The NBFC crisis in 2018, triggered by the collapse of IL&FS, led to a tightening of liquidity options and reduced borrowing access for many in the mid-sized or high-sized segments. At the time, private credit funds were able to offer solutions for borrowers who were unable to access loans from traditional banking sources. With the evolving market of private credit, here’s all you must know about it.
What is a private credit fund?
Private credit, a standout category of Alternative Investment Funds (AIFs), unlike banks or traditional lenders, steps in to fill a crucial gap by offering much-needed financing to mid-market and emerging companies. The demand for private credit funds has grown, of late, due to the investors’ need for bigger returns amid tightening lending rules across banks. However, private credit transactions include a range of debt instruments and hold more risks than traditional loans due to their less regulated nature.
The Reserve Bank of India, in its 2024 Financial Stability Report, stated the risks stemming from
private credits, owing to its connection with banks and NBFCs, riskier credit profiles of borrowers, and even complex deal structures. Despite the risk factors and drawbacks, AIF investment across various categories, including private credit, touched $50 billion on March 31, 2024, as per a SEBI report.
Investor profiles in private credits
Those investing in private credit funds are majorly accredited individuals who combine or pool their capital, enabling the manager of the fund to make investments in loans to various private companies. High-net-worth persons and institutional investors are deemed eligible to invest in these funds, which are not even listed on an exchange or otherwise transferable. Some of the major deals witnessed in recent years include KKR, ADIA in Reliance Logistics and Warehousing, Zeal Global & SC Lowy in GMR Highways, Incred in Whizdam Finance, BPEA Credit in mPokket Financial Services, and Modulus Alternatives and Incred financing for Fourth Partner Energy, as per a Moneycontrol report.
Regulatory eligibility for private credits
Earlier, in December 2023, the Reserve Bank of India issued a set of guidelines to regulate bank and NBFC exposure to AIFs in line with the concerns around the evergreening of loans. Regulated entities (REs) with debt exposure are restricted from investing in AIFs that have downstream debt investments among borrowers.
While private credits still don’t require an NBFC license to allot credits, having entered the Indian economy through AIF—the privately pooled investment vehicle, the central bank along with other regulators might have to just remain on a constant vigil to understand the process of lending and risks associated with them.
