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

The Indian private credit market continues to grow at US$9.2 billion in 2024.

In brief

• In FY25, India's banking sector is facing mixed prospects, with public sector banks showing strong profitability and improving asset quality but facing slower wholesale lending growth due to stricter regulations and rising concerns over unsecured loan quality.
• Private credit investments reached US$9.2 billion across 163 deals in CY2024, driven by larger transactions and stronger domestic participation. Market competition intensified with new AIF registrations, larger fundraises, and renewed NBFC and global bank activity, while rising domestic investor interest further strengthened fund availability.
• The EY Private Credit Pulse survey revealed that fund managers remain optimistic about India's medium-to-long-term private credit growth despite short-term challenges. However, rising competition, especially in performing credit, is making leveraged finance deals tougher to execute and potentially impacting credit quality.

Global growth forecasts remain largely unchanged since April 2024, but revisions across regions reveal contrasting trends. The US saw an upgrade in growth, while large European economies faced downgrades. Geopolitical tensions, commodity disruptions and extreme weather led to downward revisions for regions like the Middle East, Central Asia and sub-Saharan Africa. However, optimistic forecasts for emerging Asia were driven by a high demand for semiconductors, electronics and strong AI investments. 

Continuing Russia-Ukraine conflict, a frozen conflict in the Middle East and tariff led foreign policy of the US continue to disrupt global trade dynamics. Countries are withdrawing from global alliances and imposing trade restrictions, creating uncertainties in bond markets and global trade. Meanwhile, increased U.S. oil output and exports could help lower energy prices, easing pressure on central banks to maintain rates. This combination of economic and political instability has led to heightened market volatility, slowing investments and global economic growth.

Shifting focus to the India growth story, the IMF forecasts India's growth to remain at 6.5% for CY 2025, aligning with earlier projections from October 2024. On the credit front, FY25 sees a mixed picture for the Indian banking sector. Public sector banks are benefiting from improved profitability and stable asset quality, but their institutional credit growth is tempered by cautious credit expansion, driven by stricter regulatory measures to prevent overheating in certain lending segments. Thanks to government reforms, public sector banks' GNPAs dropped from 14.98% in 2018 to 2.6% by December 2024, with further decline expected. However, rising write-offs and worsening unsecured loan quality remain a concern. India Ratings estimates bank credit growth at 13% to 13.5% for FY25 and FY26, slower than FY24’s 16%. Slower deposit growth and higher Risk-Weighted Assets on unsecured loans are expected to drive this decline.

Between March and September 2024, select large NBFCs saw a net wholesale lending growth of US$1.31 billion, primarily due to higher private sector lending from government-backed NBFCs. To compete with private credit funds, some NBFCs are expanding their corporate loan books and launching AIF platforms. Meanwhile, debt mutual funds, despite a drop in credit risk fund AUM, are increasing their involvement in corporate lending. Corporate bond issuances are expected to grow 8.9% to 9.5%, fueled by regulatory changes and rising retail participation.

Private credit deal flow in India for H2 2024

As per latest private credit trends, investments reached US$3.3 billion in H2 CY2024, bringing the annual total to US$9.2 billion across 163 transactions. While the market showed 7% YoY growth against CY 2023, it fell short of the US$10 billion expectation due to the deferral of several deals to January 2025. Notably, these figures exclude transactions below US$10 million, foreign bank-led deals and offshore credit raises, which would significantly expand the market size.

Market competition further intensified due to new AIF registrations, larger fundraises, and renewed activity from NBFCs, mutual funds and global banks. Meanwhile, vibrant equity markets provided companies with cheaper capital alternative, exerting pressure on private credit yields and contributing to lighter covenants and a potential weakening in credit risk assessment.

A key trend in H2 2024 was the dominance of domestic private credit players, who accounted for ~63% of deal value and ~61% of deal count, surpassing global funds. Real estate continued as the leading sector, attracting 43% of investments, followed by consumer durables and financial services. Larger deals remained prevalent, with transactions exceeding US$100 million, comprising 50% of total value, while US$40 to US$60 million deals contributed ~15%. Refinancing and acquisition financing were the key lending purposes in H2 2024, indicating a focus on stabilizing and consolidating assets. 

Domestic investor participation increased, driven by promoter stake sales, ESOPs, family office formalization, and a lack of fixed-income options. These trends continue to strengthen fund availability, ensuring sustained growth in the private credit market.