How private credit is evolving in India

We examine how private credit is emerging as a strong structural opportunity in India.

Private credit – a global perspective

Globally, investors are diversifying their portfolios and seeking better returns by moving from traditional asset classes towards alternative asset classes. Private credit now accounts for about 12% of global private capital assets under management. With abundant liquidity, post the pandemic, money managers are scouring global markets for yields, and a lot of these funds are hitting the shores of emerging markets, including India.

Private credit has witnessed an annual growth in AUM of ~10% over the last 11 years. The North American and European markets constitute 90% of the total private credit AUM. The global private credit AUM in 2020 aggregated to US$848 billion (as a reference point, the AUM on the Private Equity markets is approximately US$3.9 trillion).

Our research indicates that not all jurisdictions are equally favorable for creditors. Variations between jurisdictions can explain why certain countries such as the US and the UK rank ahead of others in attracting private credit. The differences between jurisdictions can be on account of power of creditors, secondary trading of debt, stable currency and favorable regulatory policies. These are essential prerequisites for the growth of private credit.

Private credit in India – a structural opportunity

India offers a large structural opportunity for private credit investors. Post a spate of bad loans, traditional lenders have become risk-averse while NBFCs are recovering from a liquidity crisis that engulfed them in 2018. This has left a large void for private credit providers to capture. Credit enforcement, bolstered by the introduction of the creditor-friendly “Insolvency & Bankruptcy Code” supported by dedicated tribunals, has provided private credit with a great start in India. A series of economic and administrative reforms working towards a more business-friendly environment, coupled with the push for growth, provide the ideal platform for private credit to grow to potential. With abundant liquidity, post the pandemic, money managers are scouring global markets for yields and a lot of these funds are hitting the shores of emerging markets, including India. 

India will continue to offer opportunities across 12% – 24% IRR range as multiple dynamics are at play. Our estimate of the performing credit opportunity (Expected IRR 12% – 18%) range from US$39b to US$89b over the next 5 years. Stressed asset investment opportunities (emanating from the existing stock of unresolved NPAs and fresh credit defaults) and special situation opportunities could be worth around US$25b over the next 5 years. These stressed assets and special situation opportunities would attract private credit funds looking for higher yields (Expected IRR 18% – 24%).

Private credit – insights for operating in India

Fund setup and regulatory environment

Given the paucity of capital required to resolve stressed assets, the regulators have actively modified existing and developed new regulations to welcome private credit. Principally there are two types of structures funds can choose for investing in India: 

1. Offshore investment routes (FDI, FVCI, FPI and ECB)
2. Onshore vehicles (NBFC, AIF, ARC)

Each of the foreign investment routes come with pre-conditions as well as pros and cons. Choice of investment route depend on several factors which we have discussed in our whitepaper in detail. Getting the right structure/vehicle(s) is critical to doing deals in the Indian market. Each of these has it's regulatory, and tax conditions/nuances, and these are dynamic.