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

Evolving regulations 

Following the introduction of the Insolvency and Bankruptcy Code, 2016 (IBC), 6,571 cases were admitted, leading to the rescue of corporate debtors in 2,485 cases, liquidation in 2,030 cases, and ongoing proceedings for the remaining cases. Cases resolved and referred for liquidation had assets valued at approximately US$21b and US$7b, respectively, upon admission. This signifies a 73% resolution of distressed assets in terms of value, highlighting IBC’s positive impact on resource allocation for struggling businesses. The biggest impact of IBC has been in the behavior of the borrowers, with 25,107  IBC applications getting resolved before admission by the borrowers through settlement of overdue debt. 

Regulators and the maturing insolvency ecosystem are working hard to solve the biggest pain point in the implementation of IBC i.e., its resolution time. The average duration for the completion of the Corporate Insolvency Resolution Process (CIRP) yielding a resolution plan (i.e., from admission to NCLT approval) is ~512 days, surpassing the initially intended timeline of 180 days by more than two-fold. This calculation excludes the time required for case admission, further elongating creditors' recovery timelines.

Judgments in cases like State Tax Officer vs. Rainbow Papers Ltd. and Vidarbha Industries Power Limited vs. Axis Bank Limited generated confusion and challenges among stakeholders, prompting the Ministry of Corporate Affairs (MCA) to invite public comments on proposed amendments to IBC that are aimed to alleviate any doubts and effectively nullify the effect of these judgments.

The sovereign guarantee, a distinguishing feature that sets National Asset Reconstruction Company Limited (NARCL) apart from other Asset Reconstruction Company (ARCs) and bad loan aggregators, has caused delays in recent transaction closures. In January 2023, the government took action to accelerate the process. NARCL has acquired three large assets from the Indian banking system in H1 2023, in addition to the acquisition of Shri Radha Krishna Export Industries Limited (SREI) under IBC. Rising lending by AIFs in India has led SEBI to reform supervision via dematerializing AIF units, setting criteria for investment teams, compliance officers, investment valuation, and winding-up procedures. 

Joint collaborative efforts of the International Financial Services Centre (IFSCA) and the Government of India have boosted business activities across financial sub-sectors in Gujarat International Finance Tec-City (GIFT City), which is now ranked third by the Global Financial Centers Index.

Rising domestic capital participation 

There has been a robust interest from family offices, Ultra-High-Net-Worth Individuals (UHNWIs), and High-Net-Worth Individuals (HNWIs) in investing in private credit funds. This fast-growing trend is driven by wealth expansion, formation of and professional management of family offices, formalization of economy, and limited fixed-income avenues. If the momentum continues, it is expected to give a boost to the Indian private credit market through cheaper funds versus US dollar-denominated foreign capital. 

Private credit activity in H1 2023

In the first half of 2023, private credit players offered innovative structured solution capital to corporate borrowers. Based on publicly available information, we tracked and listed transactions worth US$ 4 billion in our detailed report for H1 2023. This is not an exhaustive list and specifically excludes venture debt, debt funding in financial services players and offshore bond raises. Barring the two high-value deals within the real estate and metal and mining sector, the average ticket size for these identified transactions was ~US$75m. The real estate sector notably led the deal flow, representing over 50% of the total value. New fund registrations and fundraise continue to be resilient. Based on several discussions with domestic and global players, a robust Indian economy continues to attract interest, with several large funds evaluating opportunities and suitable niches to fit their strategy and capability.

Growing investor optimism 

Our latest survey, conducted in June 2023, among senior leaders of large Indian and global, high-yield and performing private credit funds to capture the pulse of the market shows continuing bullishness about future growth prospects.

Over the next 12 to 24 months, most fund managers anticipate increased deal flow in real estate and manufacturing, while expecting slower activity in metals and road sectors. Demand for private credit will hinge on stress-related, special situations, and capex financing for the present period and the next one to two years. Interestingly, a significantly higher number of fund managers expect stress to drive deals compared to the last survey of December 2022.