What Exactly Is Private Lending?
Private lending, or private credit, refers to loans provided to companies by non-bank institutions. Think of it as direct lending from specialised funds instead of traditional banks. These funds pool capital from high-net-worth individuals (HNIs), family
offices, and institutional investors to offer customised financing solutions. In India, this activity is primarily structured through SEBI-regulated vehicles called Alternative Investment Funds (AIFs). Unlike standard bank loans, private credit offers flexibility in structure, tenure, and collateral, making it attractive for companies with needs that don't fit neatly into a bank's rigid lending criteria. This could include funding for acquisitions, bridging capital for a new project, or refinancing existing debt.
The Drivers Behind the Boom
Several factors are fuelling the private credit explosion in India. For years, banks have shifted focus away from large, complex corporate loans towards more scalable retail and small business lending, partly due to tighter regulations and past stress on their balance sheets. This created a significant funding gap, especially for mid-sized companies. Private credit funds have stepped in to fill this void. The implementation of the Insolvency and Bankruptcy Code (IBC) has also strengthened lender confidence by creating a more predictable framework for recovering dues, making the asset class more attractive. Furthermore, a growing economy with ambitious goals for infrastructure and manufacturing requires diverse sources of capital that banks alone cannot provide.
A Look at the Numbers
The growth has been remarkable. The Indian private credit market saw investments of around USD 3.5 billion in the first half of 2026 alone, spread across more than 100 deals. While global funds were once dominant, the market is now increasingly driven by domestic capital, with Indian funds accounting for 74% of deal value in H1 2026. The real estate sector has been the largest recipient of this capital, accounting for 35% of deal value, followed by sectors like healthcare and even food and beverage, which saw a significant jump in activity. The market is also seeing a rise in mid-sized transactions, typically in the USD 10 million to USD 60 million range, which highlights the growing need for structured financing among a broader set of companies.
The Appeal for Investors
For investors, the primary draw is the potential for high yields. In an environment where traditional fixed-income instruments offer modest returns, private credit funds target yields ranging from 12% to over 18%, depending on the risk profile of the loan. Performing credit strategies may yield 14-16%, while more complex special situations or distressed debt can aim for returns upwards of 22%. This provides an opportunity for sophisticated investors to diversify their portfolios beyond equity and real estate and access a stream of regular cash flow. The minimum investment for these AIFs is typically INR 1 crore, positioning it as an asset class for those who understand the associated risks.
Understanding the Inherent Risks
Higher returns invariably come with higher risks. The most significant is illiquidity; private credit is a long-term investment, and capital is typically locked in for several years with no easy exit route. Credit risk is another major factor – the risk that a borrower defaults on their loan. While loans are often secured by assets, the enforcement and recovery process can be time-consuming. As the market becomes more competitive, there's also a risk of weakening underwriting standards. Moreover, unlike publicly traded bonds, private loans are not marked-to-market daily, meaning their valuation depends on the fund manager's assessment, which can lack transparency. Regulators like SEBI and the RBI are keeping a close watch to prevent systemic risks and the misuse of these structures.
