Non-bank lenders and credit funds can invest up to USD 89 billion in performing private credit delivering returns of over 12 per cent, in next five years, a report said on Thursday.

Stressed asset investment opportunities over next five years, emanating from existing stock of unresolved NPAs, fresh credit defaults, and special situation opportunities can be worth approximately USD 25 billion, the report by consultancy EY said.

“India offers a large structural opportunity for private credit investors. Post a spate of bad loans, traditional lenders have become risk averse while NBFCs are recovering from a liquidity crisis that engulfed them in 2018. This has left a large void for private credit providers to capture,” its partner Dinkar Venkatasubramanian said.

The EY report defined performing private credit as the one which delivers an internal rate of return between 12-18 per cent per annum, and estimated the overall lending opportunity to be between USD 39-89 billion over the next five years depending on the rate of credit growth.

In the stressed asset lending space, which can be looked at by private investors looking for higher yields and strategic investors, the returns can go up to 18-24 per cent, it said.

India will continue to offer opportunities across 12–24 per cent IRR range as multiple dynamics are at play, it said, pointing out that stable currency and high economic growth will improve investor confidence.

On the other side, bottoming of interest rate cycle, inflation fears on the back of commodity cycle picking up and recent concerns regarding delays in enforcement of creditor rights will push rates higher, the report said.

It also highlighted challenges for private credit market, including delays in formal bankruptcy process, delays in resolutions outside the National Company Law Tribunal framework, corporate governance issues like cash leakages, easy monetary policy environment, inability of alternate investment funds to directly enter the secondary market and no recourse to the SARFAESI provisions for such investors.

There are a slew of deals which can take place under the private credit umbrella, including buying out a stressed business under bankruptcy laws or otherwise, priority debt funding, secondary transactions, performing credit, one-time settlement and opportunistic or special situation transactions, it said.

Investors can enter either through the offshore route, which will include coming in as foreign direct investment and foreign portfolio investment, or, from the onshore front which will involve setting up an AIF, NBFC or asset reconstruction company, it said.