First, What Is Private Credit?
Think of private credit as lending that happens outside the traditional banking system. It involves non-bank institutions, typically organised as Alternative Investment Funds (AIFs), lending money directly to companies. Unlike a bank loan, these deals
are not public and are tailored specifically to the borrower's needs. The borrowers are often mid-sized companies that may not fit the rigid criteria of banks or find the public bond market inaccessible. In exchange for providing this flexible, customised capital for needs like acquisition financing or growth funding, private credit funds can earn higher returns than traditional lenders, often in the range of 14% to 22%.
A Perfect Storm for Growth
The surge in private credit isn't accidental; it's the result of several converging trends. For years, India's banking sector was burdened by non-performing assets (NPAs), which made banks more cautious about lending to corporations. This created a financing gap. Around the same time, regulatory changes like the Insolvency and Bankruptcy Code (IBC) of 2016 gave lenders more confidence in their ability to recover dues, making the market more attractive. This created a void that nimble private lenders were perfectly positioned to fill, offering capital for purposes that banks often structurally underserve, such as funding for real estate projects, acquisitions, and complex transactions.
Meet the Key Players
The private credit ecosystem in India is primarily populated by SEBI-regulated AIFs. These funds pool money from sophisticated investors, including high-net-worth individuals (HNIs), family offices, and global institutional players. On the borrower side, the demand comes from a diverse range of mid-market companies and sectors that need flexible capital. Real estate has historically been the largest recipient of private credit, accounting for 35% of deal value in the first half of 2026. However, the market is diversifying rapidly, with sectors like healthcare, manufacturing, and even food and beverage seeing a significant uptick in activity. A notable trend is the rise of domestic funds, which accounted for 74% of deal value in the first half of 2026, signalling a maturing local market.
Regulation Is Shaping the Market
Regulators like the Securities and Exchange Board of India (SEBI) and the Reserve Bank of India (RBI) are not ignoring this growing sector. Private credit in India primarily operates through SEBI-regulated Category II AIFs, which are structured as closed-ended funds for sophisticated investors. This structure prevents the kind of liquidity mismatches seen in some global markets. The RBI has also been proactive in ring-fencing the traditional banking system from this newer market, putting caps on banks' investments into AIFs to prevent systemic risk. While some observers worry about the risks that have emerged in the much larger US private credit market, the Indian context is structurally different, with lower leverage and stronger regulatory guardrails.
The Road Ahead: Opportunities and Risks
The outlook for private credit in India remains overwhelmingly positive. With the economy's ambition to grow, the demand for capital from businesses will far outstrip what banks alone can provide. Private credit is filling a vital gap, especially for mid-sized firms driving growth. However, the sector is not without risks. Competition is intensifying, which could put pressure on yields and potentially lead to weaker lending standards. Investors are attracted by high returns, but these come with the trade-offs of illiquidity—money is often tied up for several years—and the inherent credit risk of lending to smaller or more leveraged companies. The continued health of the market will depend on maintaining a disciplined underwriting approach even as deployment opportunities expand.
