Kroll, and Indian Private Equity Capital Venture co-hosted a webinar to discuss the increasing appetite for private credit in India. The 2020 webinar on the Indian private credit sector brought to light the changing dynamics in the lending space. Last year proved to be pivotal in exposing the lines and reinforcing the strengths of private capital ventures and shifting consumer mindsets towards private borrowing.
It has become increasingly evident that the traditional credit systems are not able to cope with the rapidly increasing demand for credit among Indians. The slowing credit from traditional systems has allowed new players to address the market and lend private credit funds to businesses and consumers. The discussions in this webinar covered various perspectives ranging from performing debt and stressed lending to venture debt. Towards the end of the webinar, the panel hosted a workshop on private credit valuation for over two hundred attendees.
Key Highlights Include
- A host of regulatory and macro-level issues in India have resulted in declining bank lending across multiple sectors. Independent franchises, fintech and private credit funds have taken up a big part of that share in enabling mid-market firms to grow.
- There is a massive capital shortage in funding mid-market growth. Corporate debt over GDP ratios in India is under 60%. Other emerging markets and developed markets all have a debt to GDP ratio of higher than 80%.
- A return to high GDP growth for India will drive strong demand for private credit by mid-market (and small and medium-sized enterprises) companies.
Private Credit Acting as a Bridge Between
- New business and their need for capital: It is more efficient to borrow from a private credit lender than to raise equity for certain companies that have just turned around and do not have vast amounts of profit to attract bank credit.
- Family owned and publicly owned enterprises: Private capital allows family-owned businesses to prepare for the rigor of public-owned markets by lending and investing in an exchange of shares, almost equivalent to a private equity fund.
- Domestic and International markets: In the event that an organization expands internationally, private capital acts as a bridge financing international and domestic capital.
Under the context of structured credit, the panelists discussed how the COVID-19 pandemic shaped the private credit market and pointed at credit being leveraged as a means of sustenance and not long-term borrowing. At the start of the pandemic, borrowers wanted to ensure enough liquidity to stay afloat, and therefore, turned to private capital. Later, with economic recovery, the market saw increasing bolt-on acquisitions, which were accomplished by private borrowing.
In the category of stressed credit, the panellists and attendees agreed that the largest pool of private credit throughout the pandemic has been directed towards distressed investing, which has brought India to the forefront of global investments. Gross non-performing asset (NPA) numbers, around 8.5% before COVID19, are estimated to increase by about 40% to 50%, in line with the RBI’s estimates of 12.5%. Such defaults will present opportunities for increased private stressed and distressed credit, either standalone or within secondary pools in NBFC portfolios. Nevertheless, recovery mechanisms need should be designed to shrink the buyer-seller bid ask as evident in the data from resolutions and liquidations, the latter forming the bulk of the realizations.
In the subject of venture debt, the speakers drew attention to the increasing traction over the last year. The venture debt industry has seen experts fine-tune the lending system and structuring finances. Repayment terms have also seen new approaches, as percentages of revenues instead of the traditional route of diluting the shares and then reducing the dilution over time. Lenders in the venture debt space have started taking the long-term approach that encourages them to understand businesses intricately as well as the cash flows and economies that sustain them.
Developing a business on the back of venture debt and growing it towards achieving a sustainable cash flow has become a key differentiator in attaining traditional forms of credit.
Depending on how one defines venture debt, the numbers may vary. Venture debt forms approximately 5-6% of all investing in the Indian venture ecosystem. Comparing this to the 15-20% seen in mature markets, India has a long way to go in building this asset class.