What Exactly Is Private Credit?
At its core, private credit is any lending that happens outside of the traditional banking system or public markets. Instead of a company going to a bank for a loan or issuing bonds that anyone can buy, it negotiates a loan directly with a non-bank lender.
These lenders are typically specialised investment funds, asset managers, or business development companies (BDCs) that pool capital from investors like pension funds, insurance companies, and high-net-worth individuals. Think of it as a parallel lending universe. While banks have become more regulated and cautious since the 2008 financial crisis, private credit has stepped in to fill the gap, offering financing to businesses that might be considered too small or risky for traditional loans.
The Boom in India and Globally
The global private credit market has surged, growing into a significant asset class. This expansion is driven by several factors. For investors, it offers the potential for higher yields compared to publicly traded debt and a way to diversify their portfolios. For businesses, it provides faster, more flexible access to capital. In India, the market is also on a sharp growth trajectory. Although smaller than in the US, India's private credit market is expanding rapidly as banks and NBFCs leave funding gaps, especially for mid-sized companies and in sectors like real estate and infrastructure. In the first half of 2026, private credit investments in India reached USD 3.5 billion. Notably, domestic funds are major players, accounting for about 74% of the deal value and showing a strong appetite for opportunities in real estate, healthcare, and even the food and beverage sector.
The Appeal for Borrowers
For companies in need of cash, private credit offers several distinct advantages over a standard bank loan. The primary appeal is speed and flexibility. Private lenders can often process deals much faster because they face fewer regulations and have simpler approval processes. They can also create highly customised loan structures with bespoke repayment timelines and conditions (known as covenants) that are tailored to a company's specific needs—something traditional banks are less likely to offer. This flexibility is crucial for companies funding an acquisition, navigating a competitive sale process, or those that simply don't fit the standard underwriting models of a large bank. Furthermore, it allows businesses to access capital without diluting ownership by issuing new shares.
Why Lenders Are Piling In
The main attraction for lenders and their investors is the potential for higher returns. Because these loans are often made to mid-market companies or in more complex situations, they typically carry higher interest rates than conventional bank loans or publicly traded bonds. Most private credit loans also have floating interest rates, which means they offer protection in a rising-rate environment. Lenders also gain more control and protection through privately negotiated loan agreements, which can include stricter terms and closer monitoring of the borrower's performance. For large institutional investors, private credit serves as an important source of portfolio diversification, as its performance is not always directly tied to the daily fluctuations of the stock and bond markets.
Understanding the Inherent Risks
Despite its benefits, the private credit market is not without risk. A major concern is its opacity. Unlike public markets with constant trading and transparent pricing, private loans are valued infrequently, often based on the manager's own models, which can hide underlying problems. Another key risk is illiquidity; investor capital is often locked up for several years, with limited opportunities to sell. Credit risk is also a factor, as borrowers are often smaller or more leveraged companies that could be more vulnerable to default during an economic downturn. As the market grows, some regulators have raised concerns about this “shadow banking” system, questioning whether a wave of defaults could pose a broader risk to the financial system, though many experts believe the structure of these funds makes them less of a systemic threat than traditional banks.
