What Exactly Is Private Credit?
Think of private credit as lending that happens outside the traditional banking system. It involves non-bank lenders, typically organised as Alternative Investment Funds (AIFs), providing customised debt solutions directly to companies. Unlike bank loans,
which often follow rigid templates, private credit offers bespoke terms, faster execution, and more flexible structures. This makes it a vital source of capital for mid-sized companies, promoter funding, acquisition financing, and special situations that may not fit neatly into a bank's lending criteria.
The New Reality for Borrowers
For businesses in need of capital, the growing private credit market offers a powerful alternative. Borrowers are finding that private credit funds can provide flexible and structured capital for needs that banks might not service, such as acquisition financing or last-mile project funding. The key advantages are speed and customisation. However, this flexibility often comes at a higher cost compared to conventional bank loans. The biggest change is the increased availability of this funding channel, especially for mid-market companies that are too large for venture capital but may not meet the strict criteria for bank loans or public bond markets. This boom means more companies can access growth capital, refinance existing debt, and fund strategic acquisitions that were previously difficult to finance.
A Golden Opportunity for Investors?
Investors are increasingly turning to private credit in search of higher yields than those available from traditional fixed-income products like bank deposits. The main attraction is the potential for higher risk-adjusted returns, with many funds targeting internal rates of return (IRR) between 12% and over 18%. A significant trend is the rise of domestic capital; in the first half of 2026, domestic funds accounted for 74% of deal value, showcasing growing confidence from local high-net-worth individuals, family offices, and institutional investors. However, the risks are also higher. These include credit risk (the borrower defaulting) and liquidity risk, as these investments are not easily traded. Investors must be prepared for longer lock-in periods, typically three to five years.
The Mid-Market Takes Center Stage
A defining shift in 2026 is the market's pivot towards mid-sized deals. In the first half of the year, transactions between $10 million and $60 million represented 61% of the total deal value, a significant increase from the previous half. This signals a maturing market moving beyond a few large, headline-grabbing transactions to a broader and deeper ecosystem. Domestic funds are particularly well-positioned to cater to this mid-market segment, leveraging their local presence and ability to underwrite more complex, structured deals. While real estate remains the largest sector for private credit deployment, areas like healthcare, food and beverage, and infrastructure are gaining significant traction.
Regulatory Guardrails and Future Trends
As the market grows, regulators like the Securities and Exchange Board of India (SEBI) and the Reserve Bank of India (RBI) are stepping in to create a more formalised framework. Regulations primarily govern these activities through Category II AIFs, which are structured for sophisticated investors. Recent circulars from the RBI aim to prevent the "evergreening" of stressed loans and ring-fence the banking system from risks in the private credit space. Furthermore, changes to the Insolvency and Bankruptcy Code (IBC) are making lenders focus more on the quality of collateral and their voting power in resolution proceedings. Looking ahead, the adoption of Artificial Intelligence (AI) for underwriting and portfolio monitoring is also set to become a key trend, helping funds better assess risk as the market expands.
