The Familiar Path: What Are Bank Loans?
For decades, if a business in India needed money to grow, it went to a bank. Bank loans are the most traditional form of financing. They are provided by public sector, private sector, and cooperative banks, all heavily regulated by the Reserve Bank of India (RBI).
This process is structured and methodical. A business must submit a detailed application, provide extensive documentation including financial history and business plans, and undergo a thorough credit check. Banks are cautious, looking for a stable track record and often requiring collateral—an asset like property that the bank can claim if the loan isn't repaid. This rigorous process ensures reliability and transparency, with interest rates that are generally competitive and predictable. It's the tried-and-tested route, best suited for established businesses with a solid financial history.
The New Challenger: What Is Private Credit?
Private credit is essentially any lending that happens outside the traditional banking system. Instead of a bank, the lenders are non-bank entities like specialised investment funds, asset managers, or even groups of high-net-worth individuals. These funds pool money from investors and lend it directly to companies. In India, this is often done through SEBI-regulated structures called Alternative Investment Funds (AIFs). This market has grown significantly as businesses seek more flexible financing that banks may not provide. It’s particularly useful for mid-sized companies, startups, or businesses in sectors that banks might consider too risky.
Key Difference 1: Speed and Flexibility
The biggest advantage of private credit is its flexibility and speed. While a bank loan process can be slow and rigid with standardized products, private credit deals are directly and privately negotiated between the borrower and the lender. This allows for customised loan terms, repayment schedules, and covenants (the rules of the loan) that are tailored to the specific needs of the business. Because they are less regulated than banks, private lenders can approve and disburse funds much faster, which is critical for businesses needing to act quickly on an opportunity, like an acquisition or expansion.
Key Difference 2: Risk and Cost
That speed and flexibility come at a price. Private credit lenders are often willing to take on higher risks, such as funding a company with a shorter track record or one in a turnaround situation. To compensate for this increased risk, they charge higher interest rates. While a typical business loan from a bank in India might have an interest rate of 9-11%, a private credit deal often targets returns for the lender in the range of 12% to over 18%. So, while private credit offers access to capital that might otherwise be unavailable, it is a more expensive form of financing.
Who Chooses What, and Why?
The choice between a bank loan and private credit depends entirely on the company's situation. An established manufacturing firm with years of steady profits will likely opt for a lower-cost bank loan for its predictable needs. In contrast, a fast-growing tech startup that isn't profitable yet but needs capital to scale might turn to private credit. Private credit is also a popular source for funding specific situations like mergers and acquisitions, project financing, or providing capital to businesses in stressed sectors where banks are hesitant to lend. In the first half of 2026, sectors like real estate, healthcare, and food & beverage were major users of private credit in India.
