What Exactly Is Private Credit?
Think of private credit as bespoke lending. It refers to loans that are not issued by banks or traded on public stock markets. Instead, specialised investment funds lend money directly to companies. If a bank loan is like buying a suit off the rack, private credit is like getting
one custom-tailored. The terms, repayment schedules, and interest rates are all privately negotiated between the lender and the borrower. These lenders are typically Alternative Investment Funds (AIFs), which pool capital from high-net-worth individuals (HNIs) and institutional investors to lend to businesses, often mid-sized companies that are underserved by traditional banks.
Why Is It Booming in India Right Now?
Several factors are fuelling this boom. Firstly, traditional banks have become more cautious, creating a funding gap, particularly for mid-market companies and sectors like real estate. Private credit funds have stepped in to fill this void. Secondly, India’s strong economic growth means more companies need flexible, fast capital for expansion, acquisitions, and refinancing, which private credit can provide. Thirdly, global and domestic investors are increasingly attracted to India. For investors, private credit offers potentially higher returns than traditional fixed-income options. For businesses, it provides access to customised capital that public markets or banks may not offer.
Who Are the Main Players?
The market involves two key groups: lenders and borrowers. The lenders are increasingly domestic AIFs, which now account for the majority of deal value. In the first half of 2026, domestic funds were behind 74% of the total deal value. These funds gather capital from sources like family offices, HNIs, and institutional investors. The borrowers are typically mid-sized companies, real estate developers, and businesses in sectors like infrastructure, healthcare, and manufacturing. In the first half of 2026, real estate was the largest sector, accounting for 35% of deal value, followed by healthcare (13%) and a surprising surge in the food and beverage sector (12%).
What Are the Opportunities for Investors?
For sophisticated investors who meet the minimum investment threshold (typically ₹1 crore for AIFs), private credit presents several opportunities. The primary draw is the potential for higher yields, with gross returns often targeted between 12% and 18%, or even higher, depending on the risk. This is significantly more than many conventional fixed-income products. Furthermore, because these investments are not traded on public markets, their returns are often less correlated with the daily volatility of the stock market, providing a good source of portfolio diversification. The loans are also typically secured against assets, offering a layer of protection.
And What Are the Risks to Consider?
Higher potential returns always come with higher risks. The most significant is credit risk—the chance that the borrower might default on the loan. Unlike publicly traded bonds, these investments are also illiquid. This means an investor's money is typically locked in for a period of three to five years, with no easy way to exit early. There's also valuation uncertainty; since the assets aren't publicly traded, their value can be subjective. While regulators like SEBI and the RBI have put guardrails in place to protect the broader financial system, investors must do their own due diligence to understand the specific risks of the fund and its strategy before committing capital.
