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In recent years, banks have increasingly turned to private credit as a means of diversifying their revenue streams and expanding their lending portfolios. Once dominated by private equity firms, hedge funds, and specialized direct lenders, the private credit market is now seeing a growing presence of traditional financial institutions. But why are banks moving into this space, and what does it mean for borrowers and the broader financial landscape? In this blog, we’ll explore those questions as well as several AI-powered features in AXIS by AIO Logic that can help banks automate and optimize their private credit operations.

The Rise of Private Credit

Traditionally, the term “private credit” has referred to loans that are made by private entities rather than traditional banks. These loans are typically extended to mid-market companies, leveraged buyouts, and real estate ventures. The appeal of private credit lies in its flexibility, speed, and the ability to customize lending terms that may not fit within the rigid frameworks of traditional bank loans. However, the rapid growth of private credit – which has been fueled by borrowers seeking alternative financing options and investors looking for higher yields – has led banks to begin entering or expanding their existing presence in the market.

Why Are Banks Entering the Private Credit Market?

1. Regulatory Constraints on Traditional Lending

Banks operate under strict regulatory oversight, particularly in the wake of the 2008 financial crisis. Regulations such as Basel III have imposed higher capital requirements and stricter lending standards, making it more challenging for banks to engage in certain types of lending, especially to riskier borrowers. Private credit allows banks to circumvent some of these constraints by participating in credit markets through their asset management arms or strategic partnerships. This approach enables banks to tap into lucrative lending opportunities while managing their regulatory burdens effectively.

While commercial lenders of all types face significant regulatory burdens, banks are subject to even heavier burdens. In an effort to make it easier for lenders to meet compliance requirements, AXIS by AIO Logic includes several automated compliance features. For example, AXIS’s AI can ensure that lending processes adhere to regulatory requirements by automatically checking for compliance issues and generating necessary reports, reducing the burden on compliance teams. Additionally, AXIS can process and assess complex borrowing bases and borrower compliance certificates, and trigger alerts on any violations.

2. Attractive Yields and Fee Income

In a low-interest-rate environment, banks have faced pressure on their net interest margins. Private credit offers attractive yields compared to traditional loans and bonds, making it an appealing way for banks to boost profitability. By structuring deals with higher interest rates, origination fees, and other lending fees, banks can generate more revenue while diversifying their income streams. These higher yields help banks counteract declining profitability in other areas of lending, making private credit a key component of their strategy.

Thanks to its robust functionality, AXIS by AIO Logic allows lenders to customize loan structures to suit their needs, including interest rate structures. AXIS provides independent functionality for Current and PIK interest, as well as simple and compounding interest. In addition to fixed rates, AXIS allows users to use variable rate structures. For variable rates, users choose the desired index, index calculation logic (e.g., 1st of month, 30-day average, etc.), and set the margin to be added to the index rate. Once the parameters are set, the applicable rate calculation is entirely automated as all required data is integrated into AXIS.

3. Expansion of Client Offerings

For many banks, entering the private credit market is a strategic move to enhance their client relationships. Corporate clients, private equity sponsors, and institutional investors are increasingly looking for tailored financing solutions beyond what traditional bank lending can provide. By offering private credit options, banks can retain and deepen their relationships with these clients, ensuring they remain a one-stop shop for financial services. This expanded product suite also positions banks as more competitive players in the financial services industry, strengthening their ability to attract and retain key clients.

In addition to helping banks deepen their relationships by allowing them to efficiently offer private credit, AXIS can also help banks form strong relationships with clients through powerful collaboration features such as discussions, notes, and tasks – all of which are available in both the Customer and Broker portals. Additionally, features such as automated follow-ups help ensure that consistent communication is maintained between lender and borrower. As a result, lenders can build long-term relationships with borrowers and reduce the dependency on generating new clients.

4. Risk Diversification

Participating in private credit allows banks to diversify their loan portfolios, reducing their reliance on traditional corporate lending and consumer credit. By allocating capital to private credit, banks can spread risk across different asset classes and borrower profiles, enhancing their overall risk management strategy. This diversification not only reduces exposure to economic downturns but also ensures a more balanced approach to long-term financial stability.

In order to effectively analyze diversification and manage risk, lenders need strong portfolio analytics capabilities. To that end, AXIS offers a robust suite of automated portfolio reporting and analytics. In addition to the standard analytics suite, customized reporting and analytics can be created. To help lenders monitor the concentration of their portfolio, AXIS provides automated concentration testing. For this functionality, users can define testing metrics and thresholds, and AXIS will automatically trigger notifications if a threshold is breached or trending towards breach.

5. Competitive Pressure from Non-Bank Lenders

Non-bank lenders, such as private equity firms and credit funds, have gained significant market share in the lending space. Their ability to provide fast, flexible financing has put pressure on banks to adapt. By entering the private credit market, banks can compete more effectively with these alternative lenders and reclaim a portion of the lending business that has migrated away from traditional banking.

Through its sophisticated automations and powerful AI, AXIS helps lenders significantly enhance efficiency and reduce financing times. This starts from the early stages of the loan origination process, where AXIS automates the initial screening and validation of loan applications, reducing the time and effort required for manual processing. Broadly speaking, AXIS can improve efficiency at every stage of the loan lifecycle by up to 5x, including during the origination and underwriting processes. For borrowers, this translates into significantly quicker access to funds.

The Future of Banks in Private Credit

Looking ahead, banks are likely to continue expanding their presence in private credit as they seek new avenues for growth and profitability. As interest rates fluctuate and market conditions evolve, banks will need to strike a balance between risk and reward while navigating regulatory changes. Overall, the growing involvement of banks in private credit represents a shift in the financial landscape, where traditional and alternative lending are becoming increasingly intertwined. If your firm is seeking to expand its presence in the private credit market, feel free to contact us today to schedule an intro call and learn how AXIS can automate and optimize your private credit operations!