become.
The documents, which include a December 2025 internal review of non-bank lenders and a May 2026 memo from the RBA's financial stability department, paint a more anxious picture of the private credit sector than the RBA has previously let on in its public commentary.
The May memo concluded that default rates are rising and are expected to keep climbing through the rest of 2026.
Sevenfold growth in a decade
According to the RBA's own figures, the Australian private credit market has expanded from around $35 billion in assets under management in 2014 to as much as $250 billion today. That growth has coincided with banks becoming increasingly willing to extend credit lines to private credit funds themselves, a form of indirect exposure the RBA is watching closely.
Analysis commissioned by RBA assistant governor Brad Jones, released as part of the FOI documents, estimated Australian banks' direct exposure to local private credit funds at up to $12 billion.
Once offshore non-bank lending exposures are factored in, that figure rises to $162 billion – about 3% of the total assets held by Australian banks, and dominated overwhelmingly by exposure to non-resident lenders rather than domestic funds.
Concentrated bets on property and construction
The RBA's review flagged that Australian private credit funds carry heavy, concentrated exposure to real estate and construction, an issue the Australian Securities and Investments Commission (ASIC) has also identified in its own supervision of the sector.
The central bank warned that a housing price downturn or a sustained rise in construction costs could trigger losses that ripple more widely than the sector's size might suggest, given how tightly its lending is clustered around a handful of property-related niches.
That concentration risk sits alongside a separate worry: contagion from offshore. The RBA's documents noted that a severe stress event at a large overseas private credit provider could spill over into the Australian market, and that well-funded international players could also expand rapidly into Australia in response, amplifying whatever shock originated abroad.
The Bank for International Settlements (BIS) flagged similar signs of stress in private credit globally last month, and central banks in Europe and the UK have both conducted their own reviews of the sector's risks.
Private credit funds typically carry less leverage than banks and are shielded from sudden mass withdrawals by redemption limits built into most fund structures, a feature that could theoretically make the sector's growth a net positive for financial stability overall.
But the RBA's own analyst flagged uncertainty about whether that protection holds up under extreme stress – a caveat that matters given the redemption "gatings" already seen at major US private credit managers Ares and Apollo over the past year.
Private credit "on notice"
In September 2025, ASIC chair Joe Longo said the private credit sector needed to lift its practices to protect confidence and market integrity, warning the regulator "would not hesitate to intervene where progress falls short."
Longo said, "Enhanced standards are needed to lift practices across the sector. They will help promote confidence, improve market integrity and empower investors to make informed decisions.
"When an industry agrees on clear standards, it shows a strong commitment to doing things right and we welcome the industry's commitment to leading this work. They need to act decisively."
Between October 2024 and August 2025, ASIC examined 28 funds – from majors like Metrics Credit Partners and La Trobe Financial to global entrants like KKR and smaller local managers – and found funds reporting default rates of 0-6% were using inconsistent definitions of "default" and "loan security," alongside fee structures opaque enough to obscure the true cost to investors. ASIC flagged fees, margin structures and conflicts of interest in wholesale funds as its 2026 focus.
In January 2026, ASIC warned retail investors were accessing complex private credit products for as little as $2,000, often via superannuation platforms, raising the odds of mis-selling and poor disclosure. Longo framed it as one of several priorities meant to protect trust and confidence across the financial system.
Last month, ASIC put the private credit sector “on notice”, warning that tighter liquidity, emerging borrower stress and signs of credit deterioration “are testing valuations, governance and investor disclosures”.
Speaking to MPA recently, Royden D'Vaz, general manager of private credit player Assetline, acknowledged that "regulators are watching the private credit space more closely." However, "that's not a deterrent; it's validation."
D'Vaz believes the risk is most pronounced at the smaller end of the market. He said: "Established private lenders like Assetline who have a solid track record and institutional backing tend to have more sophisticated and diversified funding structures.
"By contrast, smaller or newer private lenders often rely on simpler and more limited funding sources, such as personal or partner capital, joint venture agreements or high-yield capital. Because their funding base is narrower and more relationship-driven, they may face liquidity constraints and offer smaller loan sizes or higher rates to manage risk and maintain margins."
George Lyall (pictured), general manager at Millbrook Group, welcomed the increased scrutiny. He said: "The RBA's concerns reinforce the need for strong governance across the private credit sector. We welcome regulatory oversight that builds investor confidence and promotes consistent standards. Private credit is here to stay, and it's up to all participants to uphold high standards that support a sustainable and trusted industry."
