What Exactly Is Private Credit?
Think of private credit as a direct loan to a company from a specialized investment fund, rather than a bank or through publicly traded bonds. These loans are not listed on any stock exchange. Instead, they are privately negotiated between the lender
and the borrower, allowing for customized terms, flexible repayment schedules, and speed. In India, these transactions are typically structured through SEBI-regulated bodies known as Alternative Investment Funds (AIFs), which pool money from high-net-worth individuals and institutional investors to lend to businesses.
The Reasons Behind the Boom
Several factors have created a fertile ground for private credit's growth in India. For years, traditional banks have become more cautious, leaving a funding gap for many mid-sized companies that are either too small for public markets or don't fit the rigid criteria of banks. Private credit funds have stepped into this void, offering tailored financing for specific needs like acquisitions, expansion, or refinancing. The country's strong economic fundamentals and the government's push for infrastructure and manufacturing have also boosted demand for alternative capital sources. In the first half of 2026 alone, private credit investments in India stood at a significant USD 3.5 billion.
How a Deal Is Structured
The process begins with an AIF raising capital, typically from sophisticated investors who can commit a minimum of Rs 1 crore. The fund's managers then identify and perform deep due diligence on potential borrowers—usually mid-market companies seeking capital they can't get elsewhere. They negotiate every detail of the loan: the interest rate, the repayment tenure (often three to five years), and crucially, the security. These loans are almost always secured, meaning they are backed by specific assets or cash flows of the borrower's business, which provides a layer of protection for the investors.
The Key Players in the Arena
The Indian private credit market has seen a notable shift. While global funds were once dominant, domestic funds have taken the lead, accounting for 74% of the deal value in the first half of 2026. These local players have a strong understanding of the mid-market and can move quickly. The borrowers are typically established mid-sized companies in sectors like real estate, healthcare, and even food & beverage, which has seen a recent surge in activity. These are businesses that need flexible capital for growth, but may be underserved by traditional banks.
Opportunities and Inherent Risks
For borrowers, private credit offers speed and flexibility that banks often cannot match. For investors, it presents an opportunity for higher yields, with target returns often ranging from 12% to over 18%, which is attractive in an environment of volatile equity markets and low fixed-deposit rates. However, the asset class is not without risks. The primary concern is credit risk—the possibility that a borrower may default on its loan. These investments are also illiquid, meaning the money is locked in for several years. Unlike public stocks and bonds, these loans cannot be easily sold. Regulation from SEBI and the RBI provides a framework, but investors must be sophisticated and have a long-term horizon.
