Private credit in India is closing deals — and its eyes

By Andy Mukherjee

India is a sizzling market for private credit, though some participants are wondering if in their eagerness to close deals, investors are shutting their eyes to risks, especially the legal minefields around collateral and bankruptcy.

A decade ago, India’s banks were struggling with the world’s biggest load of soured corporate loans. At about $200 billion, the write-offs on that exposure have been large. Deposit-taking institutions that tried to recover the debt via insolvency proceedings have had to accept harsh haircuts.

Traditional lenders are so scared by that experience that they’re happy financing small-ticket loans to individuals. Personal credit, which was less than half of banks’ advances to industry 10 years ago, is now 1.5 times as large and growing nearly twice as fast.

Credit demand and supply have changed in other ways, too. Large firms, traditionally the heaviest users of bank financing, seem to be the least interested in project finance. They are borrowing selectively to fund acquisitions and refinance existing debt rather than to create new capacity.

Startups and their founders are far more eager to raise debt, though that’s mostly because venture capital funds have become stingy. Initial public offerings are being delayed in a slowing economy, and equity valuations for many unlisted firms are cooling off. Non-bank financiers, too, are starved for funding. Banks have turned cautious about these firms’ exposure to overleveraged households.

This is a perfect scenario for nontraditional lenders — global insurers, asset managers and sovereign wealth funds — to fill in the void left by banks and pocket a cool 18 per cent-20 per cent return. Värde Partners, Oaktree Capital Management and Davidson Kempner are among the most aggressive, though everyone from BlackRock Inc. to Allianz Global Investors is participating enthusiastically in the deal-making.

Local players are more than a little miffed. Even though they’re in on many small loans, the deluge of foreign money is cutting them out of marquee transactions. Domestic private-credit ventures, especially those affiliated with banks, are also keen to earn high rates of return on capital. But they’re more interested in return of capital. Some of them have struggled to raise funds because they aren’t seen as bold enough.

Their foreign rivals, meanwhile, lack neither capital nor courage. As a couple of prominent Mumbai financiers told me, overseas institutions may be mispricing the true credit risk. This won’t end well, they caution. Foreign investors may get hurt because of their greed and then cry about how tough it is to get repaid in India.

Some of them already are. In 2021, US lenders gave $1.2 billion (Rs 10,268 crore) to Indian entrepreneur Byju Raveendran for his eponymous online education venture, then the country’s most valuable startup. Now Byju’s has collapsed, and the money is largely gone. Creditors will be lucky to get even a few cents on the dollar from bankruptcy proceedings in India. Raveendran, meanwhile, is accusing investors of manufacturing a false narrative of fraud against him. “We don’t belong in courtrooms,” he said in a recent interview in Dubai, where he now lives. “We belong in classrooms.”

And yet, Byju’s is no longer a cautionary tale in a gung-ho market. Creditors are chasing special situations, such as a nephew who needs a hefty loan to buy out an uncle. The other opportunity is in restructuring. Last month, Shapoorji Pallonji Group, a real estate and construction conglomerate, raised $3.4 billion (Rs 29,000 crore) from Deutsche Bank AG and about a dozen other investors to refinance previous high-cost debt.

It is this deal, a new record for India’s private-credit market, that has raised eyebrows. Although repayment is due only in three years, the yield on the zero-coupon bond is as high as 19.75 per cent. The collateral is also tricky. As reported by Bloomberg News, the deal is backed by about $3.6 billion (Rs 30,805 crore) of real estate, as well as investments in oil and gas, though the jewel in the crown is a 9.2 per cent stake in Tata Sons valued at roughly $18.6 billion (Rs 1.6 lakh crore).

But how will value from the holding company of Tata Group, a sprawling conglomerate whose listed units are worth $325 billion (Rs 27.81 lakh crore), ever be realized? Shares in privately held Tata Sons aren’t freely transferable. That’s the official position of the charitable trusts that are its majority shareholder. Maybe investors are betting that the trusts will eventually relent, or that they will buy out Shapoorji, the largest minority shareholder. Neither outcome can be predicted with any degree of certainty.

The bold bet shines a light on the buccaneering spirit that has taken over India’s nascent private-credit industry. Policymakers would want to see more risk-taking in creation of new assets. The new central bank chief has slashed interest rates, including by a more-than-expected half percentage point on Friday. He has also flooded the financial system with liquidity.

But given the cloudy outlook for global trade and local consumption, corporate investment isn’t India Inc.’s priority. Swapping assets among one another is. As for the money, there are enough private lenders willing to write checks of $100 million (Rs 855 crore) or more. If they don’t, someone else will.