What is Private Credit?
In simple terms, private credit refers to lending by non-bank institutions directly to companies. Instead of going to a bank or issuing bonds on the public market, a business gets a loan from a fund. These funds pool capital from high-net-worth individuals
(HNIs) and institutional investors. In India, this activity is primarily structured through SEBI-regulated Alternative Investment Funds (AIFs). The key appeal for borrowers is flexibility and speed, as the loans are privately negotiated and tailored to specific needs like funding an acquisition, managing working capital, or refinancing existing debt.
The Engine of Explosive Growth
India's private credit market is expanding at a remarkable pace, doubling in size over the last five years to an estimated $25 billion. Several factors are fueling this growth. Traditional banks, constrained by regulations and capital requirements, often leave a funding gap, particularly for mid-sized or unrated companies. Private credit funds are stepping in to fill this void. The demand is robust, driven by needs for acquisition financing, project funding, and refinancing. In the first half of 2026 alone, the market saw investments of US$3.5 billion. A significant trend is the rising dominance of domestic funds, which accounted for 74% of the deal value in H1 2026, indicating a maturing local market. This growth is also reflected in a shift towards mid-market deals, which comprised 61% of the total value in the same period.
Navigating the Inherent Risks
High growth is rarely without risk, and private credit is no exception. A major concern is credit risk—the possibility that borrowers will default on their loans. The real estate sector, for example, attracts the largest share of private credit (35% in H1 2026) but is also perceived by investors as having the highest default risk. Another significant risk is illiquidity. Unlike public bonds, these investments cannot be easily sold and typically require investors to lock in their capital for three to five years. Regulators are also watching the space closely. Both SEBI and the RBI have introduced rules to prevent misuse, such as "evergreening" of bad loans where new funds are used to pay off old, stressed debt. While India's regulatory framework has safeguards, like prohibiting leverage at the fund level and ring-fencing banks from AIF exposure, investors must remain vigilant.
What Should Investors Watch?
For those considering this asset class, a disciplined approach is crucial. The minimum investment for an AIF in India is typically Rs 1 crore, positioning it for sophisticated investors who understand the risks. The first step is rigorous due diligence on the fund manager. An investor should examine the manager's track record, their credit assessment process, and their strategy for managing defaults. Diversification is another key principle. While the real estate sector offers high deployment, its perceived risk highlights the need to spread investments across different sectors like healthcare, infrastructure, and consumer-facing businesses. Finally, investors should pay close attention to the structure of the deal, including collateral quality, covenants, and contractual protections. With return expectations for many funds sitting between 12% and 18% or even higher, understanding the underlying risks that generate these returns is paramount.
