What is Private Credit?
At its core, private credit is simply lending that happens outside the traditional banking system. Instead of a company going to a bank for a loan, it borrows directly from a non-bank entity. These lenders are typically specialised funds, such as Alternative
Investment Funds (AIFs) in India, which pool capital from high-net-worth individuals (HNIs), family offices, and institutional investors to lend out. These loans are privately negotiated, allowing for customised terms that public markets or banks might not offer.
The Familiar World of Traditional Lending
Traditional lending is the system we are all familiar with. It is dominated by commercial banks that take deposits from customers and lend that money out to businesses and individuals. This entire process is heavily regulated by bodies like the Reserve Bank of India (RBI). Banks follow strict, standardised procedures for loan approval, requiring extensive documentation and strong credit histories. Their business is built on managing risk within a regulated framework, which often makes their lending products less flexible.
The Key Differences for Investors
For Indian investors, the choice between these two worlds comes down to a trade-off between risk, return, and liquidity. Private credit typically targets higher returns, with yields that can range from 12% to over 18%, significantly higher than traditional fixed-income assets. This premium is compensation for taking on higher risk, including the possibility of borrower default. Traditional bank-led instruments like fixed deposits offer much lower returns but come with greater safety and predictability. Another major difference is liquidity. Private credit investments are generally illiquid, meaning your capital is locked in for a period of three to five years or more. Bank deposits and listed bonds, in contrast, can be accessed much more easily.
Why is Private Credit Booming in India?
The private credit market in India has seen explosive growth, with investments reaching USD 3.5 billion in the first half of 2026 alone. This surge is driven by a few key factors. As banks face tighter regulations, they have become more selective, creating a financing gap for many mid-sized companies that need flexible or speedy capital for growth, acquisitions, or refinancing. Private credit funds have stepped in to fill this void. An EY report highlighted that domestic funds now account for 74% of deal value, showing a maturing local market that is increasingly serving mid-market companies. This growth is expanding India's credit ecosystem, providing a crucial alternative to bank and bond markets.
Understanding the Risks Involved
The higher potential returns of private credit come with a distinct set of risks. The most significant is credit risk—the chance that the borrower will default on the loan. These funds often lend to companies that may not qualify for bank loans, which can mean a higher risk profile. Another key risk is illiquidity; investors cannot easily exit their positions. There is also valuation risk, as these unlisted debt instruments are not 'marked-to-market' daily, and investors rely on the fund manager's periodic assessments. While fund managers use security structures like asset collateral to mitigate losses, the process of recovery in case of a default can be long and uncertain.
How Indian Investors Can Participate
For most individual investors in India, the primary way to access private credit is through SEBI-regulated Alternative Investment Funds (AIFs). Private credit funds typically fall under the Category II AIF framework. It's important to note that this is not a retail product; SEBI mandates a minimum investment of INR 1 crore for AIFs, positioning it as an asset class for sophisticated investors who understand the risks. These funds are managed by professional asset managers who source deals, conduct due diligence, and manage the loan portfolio.
