Although many institutional investors are familiar with Indian equities, this asset class is not the only way to play the Indian growth story. In fact, private credit has seen strong growth in the past decades and is predicted to double its share of the country’s GDP in the next eight to 10 years, according to EAAA Alternatives
In 1986, the United States Congress adopted changes to bankruptcy law that permanently moved the oversight of bankruptcy proceedings from the courts to a national watchdog, the US Trustee Program, a litigating component of the Department of Justice.
Moving this oversight function from the judicial to the executive branch heralded a new era of stability and transparency for creditors and resulted in decades of steady growth in US credit markets.
In India, a similar growth story has been unfolding since the introduction of the Insolvency and Bankruptcy Code (IBC) in 2016. This code placed stringent requirements on companies to pay back their loans or face default.
The credit markets will also have a journey which will be very similar to what the US market saw, which is a widening and deepening of credit. And the number of people trying to access credit in India is also increasing
“The US implemented its Bankruptcy Code in 1986, and the GDP for the US grew from a base of $4.5 trillion nearly at 5.5 per cent for the next decade after that, and India is very similar to the US in many ways,” Amit Agarwal, Chief Executive Officer at EAAA India Alternatives, says in an interview with [i3] Insights.
“India implemented its Bankruptcy Code in 2016 and the India [GDP] has grown roughly at 6.5 per cent, which is almost a per cent more than what the US grew in that scenario. India is now a $4.5 trillion plus economy and is expected to continue growing and reach around a $9 trillion to $10 trillion economy [in the next 10 years].
“The credit markets will also have a journey which will be very similar to what the US market saw, which is a widening and deepening of credit. And the number of people trying to access credit in India is also increasing,” he said.
Bankruptcy Code Strengthens Creditor Confidence
The 2016 IBC was an important step forward in instilling confidence in lending to private companies. Previously, bankruptcy proceedings and debt recovery could take up many years, sometimes involving multiple courts. Under the IBC, there is now a fixed timeline for resolving insolvencies and bankruptcies.
The code introduced the requirement that corporate insolvencies must be resolved within 180 days, while the deadline can be extended by a maximum of 90 days. If not resolved by then, the company proceeds to liquidation. This has sped up debt recovery tremendously.
The code also shifted power to lenders, including the right to approve a resolution plan or to liquidate a company.
The bankruptcy code has come in at the right time, with the right intent and the right implementation, and this has allowed credit markets to expand. India has recovered over $40 billion from defaulting creators under the bankruptcy code over the last eight years, which is unheard of in India
The code is not perfect and lenders still face issues with case backlogs, deadline extensions and limited availability of trained insolvency specialists. But it is a significant improvement on the old system.
“I am not saying that the Bankruptcy Code is working at top efficiency, or that we are the best bankruptcy code regime in the world, but we have come to a place which is meaningfully different from where it was,” Agarwal says.
“We have seen the credit culture change, where creditors have the confidence that they can go into a company and if things don’t go well, they have an exit path that takes maybe one to two years, but it’s not an elongated process of seven to 10 years.
“The Bankruptcy Code has come in at the right time, with the right intent and the right implementation, and this has allowed credit markets to expand. India has recovered over $40 billion from defaulting creditors under the Bankruptcy Code over the last eight years, which is unheard of in India,” he said.
Growth Ambitions Likely to See Releveraging
Indian companies have been deleveraging their balance sheets for many years, which has resulted in the current low levels of leverage among most companies. For example, the Indian non-financial corporate sector has seen its debt-equity ratio fall from its highest point of 1.85 in 1991/92 to just 0.89 in 2021/22, and it is likely to have dropped further in the years since.
The leverage levels have fallen to such an extent that renowned economist Ajay Shah rang the alarm bell over the detrimental effect of such suboptimal debt levels.
“Leverage in most industries is at astonishingly low levels,” Shah said in a 2023 article for the Business Standard.
“Borrowing improves return on equity, which is good for shareholders. An economy where large firms have little debt runs the risk of being less dynamic. Shareholders and boards need to reopen the discussion on optimal firm leverage,” he said.
