Fault lines show up in India’s $25 billion private credit market

MUMBAI: Credit quality fault lines are beginning to show up in India's, high-cost fast-growing private credit market that has expanded to about $25 billion in size, executives linked to the industry with high-teens financing costs told ET.

These reported incidents of stress in an industry with 'light-touch' regulations have raised concerns over transparency, risk monitoring and investor
protection. There have been at least a couple of defaults in the range of Rs 100 crore each, sources said.


"Early signs of stress are emerging in a handful of private credit transactions, although such developments rarely become public because the funds are not required to disclose asset-level performance," said an industry source aware of the potential risks.

Industry executives say a few private credit deals are already showing early signs of stress. Light-touch regulations have meant that unlike banks or non-bank lenders that must periodically disclose their suspect-loans data, lenders in these markets do not need to disclose asset-level performance.

One mid-size private credit fund is currently under scrutiny about a possible default involving a Dehradun-based hotel developer.

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The private credit industry has expanded massively over the past five years as global investors searched for higher yields and as tighter bank regulations limited traditional lending to leveraged companies. Funds have stepped in to finance acquisitions, promoter liquidity and structured credit deals.

Limited Liquidity, Disclosures
However, this asset class carries inherent risks because it is both illiquid and lightly disclosed. The private credit market is estimated to be around $20-25 billion in assets, with global funds and domestic alternative asset managers participating in deals ranging from structured financing to special situations lending.

"Until now, yield-hungry investors have been putting money into private credit without fully understanding the risks," another market participant said. "It is an illiquid pool of capital and the transparency on covenants, pricing and underlying exposures is limited."

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The risks have become more visible globally in recent months as concerns over deteriorating credit quality triggered redemption requests from investors in some overseas credit vehicles like Blue Owl Capital. Those liquidity pressures forced funds to slow withdrawals.

Private credit structures are closed-ended funds, which limits immediate liquidity risks. However, deterioration in underlying borrower quality could still create stress for investors.

Private credit lenders do have access to legal remedies such as the insolvency process under the Insolvency and Bankruptcy Code (IBC), though recoveries are uncertain and often take years.

"IBC provides a route, but it does not guarantee recovery," another industry executive said. "Funds could recover 5% or 35%, and the process can take several years."