Private Credit Market in India: Booming Growth Raises Concerns of Risk Mispricing

India’s private credit market is experiencing a significant boom, with a multitude of new players entering the segment. While this growth is exciting, experts are raising concerns about the potential mispricing of risk in the market.

One example of this trend is seen in the recent debt-raising activities of companies like Hubergroup, where lenders are accepting lower returns due to intense competition among non-banking financial companies and private credit funds. This competition has led to a drop in pricing for such deals, raising questions about the sustainability of these lower returns.

The influx of new players, both domestic and global, into the private credit market is evident in the data published by Sebi, which shows a significant increase in the number of alternative investment funds focusing on credit/special situations. This surge in activity has led to a higher deal flow in 2023 compared to the previous year, indicating a growing interest in this market segment.

However, the increased competition in the private credit market has its drawbacks. Established players are finding it challenging to secure attractive deals, as new entrants are willing to accept lower returns to gain market share. This can lead to compressed margins and a potential race to the bottom in terms of pricing, ultimately impacting the overall health of the market.

Moreover, the rise of funds with limited track records entering the space raises concerns about the mispricing of risk. As Ankur Jain of InCred Alternatives points out, this trend could have long-term implications for the market if not addressed promptly.

The Reserve Bank of India has also flagged the private credit market as a systemic risk, citing the interconnectedness of non-bank lenders with the broader banking system. The regulator is concerned about the potential impact of a credit collapse in this segment on the overall financial stability of the country.

Despite these challenges, players like Neo Asset Management and Vivriti Asset Management are optimistic about the opportunities in the private credit market. They emphasize the importance of thorough due diligence processes and differentiated credit origination, underwriting, and monitoring skills to navigate the competitive landscape successfully.

In conclusion, while the private credit market in India is experiencing rapid growth, it is essential for players in this segment to maintain prudent risk management practices and uphold high standards of underwriting to ensure the long-term sustainability of the market. Only by addressing these concerns can the private credit market continue to thrive and contribute positively to the Indian economy.