Pity the typical Indian business owner. Of the country’s 3,000 listed firms, the largest 10 percent hold 90 percent of listed corporate debt, according to Goldman Sachs, leaving the others to share the rest.
Rewriting the rulebook
The appetite is there and the corporate demographics certainly match up. Yet, lending in India is not without its challenges. One of the biggest issues is the poor regulatory framework, with little protection for lenders in the event of bankruptcies.
So while challenges still abound, private debt is here to stay.
Banking sector woes
The intent from the Reserve Bank of India is very clear – foreign investors are being invited in and domestic alternative lending encouraged. Much of this is because of the struggles of the Indian banking sector, which is heavily regulated with large chunks of balance sheets mandated for lending to government and infrastructure projects.
Large slices of public sector bank books were ploughed into infrastructure financing when the times were good. Now lenders find themselves with rapidly increasing non-performing asset ratios, particularly in their power and steel exposures.
Non-performing loans within the public sector banks stood at 17 percent as of 30 September, according to the Reserve Bank of India, and research by Credit Suisse suggests that the public lenders have continued to double down on loans to the most stressed sectors.
With their balance sheets dedicated to financing government and infrastructure, banks effectively ignore most of corporate India – particularly the family-owned medium-sized businesses that make up
the bulk of the country’s economic activity.
But private credit providers aren’t complaining.
Venture debt is another up and coming market. In the last five to 10 years, it has emerged as a significant asset class in India, with more than $5 billion raised by venture capital-backed businesses in 2015.
“The tenures are short for venture debt… it’s a pretty healthy market, and the underlying dynamics are growth-oriented,” says Shujaat Khan of Blue River Capital.
According to Rahul Khanna, managing partner of Trifecta Capital, a venture debt firm that has raised more than 200 crores rupees in commitments from Indian institutional investors as part of a 500 crore rupee fundraise, venture capital-backed businesses also have debt financing needs that are not serviced by traditional financial institutions.
Khanna says that equity financing is typically more expensive than debt: “While venture debt is not a complete substitute for raising equity capital, a healthy mix of equity and debt financing helps reduce the dilution impact on the founder and, more importantly, brings down the blended cost of capital for the business.”
Moreover, as these small businesses scale, their needs include capex or acquisition financing, where debt is preferable but not available from traditional lenders. Lastly, he says, many companies see venture debt as supplementary to an equity capital raise. As it is largely non-dilutive, it extends the runway between two rounds of funding.