NEW BANKERS IN TOWN

AS BANKS AND NBFCS PULL BACK FROM MID-MARKET LENDING, A NEW BREED OF PRIVATE CREDIT PLAYERS IS STEPPING IN AND REWRITING THE RULES OF FINANCE. BUT CAN REGULATION KEEP PACE WITH THE EMERGING RISKS IN LENDING TO THE MID-CORPORATE SECTOR?

- BY ANAND ADHIKARI

PRIOR TO THE 2008 global financial crisis, private credit was a niche asset class in the US, with total credit of around $200 billion, roughly one-fourth the total bank lending to the corporate sector. But after the crisis, as banks pulled back due to tighter capital norms and regulatory scrutiny, private equity giants such as Blackstone, KKR and Apollo stepped in. Backed by money from pension funds, insurers and sovereign wealth funds, private credit crossed the $1-trillion mark in 2024, nearly half the banks' corporate lending.

A similar shift began unfolding in India after IL&FS, YES Bank and RBL crises. The trend accelerated during the pandemic. As banks and non-banking financial companies (NBFCs) withdrew from risky mid-market lending due to rising non-performing assets (NPAs), private credit players-especially Alternative Investment Funds (AIFS) began stepping in.

Now, AIFs are targeting a wide range of opportunities, including performing credit, distressed situations, mergers and acquisitions (M&As) and late-stage start-up funding. However, regulation in this high-risk segment is still playing catch-up.

NEW BANKERS

The private credit market is close to ₹2.1 lakh crore and currently stands at about 15% of the overall AIF industry. It is projected to grow to $60-70 billion by 2028. "It was as low as 6% of the AIF industry five years ago. So, it has grown quite rapidly," says Bhavdeep Bhatt, CEO, Northern Arc Investment Managers, which is into private credit. This isn't just a funding shift. It's a structural transformation. The numbers back it. Between FY16 and FY24, the share of industry in bank credit dropped from 35% to 21%, while retail loans surged from 18% to 31%, according to data from the Reserve Bank of India.

The shift is even more dramatic in the NBFC space, where credit to industry plunged from 61% to 37% during the period. So, who's writing the cheques now?