Understanding the Growth and Risks of Private Credit Investments in India
Private Credit: A Growing Asset Class in India with Potential Risks
Private credit has emerged as a rapidly growing asset class in India, offering investors an alternative to traditional fixed-income strategies. With an estimated investment of around USD 15 billion at the end of FY22, private credit continues to gain traction in the Indian market.
Experts believe that private credit can help diversify investment portfolios and offer potentially higher yields compared to public bonds or bank deposits. However, it is important to note the risks associated with this asset class.
One of the key benefits of private credit is its tailored solutions, allowing investors to meet their individual needs and preferences. This asset class often offers higher yields due to the illiquidity premium associated with private lending.
Despite the higher risk involved in private credit investments, experts believe that the lower default rate in India, combined with the high yields offered, more than compensates for the perceived risks. Private credit investments are also less correlated with public markets, reducing portfolio volatility.
However, there are risks associated with private credit investments, including credit risk, liquidity risk, dependence on key personnel, and operational risks. Investment managers must engage deeply with companies to understand their business models and governance structures to mitigate these risks.
To manage these risks, private credit funds employ strategies such as active due diligence, diversification, and adding protective clauses in loan agreements. Diversification across sectors and borrowers is recommended to reduce the impact of any single borrower default.
Overall, experts believe that private credit is here to stay and expect the AUM in India to reach USD 60-70 billion by 2028. With the growth of Indian investors and improved due diligence standards, private credit is poised to become a sustainable asset class in the country.