Hot India's private credit market faces risks as exuberance grows

By Finbarr Flynn

India’s private credit market is growing so fast that a rush of new participants into the direct-lending sector is fueling concern about a weakening of lending standards.

“We have seen a bunch of first-time managers raise a lot of local capital,” Indranil Ghosh, head of Pan-Asia special situations at Cerberus, said at the Bloomberg India Credit Forum in Mumbai on Friday. “With some of those managers, I suspect that the underwriting standards, the diligence standards, the structuring, covenants are slightly lighter than what a lot of the global firms and well-established domestic institutions are used to.” 

The term ‘private credit’ can mean different things in different places, and by some definitions India was one of the original practitioners with its rich history of non-bank lenders. But the country is still relatively new to the sort of funding that many observers associate with the term, with recent growth in involvement of local and global funds focused specifically on strategies including direct lending, special situations and mezzanine finance.

Local firms are fueling competition with global giants such Cerberus and Oaktree Capital Management. India’s direct-lending market has yet to come through a full credit cycle and troubles at some players may eventually result in consolidation, according to Cerberus’s Ghosh. 

For now, India’s central bank chief is relatively sanguine about the outlook for the sector, though he expressed concern from a global perspective.  

“At the moment, we don’t see the kind of risk which we see at a global scale” for private credit in India, Reserve Bank of India Governor Shaktikanta Das said at the forum. At the global level, the “robustness and resilience of private credit is yet to be tested” and “every central bank or every regulator should be looking into” the possible risks, he said.  

The global private credit industry has more than doubled in size to a $1.7 trillion since 2019. The opaque nature of the market is attracting greater scrutiny from regulators, including the European Central Bank and the Bank of England as higher borrowing costs weigh on weaker borrowers and trigger more bad loans.

Current private debt returns fail to justify the growing risk in private credit, according to Pacific Investment Management Co.’s Mohit Mittal, chief investment officer for core strategies, who was speaking in a Bloomberg Intelligence Podcast. He warned of “more complacency” in private credit. 

In India, with the proliferation of credit funds, there is the possibility that some covenants could get diluted and prices become stretched, said Lakshmi Iyer, CEO of investments and strategy at Kotak Alternate Asset Managers. But Iyer is upbeat about the long-term outlook for the industry in India, citing growing interest from local investors in the sector.  

“We are still just at the tip of the iceberg as far as the size and scale of the credit markets in India,” said Iyer, also speaking at the forum.