Insights
Private credit landscape in India
April 14, 2025Private credit has become the “go to” source of capital for bespoke financial solutions. It occupies a unique space in the Indian credit ecosystem and has seen significant growth in terms of both deal flow and supply of capital. End use cases where bank finance is generally not available has seen the most traction. Acquisition finance has been one such use case. Another is sponsor backed financings involving credit to sponsors either looking to increase their equity share in existing businesses or to take out private equity investors backed primarily by sponsor guarantees and pledge over equity. The market has also seen deal flow to stressed borrowers with private credit investors replacing the entire debt stack of such borrower with higher yield credit. The higher risk appetite of private credit platforms allows investors to create tailor made financing solutions with more flexible repayment and security structures. Deals often include a certain moratorium on repayment of principal and coupon, repayment linked to operating cash flow or back-ended coupon and redemption premium structures.
Several recent deals have involved hybrid structures with combined debt and equity exposures, convertible instruments or equity linked returns, particularly for pre-IPO financings. Founders find this to be a useful solution given the possibility of a capped equity return, limited dilution and flexible end uses.
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While initially a lot of the private credit capital came from offshore investors, there is increasingly more domestic liquidity. Several funds have raised large amounts of capital from high net-worth individuals and family wealth offices onshore. These investor pools find the higher risk reward of private credit investments appealing and have fuelled much of the domestic capital supply.
Fund mandates have varying investment strategies cutting across performing credit, special situations, real estate focussed investments and growth stage or technology focused borrower companies (to name a few).
The insolvency framework under the Insolvency and Bankruptcy Code, 2016 (IBC) has played an important role in the growth of special situations and distressed debt funds. Many of the other enforcement avenues such as debt recovery tribunals and the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 are not available to unlisted fund investments, making the IBC regime the anchor platform for private credit recovery. Several special situations and distressed debt funds lending to stressed borrowers particularly in the mid-market segment rely on the IBC regime for their core recovery strategies and recognize that the IBC has played a key role in changing borrower behaviour.
The focus of regulators vis-à-vis private credit has been to address issues of systemic risk as opposed to investor protection. In December 2023, the RBI issued a set of rules aimed at addressing potential concerns linked to evergreening of loans by banks via alternative investment fund (AIF) platforms. Banks and NBFCs with existing exposures to borrowers are no longer permitted to lend to such borrowers via an AIF (any such loans will require a 100% provisioning against the exposure). This restriction is limited to only that part of the bank or NBFC investment in an AIF which is then further invested downstream in such borrower. As the market for private credit grows, we can expect greater regulatory attention to this space.
The market for private credit will continue to see growth, both in demand and supply. If equity capital markets slow down, private credit is well positioned to bridge any gaps and will continue to be the preferred source of funding where customized solutions are needed.
This article was originally published in Mint on 14 April 2025 Written by: Shilpa Mankar Ahluwalia, Partner. Click here for original article
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This is intended for general information purposes only. The views and opinions expressed in this article are those of the author/authors and does not necessarily reflect the views of the firm.
