First, What Is Private Credit?
Think of private credit as lending that happens outside the public markets and traditional banking systems. It involves non-bank institutions, primarily organised as Alternative Investment Funds (AIFs), providing loans directly to companies. These are
not publicly traded bonds but privately negotiated debt deals tailored to a borrower's specific needs. This allows for more flexibility in terms of loan size, repayment schedules, and structure compared to a standard bank loan. For investors, who are typically high-net-worth individuals (HNIs) and institutions, it offers the potential for higher returns than conventional fixed-income products, often targeting annual yields between 12% and 18%.
The Gap Left by Traditional Banks
For years, Indian companies relied heavily on banks. However, a decade-long period of stress, marked by high levels of non-performing assets (NPAs), made banks more cautious, especially towards lending to the corporate sector. Following the Reserve Bank of India's Asset Quality Review, many banks pivoted towards less risky retail and consumer loans, creating a financing void for many mid-sized companies. Even as the banking sector's health has improved, this caution persists, leaving many businesses underserved. Private credit funds are stepping in to fill this gap, providing capital for needs that banks are often reluctant to service, such as acquisition financing, capital expenditure, and complex structured transactions.
Key Drivers of the Boom
Several factors are fueling private credit's rapid ascent. India's strong economic growth means companies in sectors like real estate, infrastructure, and healthcare constantly need capital to expand. This demand for faster, more flexible funding is a primary driver. On the supply side, a growing class of sophisticated domestic investors, including family offices and HNIs, are looking to diversify their portfolios beyond stocks and real estate, and are attracted by the higher risk-adjusted returns private credit offers. In the first half of 2026, domestic funds accounted for a staggering 74% of the US$3.5 billion in private credit deal value, showcasing the strength of local capital. Supportive regulations from SEBI, which governs AIFs, have also boosted market confidence and provided a formal structure for this asset class.
A Focus on the Mid-Market
While large corporations can tap public bond markets, it's India's mid-market firms that are becoming the sweet spot for private credit. These companies often require financing that is too large or complex for a small bank but not large enough for the public debt market. Data from the first half of 2026 shows a significant trend towards mid-market deals. Transactions in the US$10 million to US$60 million range accounted for 61% of total deal value, reflecting the market's growing maturity and its role in serving a broad spectrum of mid-sized borrowers. The real estate sector remains the largest recipient, followed by healthcare and food and beverage, with funds being used for everything from refinancing debt to funding new projects.
Navigating the Inherent Risks
The rise of private credit is not without risks. These investments are, by nature, less liquid than publicly traded securities, meaning capital is often locked in for several years. The borrowers are typically firms that are considered higher risk than those serviced by major banks, which is why they offer higher returns. Regulators like the RBI and SEBI are keeping a close watch on the sector to prevent issues like the 'evergreening' of bad loans, where fresh debt is used to pay off old, stressed loans. The RBI has already flagged emerging stress signals like an uptick in defaults and has put in place rules to ring-fence the banking system's exposure to private credit AIFs, ensuring that any potential losses do not create a systemic risk.
