Private Credit 101 - The India context

What debt really is, where private credit fits, and what happens when it goes wrong

A lot of bright young people tell us they want to work in private credit. It is a hot asset class in India, with a lot of branding around it - even banks are renaming their structured lending divisions as private credit. Most really young professionals have never been taught what it actually is, because the basics get skipped, or buried under jargon.

At True North, we try to keep it simple. If we can't explain what we do in plain words, we probably don't understand it well enough ourselves.

So here is our honest attempt to explain private credit from the ground up - the way we'd explain it to a non-industry friend who asked. And it starts, of all places, with debt. Private credit is just one kind of debt. Once you understand debt, the rest is much easier.

What debt really is

Debt is money lent to a business, with rules attached. Those rules are what make debt different from equity.

When you own equity, you own a piece of the business. You share in whatever is left over. When you lend debt, you don't own anything. You are a lender. And a lender sits in a different seat - usually a safer one.

Here is what that seat looks like:

-     In bankruptcy, debt gets paid ahead of equity. If the business is wound down, lenders are first in line. Owners get whatever is left, if anything.

-     Debt has a fixed repayment schedule (except for working capital lines in India). You know when the money comes back. It is a date, not a hope.

-     Debt delivers fixed returns (sometimes with a bit of upside thrown in). The lender knows the return going in. It doesn't depend on how well the business does, as long as it can pay.

-     Debt carries periodic coupons. The lender gets paid along the way, not only at the end.

-     Debt may be backed by external collateral - assets outside the business set aside to back the loan.

-     Debt is protected by covenants - written promises the borrower makes, like not borrowing too much more, or maintaining certain ratios. They act as early warnings.

-     And debt is protected even before bankruptcy, while the business runs. Share pledges, charges on assets, escrows - all of it keeps debt ahead of equity. Not just at the end. Along the way too. These can be triggered by covenant breaches, and come in handy when stress appears.

These are not small things. They are the reason debt behaves the way it does. It is not correlated to equity returns, but the underlying credit has to hold for it to deliver fixed returns.

Almost everything about debt is principal protection - and debt is built to be protected.

So debt is not equity in disguise. Different instrument. Different seat. Different rules.

Where private credit fits

Now let's place private credit in that picture. It is not some new kind of risk. It is the same debt we just talked about - lent in a different way, by a different kind of lender.

For a long time, the answer to “who lends debt?” was simple. Banks. Later on, NBFCs. A business needs money, it goes to a bank, the bank lends it. That works fine for a lot of borrowers.

But banks have limits - rules on how much they can lend, to whom, against what. They like certain sizes, certain sectors, certain kinds of collateral. A perfectly good business can fall outside the bank's box. Not because it is risky. Just because it doesn't fit. That gap is where private credit comes in. Banks also have practical issues - speed of response, how many times they can lend in a year, and a committee process beyond the control of the bank's front-end staff.

Private credit is debt provided by a fund instead of a bank. The fund raises money from investors, then lends it directly to businesses. Same instrument. Same protections we covered above - repayment schedule, coupons, covenants, collateral, share pledges. What changes is the lender. Some tweaking happens, and that is called flexibility - but that's not the full story.

A few things come out of that:

-     The loan is privately negotiated. It isn't bought and sold on a public market. The lender and the borrower agree on terms directly.

-     The terms can be tailored. Because it is one to one, the structure can be shaped to fit the business.

-     The lender does deeper work. There is no public market doing the pricing, so the fund has to understand the business closely.

-     The lender stays close even after lending. It doesn't end at the cheque.

So why does any of this matter? Because once you see it this way, private credit stops looking exotic. It is the same debt, in the same safe seat we described at the start. Just lent by a different hand, to good businesses that fall outside what banks are structured to do, and in a time frame they can deliver.

That is the foundation. Everything else builds on it.

What happens when things go wrong - and why India is different

So far we have talked about how debt is meant to work. Safe seat, paid first, protected by rules. But it is worth being honest about what happens when a borrower actually stops paying - because this is where India is very different from the textbook, and from the US.

