India’s expanding credit landscape is a result of the strengthening of Indian financial markets

The current challenge faced by the financial markets is expanding their bond market to ease the growing demand for capital. The present corporate bond market in India is the world’s smallest in terms of the proportion of its gross domestic product (16 percent of GDP), and the aim is to double that ratio to the targeted 5 trillion economy.

Over the last few years, there has been something called “the meteoric rise of the private credit market” in India. The booming private credit market provides a valuable alternative to the supply of credit to businesses with specific funding needs and irregular cash flows from banking instituions. The private credit markets (taking place via asset managers involving a private credit/alternative investment (AIF) fund), are specifically catering to such businesses that banks may avoid due to higher risk and regulatory restrictions.

Such credit markets are especially relevant for mid-sized businesses that increasingly look for tailored financial solutions with flexible structures. Given the risk aversion of the local banks, traditional lending practices often are not able to meet the diverse capital needs of mid-sized, fast-growing businesses, private debt lenders provide an avenue with their flexible financing solutions. As per experts, the corporate bond market has emerged as an important player in the credit landscape. Over more than a decade, the share of bonds in overall non-government credit has gone by 7 percentage points. With a growth rate of credit from the bond market surpassing credit from banks over the last six years, bond issuances by businesses have increased drastically.

Indian lenders are increasing lending to local corporations, which is being called the new sign of a new private investment cycle in India, characterized by reduced costs and raised equity capital. This has led to the enhancement of productive capacity and working capital, which, in turn, has led to a higher demand for credit. Thus, the risk-averse banking sector is being complimented by the risk-taking behavior of the private credit market.

The Asset under Management (AUM) of India-focused private debt funds grew at an astounding pace, approximately 26 times from $0.7bn in 2010 to $17.8bn in 2023. In the first half of this year, India’s private credit investments surged to an all-time high, with investments totaling US$6 billion. The sectors with the highest credit demand include real estate, followed by infrastructure, and healthcare.

Moreover, as per EnY’s report, despite global macroeconomic fluctuations and instability, the Indian banking sector remained resilient in FY24, with high capital ratios, strong Non-performing assets (NPAs) coverage, and stable asset quality. The booming market also experienced 16% Y-o-Y loan growth, despite higher lending rates. Despite slowing down of venture capitalist activities globally, the prospects for VC in India showed resilience, still performing well in the deal value front in the Asia-Pacific region (APAC).

A peculiar nature of the Indian financial market is the tussle between financial markets and the regulatory authorities/ frameworks. While the regulatory environment would be seen as a hurdle by experts belong to the ultra-neoliberal camp, the Indian economy has always maintained its positioning as a balanced and progressive liberal and yet mixed economy, with efforts targeted at enhancing the regulatory environment for flourishment of financial markets while using the robust and independent banking system to protect the economy from extreme vagaries of the global economy.

Such a framework is crucial in providing an economic discourse on the capacity of the central bank and regulatory bodies like SEBI on one hand, and the scope of financial markets growth and resilience-building over time, on the other. Such interactions and heterogenous demands have led to various regulatory improvements in India, like the introduction of the Insolvency and Bankruptcy Code, 2016 (IBC), allowing for the maximization of the value of assets, promote entrepreneurship, and availability of credit in a time-bound manner, which in turn helps boost investor confidence.

A testimony of Indian skepticism flavored with calculated risk-taking and readiness to boost financial markets is exemplified in the words of Reserve Bank of India Governor Shaktikanta Das, “At the moment, we don’t see the kind of risk which we see at a global scale… for private credit in India… (At the global level), the “robustness and resilience of private credit is yet to be tested” and “every central bank or every regulator should be looking into” (the possible risks)”.

Here, we see a flare of rational expectations in the Indian financial market, which not only learns from past experiences across the globe but also adheres to far-sightedness with caution. Given, the risky nature of rising unsecured loans as highlighted by the experts, rising credit markets in India is yet another avenue for tug of war between budding market and the regulatory authorities, which continues till they arrive at their unique equilibrium over time.

Moreover, the fiscal policy of the economy has catalyzed a multitude of infrastructure FDI deal flows in India. For the current budget with ambitious capital expenditure target of $133bn, over $20bn is expected to arrive from private capital players. India is the market with the most active infrastructure deals market in the Asia-Pacific region.

Infrastructure has emerged and sustainably maintained its position as a dynamic market in India, despite a slowdown over the last year. India’s logistics market has been estimated to be US$ 317.26 billion in 2024, with expectations to reach US$ 484.43 billion by 2029. The overall infrastructure capex is expected to grow at a CAGR of 11.4% over 2021-26, driven by spending on social infrastructure, including water supply, transport, and urban infrastructure. With picking up of corporate credit demand, overall, lending by Indian banks have also been rising steadily. Banks like State Bank of India are looking for a drastic rise in their stock of corporate loans.

The growing developments in the Indian credit market is being regarded as a crucial inflection point in the credit ecosystem by the experts. With the emerging private credit market, increasing demand for credit by the local corporates, and resilient VCs amidst global volatilities, Indian financial policy and regulatory space has a new window of opportunity to regulate risk, set a long-term rule of the games and path to growth.