INDIA Trends and Developments Contributed by: Tirthankar Datta, JSA Advocates & Solicitors
Evolution of the Indian Private Credit Panorama
investors through FPIs propelled the growth of this credit landscape in India. However, after the collapse of a large Indian financial institution and the consequent fallout causing a liquidity crunch for NBFCs followed by a number of NBFCs failing and being referred to insolvency by RBI, the space occupied by NBFCs has steadily been ceded to a burgeoning number of private credit funds. More recently, private credit funds have been formed through domestic pooling vehicles called alternative investment funds (AIFs), which are required to obtain a registration from the Securities and Exchange Board of India (SEBI), India’s secu - rities regulator. In view of the non-performing asset (NPA) crisis faced by them some years ago, Indian banks and NBFCs have also focused on reducing their wholesale debt books and on “retailising” their loan books. This also proved a fertile environment for the growth of private credit. After a series of high-profile large NBFCs failed and underwent insolvency, the regulatory frame - work for NBFCs was revamped to increase reg - ulatory oversight under the new “scale-based regulations” by RBI, which outline the regula - tion and supervision of NBFCs as a function of their size, activity and perceived risk. All NBFCs have now been categorised into “top layer”, “upper layer”, “middle layer” or “base layer”. Upper layer NBFCs have heavier regulatory capital requirements as these are considered larger NBFCs that are “too big to fail” – ie, their failure would pose a systemic risk to the Indian financial system, thereby needing a higher level of supervision. The key players Other than NBFCs, private credit funds are now commonly structured as either:
In India, the credit landscape had historically been dominated by Reserve Bank of India (RBI) licensed banks, which are highly regulated, and non-banking finance companies (NBFCs), which are also RBI registered but are relatively lightly regulated. NBFCs that had greater regulatory and operational flexibility have played a signifi - cant role in complementing bank financing in the financial ecosystem. NBFCs benefited from the regulatory arbitrage and funded certain end uses banks are not permitted to undertake under the legal and regulatory framework prescribed by RBI to banks, such as the acquisition of shares and the purchase of land. “Private credit” is a term used for debt provided by non-bank lenders. It provides more tailored credit solutions in place of straitjacketed credit facilities offered by banks. The borrowers of private credit funds would usually (though not always) be mid-market companies or larger groups that are over-leveraged or stressed, and would not be banked by private or public sec - tor banks. Internationally, the growth of private credit has been on the back of the retreat of bank lending from leveraged financing and the rapid expansion of private equity (PE) requiring a com - ponent of debt financing. In the early 2000s, private credit style deals were structured solutions provided by interna - tional banks through their offshore branches and offshore foreign portfolio investor (FPI) entities. Such deals were typically special situation deals like financing acquisitions, private equity exits, rescue financing, funding distressed or stressed companies, and providing bridge to long-term loans or bridges to initial public offerings (IPOs). Opening up the non-convertible debenture (NCD) route for debt investments by foreign
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