5 minute read 22 Feb 2024
Private credit in India

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

By Bharat Gupta

EY India Strategy and Transactions Partner

Business leader with expertise in executing strategic solutions for complex, operational, liquidity and capital structure problems; Interested in geopolitics, mountaineering and long-distance running.

5 minute read 22 Feb 2024

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Access insights on private credit fund raise and growth, deal activity, and market outlook for India.

In brief

  • Banks have reported Indian credit growth of 23% in CY23, driven by high credit growth in retail lending and real estate sector lending. Though credit uptake in large industries is slow, capacity utilization data and bank credit pipeline reports suggest credit deployment for capex projects.
  • The private credit deal flow of India in 2023 surpassed the 2022 levels, with 108 deals valued at $7.8b, up from 77 deals worth US$5.3b. Factors included stabilized interest rates in CY23, increased real estate private credit deal activity, and large deals boosting overall value.
  • The EY Private Credit Pulse survey indicates that fund managers are bullish on the deal flow in real estate and manufacturing sectors over the next 12 to 24 months. Fund managers also believe that capex funding in India will be the biggest driver of new deals over the next 12 to 24 months.

As CY23 ends, the global economy faces sluggish growth, increasing geopolitical tension, high public debt, and high interest rates. The International Monetary Fund (IMF) predicts 2.9% global growth for CY24, down from the 3.8% average of CY2009–2019. Despite this, India remains one of the fastest growing major economies, with a projected 7% GDP growth for FY24, driven by domestic consumption, public expenditure, and strong service exports. 

Overall bank credit growth in India for 2023 was approximately ~23%. The RBI's financial stability report highlights a shift in banks and Non-Banking Financial Company (NBFCs) credit in India, with a growing proportion of credit being allocated to the service sector and retail loans. We can also see a significant growth in real estate private credit in H22023. On the other hand, the credit uptake by large industries has lagged relative to other sectors. This is also reflected in the low leverage levels and robust interest coverage ratios in the corporate balance sheet. Low leverage levels are also indicative of ability of corporates to undertake capex investments in light of the high-capacity utilization rates. 

The previous editions of ‘Private Credit in India’ report stated that the wholesale book of large listed NBFC’s had largely remained stagnant / declining since the Infrastructure Leasing & Financial Services (IL&FS) crisis and that trend has continued in CY23. Over the last couple of years, we have seen private credit funds filling the vacuum created by the departure of NBFCs from the wholesale lending space relative to their levels of activity before CY18. Moreover, in December CY23, the RBI has also issued a circular to address concerns about potential ever-greening by regulated entities, focusing on instances regarding Alternative Investment Fund (AIF’s) substitution of their direct loan exposure to borrowers with indirect exposure through investments in units of AIF. 

Burgeoning private credit deal flow in India for 2023

Based on data published by SEBI in H22023, at least 11 new AIFs have registered with credit/special situation orientation and five are in the process of registration. Nine funds have announced new fund raises aggregating in excess of US$2b in H22023.

Private credit deal flow in India in 2023 was higher than CY22 both by deal count and value (CY23: 108 deals totaling to US$7.8b versus CY22: 77 deals totaling to US$5.3b). Surge in deal flow was primarily driven by stabilization of interest rates in CY23, higher deal flow in the real estate sector and a bump in deal value from certain large deals executed in CY23. Kindly note that our analysis does not include venture debt deals, investments into financial services players, term loans / WCLs disbursed by NBFCs and offshore bond placements by Indian corporates. We have also taken a cut-off of single private placement over US$10m for the purpose of our analysis.

In CY23, global funds contributed approximately 63% of the total deals by value, primarily due to their participation in large deals. However, domestic funds led in terms of deal count, accounting for approximately 61% of the deals, due to their focus on the mid-market segment and strong deal origination capabilities. Real estate continued to be a dominant sector, attracting investments totaling US$1.7b in CY23.

In this edition, we have also commenced coverage of private credit exits during CY2023. Based on the data tracked by us, we have reported on exits aggregating ~US$2.3b. List of transactions covered in these exits has been included in our report. 

EY Private Credit Pulse survey results H2 2023

The report includes a survey of fund managers, with half of them believing that over the next 12 to 24 months, capital expenditure related financing will be the biggest driver of private credit deals, followed by stress-related financing. This is a distinct change from the previous survey. Real Estate was also ranked by 50% of fund managers as the sector with the most deal activity over the next 12 to 24 months. Manufacturing followed closely. Interestingly, real estate was also perceived as the riskiest sector in the current private credit portfolio.

While optimism exists regarding sufficient fund availability for private credit deals, competitiveness in the industry has intensified over recent years. Respondents suggest an overall private credit investment of US$5 to US$10b in CY24. In line with our past surveys, there is an indication of a slightly more bullish outlook in the two to five-year horizon compared to the next one to two years.

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Summary

The market of Private Credit in India continues to evolve and adapt to changing market dynamics. In addition to the increase in private credit deals, fundraising activity has been strong and new funds are still being registered. Indian economy is also attracting interest from large global funds.  

About this article

By Bharat Gupta

EY India Strategy and Transactions Partner

Business leader with expertise in executing strategic solutions for complex, operational, liquidity and capital structure problems; Interested in geopolitics, mountaineering and long-distance running.