KKR may merge troubled India NBFC with InCred, take minority stake
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Private equity giant KKR & Co. plans to merge its India non-bank lending arm with InCred Financial Services Ltd via an all-stock deal that would give it a minority stake in the combined company, people familiar with the matter said.

The planned deal comes at a time when KKR India Financial Services Ltd—the non-banking finance company—has been struggling with a rise in bad loans, a slump in valuation and a top-management churn for the past year.

The proposed merger appears to be a dramatic change in strategy by KKR, which had committed an additional $150 million to the NBFC as recently as January to strengthen its position in India’s non-bank lending segment.

According to the people cited above, who didn’t wish to be named, the combined entity would be run under the InCred brand name and would be led by InCred founder Bhupinder Singh.

The people also said that KKR and its investors would get a minority stake in the merged firm. KKR India Financial is fully owned by KKR Capital Markets Pvt. Ltd. KKR Capital is 51% owned by KKR & Co. Abu Dhabi Investment Authority (ADIA) and the Teacher Retirement System of Texas are its other shareholders.

InCred’s existing shareholders include PE firms Investcorp, Paragon Partners and Elevar Equity, Manipal Group chief Ranjan Pai, Dutch development financial institution FMO and former Deutsche Bank co-chief executive Anshu Jain. 

Mumbai-based InCred, which began operations in early 2017, has raised more than Rs 1,000 crore till date from its investors. This includes Rs 600 crore in large Series A round led by FMO last year. 

InCred declined to comment on the matter. KKR didn’t respond to a request for comment.

The Times of India and sister publication The Economic Times first reported the development earlier in the day.

If the deal goes through, the merged firm’s loan book would be around Rs 6,000 crore, the people cited above said.

KKR India Financial focuses on wholesale lending and had a loan book of Rs 4,754 crore at the end of December 2019, according to a March report by ratings firm Crisil Ltd.

InCred lends to individuals and small and medium-sized businesses. It had assets under management of Rs 2,069 crore as on March 31, 2020, shows a July report by Crisil.

One of the persons cited above said that KKR India Financial expects its portfolio to shrink, bringing the combined book to Rs 6,000 crore. Indeed, the NBFC’s portfolio shrank from Rs 5,966 crore in March 2018 to Rs 5,694 crore a year later and then to Rs 4,754 crore by December 2019 as bad loans rose and it tightened its lending operations.

Last month, VCCircle reported that the NBFC’s valuation had slumped below $200 million (Rs 1,520 crore) by December 2019—and possibly even further thereafter—after it booked massive losses, wrote off some loan accounts and made a provision for doubtful debts. This prompted the PE firm to commit $150 million to the NBFC in January. However, the NBFC hasn’t yet drawn this capital.

For the nine months through December 2019, the NBFC recorded pre-tax losses of Rs 1,516 crore. This wiped out the entire accumulated pre-tax profit of around Rs 1,200 crore earned by the company over the last decade.

The company's gross non-performing assets jumped to 6% as on December 31, 2019 from 2.1% on March 31, 2019. The bad loans could have risen further, especially after the disruption caused by the coronavirus pandemic.

KKR India Financial has been in turmoil for the last two years as its credit business struggled with investments in companies such as Kwality Ltd, Resonance Eduventures, Sintex BAPL Ltd, Avantha Holdings Ltd and CG Power.

The company has also seen a top-deck shuffle. In October last year, BV Krishnan stepped down as its CEO after leading the company for a decade. The same month, KKR hired Kapil Singhal from Edelweiss Group to boost its credit team. Singhal took charge of the credit business early this year. KKR India CEO Sanjay Nayar remains overall head of both the PE firm and the NBFC in the country.

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