Corporate Lending in India

KKR &Co. needs no introduction of its own. Its known to all as the leading private-equity (PE) giant and is famous worldwide for its big ticket acquisitions. If we talk about the India economy, KKR &Co. has followed a different game plan altogether. They have lent more than $1 billion since early 2011 to Indian companies through KKR India Financial Services Ltd, a non-banking finance company (NBFC) which is set up here. Also, KKR &Co. bought 16 per cent stake in Kolkata based NBFC Magma Fincorp Ltd in May last year.

For the country, KKR is quickly becoming the trend. Many other PE firms have also set up, or invested in local NBFCs to extend loans to Indian companies. Leading Investment Bank, Goldman Sachs partnered with Everstone Capital to start Indostar Capital Finance Pvt Ltd in 2009 for the purpose. It was also seen that Warburg Pincus agreed to buy a majority stake in Future Capital Holdings and have also invested $50 million in Jaipur-based AU Financers. On the similar lines, one of the largest PE firms in the world, Apollo Global Management joined hands with ICICI Venture to undertake structured debt financing activities through an NBFC. Having seen so much of movements in the PE sector, let’s see why are global PE firms, which normally pick up equity stakes in companies they invest in, bullish on corporate lending when it comes to economy like India. It is needless to say that the NBFCs are a good proxy for investment in a highly regulated banking sector.

Banks vs. NBFCs

Banks, for instance, need to comply with certain regulations and norms of CRR and must keep 4.5 per cent of their deposits with the Reserve Bank of India (RBI), the Central Bank of India. They also need to invest 23 per cent of their deposits in liquid assets including government bonds and gold. Not only this, banks also extend 40 per cent of loans to priority sectors such as agriculture. On the contrary the NBFCs are not bound by any such restrictions or regulatory norms of investment, etc. In case of PE firms, capital is brought from foreign land as proprietary or by borrowing from foreign banks at a lower interest rate of 3% to 4% which is then lend to Indian companies at high interest rates of 18% to 24%. When the stock markets are volatile, it makes tough for PE firms to generate high returns by exiting their previous investments. If we talk about market volatility, it also means that the promoters of companies are reluctant to sell shares to meet their funding needs as for them the banks have so far been serving as the major source of funds. Banks are a major source in India, as the corporate bond market is not well developed and certain restrictions and regulations don’t allow the companies to borrow from overseas.

Indian Bank Numbers

With the rising bad loans recently, banks are now turning cautious. Fiscal year 2011/12 reported that 87 companies sought permission from their lenders to restructure Rs 67,889 Crore in loans. Also in the period from April to July this fiscal year, 68 companies sought to recast debt worth Rs 44,410 Crore. Ratings firm India’s largest credit rating agency, Crisil says that the total restructuring portfolio of banks is recorded at whopping Rs 3.25 trillion this fiscal year. And this is the place where the PE based NBFCs are enjoying the game by filling the gap. It is needless to say that the NBFC structure gives PE firms the flexibility to offer structured debt and mezzanine financing where as the later involve debt that is converted into equity if not paid in time.

It is seen that not only the small or mid-sized companies are raising debt from these NBFCs, rather big names such as the Analjit Singh-led Max India Ltd, Investment company owned by steel tycoon Sajjan Jindal have raised a total of Rs 1,200 crore from KKR India Financial too in order to repay existing debt and expand their businesses. The borrower gains also from the PE firm’s global experience in dealing with various sectors.