The Familiar Path: Traditional Bank Lending
Traditional lending is the system most of us know. It’s dominated by commercial banks that are regulated by the Reserve Bank of India (RBI). When you or a business needs a loan, you go to a bank. These institutions use the vast pool of money from customer
deposits (like savings and current accounts) to lend out. The process is highly structured, with standardized loan products, stringent credit checks, and a fair amount of paperwork. Because they are dealing with public deposits and are vital to the economy's stability, banks operate under strict regulations regarding who they can lend to and how much risk they can take.
The New Contender: Private Credit Explained
Private credit, also known as private debt, is lending that happens outside the traditional banking system. Instead of a bank, the lender is a non-bank entity like a private fund, an asset manager, or a group of high-net-worth individuals. These lenders raise capital directly from sophisticated investors who are looking for higher returns. The entire deal—from the loan amount to the repayment schedule and interest rate—is privately negotiated between the borrower and the lender. In India, this activity is primarily structured through Alternative Investment Funds (AIFs) that are regulated by the Securities and Exchange Board of India (SEBI).
Speed and Flexibility: The Deciding Factor
One of the biggest reasons businesses turn to private credit is the need for speed and flexibility. Securing a bank loan can be a slow, bureaucratic process with rigid terms. Private credit lenders, on the other hand, can move much faster, often approving and disbursing funds in weeks rather than months. They also offer bespoke solutions. A company with a unique business model or a complex financing need, such as for an acquisition, can negotiate customised loan terms that a traditional bank simply couldn’t offer.
The Cost of Capital: Paying for Convenience
This speed and flexibility come at a price. Private credit is generally more expensive for the borrower than a bank loan. Lenders charge higher interest rates to compensate for taking on greater risk, financing complex situations, and because the loan isn't easily tradable (a concept known as an illiquidity premium). In India, yields for private credit lenders can range from 14% to over 20%, significantly higher than what banks charge. For borrowers, this higher cost is often a worthwhile trade-off for getting the capital they need, exactly when and how they need it.
Risk and Regulation: A Different Playing Field
Banks and private credit funds are governed by different regulators and have different risk appetites. Banks, overseen by the RBI, are conservative and prefer borrowers with strong, stable credit histories to protect depositors' money. Private credit funds, regulated by SEBI, cater to a broader range of borrowers, including those that may be considered too risky for banks. While this opens up funding for more businesses, the risk is higher. To manage this, private credit lenders often demand more control through strict loan agreements (covenants) and secure the loan against company assets. The regulatory framework for AIFs in India ensures these are closed-ended funds for sophisticated investors, which helps contain risk and prevents the kind of liquidity issues seen in other markets.
Why Private Credit Is Booming in India
The private credit market in India has seen explosive growth, with domestic funds now leading the charge and accounting for nearly 74% of deal value in the first half of 2026. This boom is driven by several factors. Firstly, India's fast-growing economy needs massive amounts of capital for everything from infrastructure to acquisitions, and banks alone cannot fund it all. Secondly, regulatory gaps create opportunities; for instance, RBI rules limit bank funding for land acquisition by real estate developers, a gap private credit has eagerly filled. Finally, the implementation of the Insolvency and Bankruptcy Code (IBC) has given lenders more confidence in their ability to recover money in case of a default, making the market more attractive.
