Finance in India has a new bogey called private credit

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₹65,000 crore, 108 deals) during calendar 2023, compared with $5.3 billion (close to ₹43,500 crore, 77 deals) in 2022. Two deals stood out: a 3-year, ₹1,723-crore refinancing deal for the Shapoorji Pallonji Group and a ₹711-crore refinancing loan for Vedanta Group. In fact, it is believed that a large chunk of the private credit in India during the past few years was earmarked for refinancing stressed real estate loans.

RBI was forced to step in last year when it became clear that a significant portion of private credit being lent by private equity funds was used for ‘evergreening’ existing loans, or providing a fresh loan to corporate borrowers on the verge of defaulting on an old loan. The central bank detected that banks and NBFCs were investing in these funds which were then routing money as private credit to companies which had already borrowed from the same banks or NBFCs; the inflows were then used for meeting older repayment obligations. This worked as a win-win for both the borrower and lender.

The borrower could avoid loans getting tagged as non-performing assets (NPAs) and being referred for bankruptcy proceedings. The lender, on the other hand, avoided having to recognize loan impairment, which would have entailed reduced income and higher provisioning, both affecting profitability. The credit fund, in turn, earned interest income and was able to keep a lid on risks by offering subordinate paper (which carries lower repayment obligations) to investing banks and NBFCs.

RBI forbade banks and NBFCs from investing in funds which were lending money to these stressed borrowers. This sleight of hand apart, private credit comes beribboned with several potential vulnerabilities. The April 2024 edition of Global