On paper, if a borrower defaults, you go to bankruptcy and the law sorts it out. In India, it rarely goes that cleanly.

-     Getting a case admitted into bankruptcy can take a long time. The clock you imagined is not the clock you get.

-     Even once admitted, things drag. Lenders don't always agree with each other. Courts are overburdened. Months become years.

-     During those long years, the promoter's intent can change. Value quietly leaves the company while everyone waits.

-     Lenders fall out with each other. That happens everywhere, even in the US. But India's bigger problem is often the opposite of fighting - it is inaction. Decision-making can be slow, especially where public-sector lenders sit in the debt stack. The system tends to reward caution over action - doing nothing rarely gets questioned, while acting can. It is a structural incentive problem more than anything else, and it can freeze a recovery for years.

-     The business itself suffers. Vendors get nervous. Customers start looking elsewhere. A company that was a going concern slowly stops being one.

Compare that with the US. There, admissions are quick, professional administrators step in early, and the business keeps running while it is sorted out. The problems are real, but smaller - because the process moves.

To be fair, India has come a long way. The bankruptcy process has improved a great deal over the last six to seven years, and the framework is far better than it was. The gap now is execution - the law reads well, but on the ground it is still a far cry from quick or clean. So you cannot lend as if it will be cleanly executed.

This changes how you think about the whole job. At its heart, the job is simple to state, even if it is hard to do well: get your money back early, before equity gets paid, and keep losses small when something goes wrong.

And the part that matters most - you don't do that with collateral alone. Collateral is just one tool, and in India a slow one. So we recover and protect in many ways, layered on top of each other. But one layer comes before all the others, because if it fails, none of the rest mean anything.

-     Real numbers. None of this works if the accounts are not true. A coupon you cannot collect, collateral over a business that does not really exist, a cash flow trap on cash that was never there - all worthless if the numbers were padded to begin with. So our first job on every deal is to establish this is a real business, with real vendors and real customers - not round-tripping, not inflated sales, not dressed-up accounts. We at True North run two separate forensic checks on every transaction for exactly this. Get it wrong, and everything built on top falls.

-     Short tenor. Less time for things to go wrong, and less money still out there if they do.

-     Coupons. Money coming back steadily through the life of the loan. Every payment is exposure already reduced.

-     Deal sizing and diversification. No single deal big enough to hurt the fund. Losses, when they come, stay contained.

-     Non-correlated collateral. Security that holds its value even if the borrower's own business is struggling. Not always possible, but we try.

-     Cash flow traps. Routing the company's cash so repayment happens before money can leak out elsewhere.

-     Alignment. The promoter should have more to lose than you do. When their own skin is in the game, default becomes their problem before it becomes yours. For us, this is the single biggest protection.

And the last pit stop - bankruptcy, with all the issues we just described. It is the backstop, not the plan.

A word on collateral, because it deserves a fairer hearing. In India, it is less a way to get your money back and more a way to keep the borrower honest - a deterrent. And it is working better than it used to. Since the bankruptcy code came in, the mere threat of the process has pushed up out-of-court settlements; borrowers would rather settle than be dragged through it. So even an imperfect process is doing real work - it changes behaviour long before anyone reaches a courtroom.

That is the real lesson. In India, you do not get rescued at the end. So you build many small protections up front, keep getting your money back along the way, and treat bankruptcy as the last resort it should be. The protections we listed at the start are not a safety net you fall into when things break. They are the work you do so you rarely have to.

Why we wrote this

None of this is secret. It is just rarely said plainly.

We wrote this because we believe private credit can be explained simply, and the people worth working with are the ones drawn to clarity, not jargon. If you read this and found yourself nodding, or arguing, or wanting to know more - that is the kind of thinking we like.

We are still learning ourselves, deal by deal. But this is how we try to think at True North, and how we try to explain it. If you see it differently, or want to push back, we'd enjoy hearing how you think about it.

More to come, in the same plain words.

Kapil Singhal, Managing Partner, True North Private Credit