But Agarwal says the changing behaviour of consumers in India in recent years has sparked higher levels of spending and this is likely to compel companies to expand their operations and borrow again.
“There is a lot of demand in retail in India, because people are just becoming aspirational,” he says. “Everybody is ramping up their personal balance sheets, people are leveraging for houses, cars, premium TVs and mobile phones.”
There is a lot of demand in retail in India, because people are just becoming aspirational,” he says. “Everybody is ramping up their personal balance sheets, people are leveraging for houses, cars, premium TVs and mobile phones
Part of this changing behaviour started during the COVID pandemic, which hit India hard and confronted people with the fact that life can be unpredictable.
“Everyone realised you live only once; and consumption is not necessarily bad if you have savings. So previously, India was a pure savings economy; people used to save significantly, but the orientation has become more of a consumption economy, which is good for the economic growth of the country,” he said.
All this economic activity means companies are more willing to fund the next stage of growth and this is likely to result in releveraging, Agarwal says.
“People are excited about the future. I think there is a lot of growth activity that will come in once a little bit of this global uncertainty has settled.
“I think India’s corporates will leverage their balance sheets significantly in the next nine to 12 months to do significant growth and expansion activities. And I think private credit is poised to play a role in growth financing,” he says.
Currently, the private credit sector is only about half a per cent of India’s GDP, but Agarwal says this will increase in the coming years.
“Private credit is very, very small in India today. If you look at the US, private credit will be 3.5 to 4 four per cent of GDP, which is significantly larger. Now, I don’t think India will go to four per cent, but even if we remain at 1 to 1.5 percent of GDP, there is a massive scale-up. And GDP is still growing,” he says.
The Case of Performing Credit
A key area of growth within the private credit sector in India is performing credit – credit investments in companies with robust fundamentals and that repay debt out of recurring cash flows.
EAAA Alternatives is a key player in the performing credit sector.
“Performing credit is credit to medium to large companies with contracted return and no real stress in either the company or the banks that are holding the debt of that company,” Agarwal says.
“And special situations are the whole universe outside of that, that’s how we think about it,” he says.
He splits the opportunities in performing credit into four categories: refinancing needs, stake enhancement, merger and acquisition (M&A) opportunities and growth needs.
“For example, we funded the capacity expansion for one of the largest cement makers in India. To the banks, it was not very clear whether that sort of capacity expansion would come on stream, on time, so we financed that,” he says.
We funded the capacity expansion for one of the largest cement makers in India. To the banks, it was not very clear whether that sort of capacity expansion would come on stream, on time, so we financed that
The cement company has been in business for 30 years and EAAA Alternatives was comfortable providing a US$73 million loan where the intrinsic value of the business was nearly three times the debt inside the company. The facility was a combination of coupon, redemption premium and upside sharing on equity.
The loan was entered into in December 2022, but the company was acquired by a competitor, which resulted in an early exit in August 2024. EAAA Alternatives which had contracted a return of nearly 20 per cent INR with the company, created a much higher return on back of the equity upside arising out of the acquisition. To put this in context the company’s borrowings from banks in its balance sheet was at around 10 per cent INR. So, the spreads generated on the deal were more than double the rate being charged by banks.
M&A is also a good source of opportunities in India, but whereas in the US acquisitions are often engaged in by private equity companies, in India they are often initiated by family-owned businesses.
“Indian families actually put a lot of their skin in the game for doing an M&A, so they put in a lot of their equity to provide collateral,” Agarwal says.
“The private credit market in India is not a sponsor-led market. It’s not Carlyle, KKR or TPG borrowing money in India from Indian private credit providers to acquire companies. Most of the borrowing is by owners and families, who run these businesses and who give high covenants, who give high collateral, and are willing to offer sound spreads over the base rate.
“In fact, a triple-B bond in India today gets around 10.5 per cent,” he says.
This article was sponsored by EAAA Alternatives. As such, the sponsor may suggest topics for consideration, but the Investment Innovation Institute [i3] will have final control over the content.
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[i3] Insights is the official educational bulletin of the Investment Innovation Institute [i3]. It covers major trends and innovations in institutional investing, providing independent and thought-provoking content about pension funds, insurance companies and sovereign wealth funds across the globe.