US private equity giant KKR is in talks with Indian banks on potential partnerships to lend to local firms, reports Bloomberg.

“We are in dialogue with banks to see if there are creative ways to partner” in lending to India’s small-to-mid sized companies, said B V Krishnan, chief executive officer of KKR India Financial Services.

The report added that KKR is also looking for acquisitions of Indian non-bank lenders, according to Krishnan, confirming a similar news story from last October.

A corporate funding squeeze in India, the world’s fastest growing economy, is creating opportunities for US private equity giants, according to the Bloomberg report.

Global investors from Oaktree Capital Group LLC to Varde Partners have considered lending to companies in India where the lack of a deep bond market and a bad-debt crisis have hampered borrowers’ attempts to access longer-term funds.

Financing for smaller firms has dried up since last September, when a string of shock defaults by shadow lender Infrastructure Leasing and Financial Services Ltd (IL&FS). put the non-bank financing industry under a spotlight.

Greater due diligence

In recent weeks the stock price and credit ratings of mortgage lender Dewan Housing Finance Corp have  been hard hit by allegations of inappropriate fund transfers, which it denies. However its parent sold a 70% stake in Aadhar Housing Finance, a lender to low-income individuals, to Blackstone LP earlier this month

Blackstone said that it now plans to make an initial capital infusion into Aadhar of about $112 million, which will reduce to about half the company’s debt to equity ratio

KKR already operates two local non-bank financiers –KKR India Financial Services Pvt and KKR India Asset Finance Pvt -- and also manages credit funds in India with outstanding loans of about 110 billion rupees (US$1.55 billion).

Krishnan told Bloomberg that in the wake of the IL&FS default, Indian companies in the supply chain of larger manufacturers “will experience distress if the financing situation doesn’t improve.”

Due diligence for merger and acquisition (M&A) deals has had to be enhanced, with greater attention paid to balance sheet risks such as working capital as these can no longer be easily addressed.

Asked what was hampering KKR’s attempts to buy loans from lenders, Krishnan responded: “The lack of standardised loan and bond documentation makes it difficult to acquire wholesale loans and price them, on a secondary basis.

There is also a lack of standardisation in terms of how lenders reckon defaults – several lenders treat loans and bonds as performing, despite covenant defaults, thereby resulting in differences in risk perception.”