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

India’s private credit market is nearing a milestone, with investments projected to reach US$10 billion in 2024. 

In brief

• The banking sector in FY24 saw 16% y-o-y credit growth despite rising interest rates, with 8.5% corporate lending growth and low NPAs. Rising unsecured loans and high deposit competition hints underlying pressure on margins.
• The evolving landscape of private credit, coupled with a record 76.8% manufacturing capacity utilization in Q4 FY24 and private capital expenditure rise of 19.8% y-o-y in FY24, signaled optimism for the future.
• H1 CY2024 saw US$6 billion in investments, led by real estate, infrastructure, healthcare. Domestic funds gained traction, led by the impact of local expertise and the growing influence of lower cost domestic money. New AIFs and robust fundraising continued to grow.
• The EY Private Credit Pulse survey revealed that private credit investments could reach US$5–10 billion in next 12 months, though we may witness around US$10 billion in transactions in CY2024 itself.

More than 50 democracies, including the European Union, UK, India, and the US, are holding elections in 2024, creating an uncertain political environment that complicates an already tense geopolitical landscape. The International Monetary Fund (IMF) projects 3.1% global growth but concerns over a US recession and China's slowdown are unsettling global markets. However, India’s robust economy, stable currency, and strong banking sector, with projected 7% growth in CY2024, position it as a key investment destination in this turbulent global environment. 

The Indian banking sector remained resilient in FY24, with high capital ratios, strong Non-performing assets (NPAs) coverage, stable asset quality, and 16% YoY loan growth. Despite higher lending rates, credit demand persisted. However, rising unsecured loans, now 36% of incremental retail loans, raise some risks. Competition for current account and savings account deposits has intensified as savers turn to capital markets, potentially impacting margins. GNPAs dropped to below 3%, while credit costs stayed low. Retail loans drove growth, though they moderated in areas like housing and vehicles. Moody’s projects FY25 credit growth at 12% to 14%, slightly lower than FY24’s 16%. Meanwhile, Non-Banking Financial Companies (NBFCs) saw moderated Assets Under Management growth, driven by the non-mortgage retail segment. NBFCs and debt mutual funds showed mixed trends, with corporate bond issuances in India growing by 9.4%, driven by private placements despite tax changes affecting debt funds.

Burgeoning private credit deal flow in India for H1 2024

In the first half of the year, the private credit landscape in India gained momentum, with Securities and Exchange Board of India registering 13 new AIFs focused on credit and special situations, while more are likely to be in queue for approval. Several major players announced multi-million-dollar closures with strategies across buyouts, refinancing, mergers and acquisitions, secondary loan sale, portfolio restructuring, etc. The market buzzed with new capital targeting high-yield opportunities, as both global and domestic funds positioned themselves to capture lucrative opportunities in a rapidly growing economy.

Private credit deals in H1 2024 soared to an all-time high for any six-month period, with US$6 billion deployed across 96 deals, even though the private capex is yet to kick start in a big way. Large deals in logistics, healthcare, and real estate dominated the space, reflecting a growing alternative financing demand in critical sectors. Domestic funds are increasingly stepping into the spotlight, gaining market share previously held by global players, driven by a deeper understanding of local dynamics, flexible structuring solutions and relationships.

Real estate remained the leading sector, consistently attracting the highest share of investments, followed by infrastructure and healthcare. In the past 2.5 years, private credit deals have totaled over US$20 billion, with a significant portion directed towards real estate.