6 minute read 13 Sep 2022
Private credit market in India

Onwards and upwards: a positive outlook for private credit in India

By Bharat Gupta

EY India Turnaround and Restructuring Services Partner

A seasoned corporate turnaround professional with over 22 years of experience in managing stakeholders in publicly listed, private and family owned businesses.

6 minute read 13 Sep 2022

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Access insights from top private credit fund managers on the Indian private credit market.    

In brief

  • Private credit market in India continues to remain strong in H12022, witnessing an increase in deal size and new funds registering in India.
  • The private credit opportunity landscape is also evolving parallelly, with distress funding opportunities being replaced by bridge to IPO, funding of the capex cycle, etc. 
  • The private credit investor sentiment in India continues to be positive in the long-term. 

The private credit market in India is showing a healthy growth trajectory, bolstered by the growth of new players, regulatory measures by RBI and SEBI, and the setting up of the GIFT city initiative aimed to develop a framework comparable with international standards. The private credit sentiments in the country appear to be bullish over the next five years.

Strong fundamentals and regulatory developments continue to bolster the private credit market

Over the last six months, since we first published our report on the private credit market in India, there have been several conversations with existing and new players actively seeking to raise India-specific private credit funds. The list of players operating in the Indian market continues to increase. During H12022 itself, seven new credit funds have registered with Securities and Exchange Board of India (SEBI). While there is strong interest in the Indian markets, the changing opportunity landscape cannot be ignored. Opportunities in the distressed space are drying up, and there is an increased pressure on yields. The focus is shifting to providing customized and lower cost performing credit (and in some situation high yield credit) to finance growth and the new capex cycle. After a peak of distressed deals, several players are now going slow and are selective in the distressed asset acquisitions.  

Measures taken by the Reserve Bank of India (RBI), focus on resolving historical Non-Performing Assets (NPA), and slow credit growth have led to significant reduction in corporate NPAs throughout the banking system. The overall Gross NPA (GNPA) of scheduled commercial banks (SCBs) declined to 6.9% as of September 2021 and dropped to 6% as of March 2022 — lowest since 2016. The GNPA ratio of non-bank finance companies has decreased from 6.1% in March 2021 to 5.8% in March 2022. This broadly explains why private credit investors are pivoting toward special situation driven by post-COVID-19 economic growth, renewed capex cycle, bridge finance, credit portfolio acquisitions and other special situations.    

On the regulatory side, in January 2022, with a view to providing additional avenues to invest in stressed assets, SEBI introduced a framework for Special Situation Funds (SSF) —a sub-category under Category 1 AIF, which shall invest in special situation assets.  Each scheme of SSF shall have a corpus of at least INR 100 crore.  Offshore investors are no longer required to rely on asset reconstruction company framework to invest in stressed assets.  Further, SSFs can act as resolution applicant under IBC.  This regulatory development is likely to provide impetus to global investor community looking for investment opportunities in India, across the broader spectrum of secondary market for corporate debt. Further, realizing the important role of IFSC in the government initiative of addressing the issue of NPAs faced by banks, a framework has been prescribed for special situation funds to be launched by fund managers in IFSC. For the SSF framework to meaningfully take off, certain additional measures, such as extension of SARFAESI protection to SSFs, ability to aggregate loans from all lenders and clarity on taxation aspects will be necessary.

Separately, GIFT City, India’s first offshore International Financial Services Centre (IFSC), continues to make rapid strides with various initiatives being taken by the International Financial Services Centre Authority (IFSCA), the regulator at GIFT City. Specifically, the IFSCA’s new Fund Management Regulations issued in April 2022, seeking to regulate the fund manager and not the fund, now provide a framework comparable to Singapore and other global asset management centers for setting up of funds and is expected to give a significant boost to fund management activities in the GIFT City.   

Credit funds set up in the GIFT City raising foreign capital enjoy a beneficial tax regime in the form of exemption from gains on sale of debt securities, income from securitization trust and concessional tax rates on interest income.  This is in addition to a 10–year tax holiday and a favorable GST regime for the fund manager in GIFT City. New fund managers as well as existing managers launching their next fund can no longer ignore the GIFT City in deciding the location of the new fund.  

Despite credit growth of large borrowers remaining flat, the overall credit growth looks encouraging  

In accounts with exposure between US$12m toUS$125m and between US$125m toUS$630m, after multiple periods of outstanding credit de-growth, the half-year period ended 31 March 2022, finally saw an average credit growth of 6% and 12%, respectively. However large borrower segment (> US$630m) remains flat. An analysis of the balance sheets of the listed manufacturing companies also indicates that the leverage levels have decreased over the last two years.

Additionally, while new credit cycle takes off, credit growth for companies with credit rating below AA is much lower than for those companies with credit rating more than AA. This indicates risk aversion persisting in the system and is maybe a potential opportunity for private credit funds.

New fund setup and deal activity have picked up in the Indian private credit market

Seven credit funds have been registered with SEBI under AIF Category -2 during H12022. Further, as on 30 June 2022, at least three private credit funds have applied to SEBI for seeking AIF registration. In January 2022, The SEBI (Alternative Investment Funds) Regulations, 2012 have been amended to introduce the ‘Special Situation Funds’ as a sub-category under Category I AIFs. However, we did not find any registrations under the ‘Special Situation Funds’ category. 

Overall, based on publicly available information, fundraising of more than ~US$1.4b has been announced/ undertaken in India during H12022.

Deals amounting to more than US$1.7b+ have been successfully closed during H12022

Investor sentiment is bullish on the Indian market

In July 2022, we initiated a periodic survey among senior leaders of large Indian and global, high yield and performing credit funds to capture the pulse of the market and identify any pivots in overall direction of the key players. 

The survey revealed that manufacturing, retail, and real estate still constitute the largest share of deal flow witnessed by the private credit investors. Interestingly, stress related deal flow has given way to bridge funding to IPO transactions, driven by lower credit stress in credit markets and indicating a pivot in strategy from several investors. A revival in the capex cycle is also leading to higher deal flow toward private credit. 

Global monetary tightening is also impacting sourcing of funds to invest in India, and numerous market participants are finding it difficult to raise funds.

Amidst, tightening supply of dry powder due to global monetary tightening and reduced stress in Indian credit markets, and as new funds set up shop in India, competition for deals has increased. This may put pressure on yields and potentially lead to mis-pricing of risk.

Lastly, our Private Credit Senti-meter, indicates that private credit investors are more cautious in the near term (next one to two years) as compared to the longer time horizon of two to five years. None of the survey participants are bearish in either time horizon.

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Private credit in India is in its early stages of evolution and the future looks extremely bright. The developments, since our last report on private credit in 2021, have been positive. With new fund registrations and funds being raised, a positive trend in the market can be observed. Insights from a first-of -its- kind survey conducted amongst the top 25 private credit fund managers in India and their outlook over the next couple of years confirm that the sentiment toward the market is bullish.  

About this article

By Bharat Gupta

EY India Turnaround and Restructuring Services Partner

A seasoned corporate turnaround professional with over 22 years of experience in managing stakeholders in publicly listed, private and family owned businesses.