What Exactly Is Private Credit?
Think of private credit as lending that happens outside the traditional banking system. Instead of a company going to a bank for a loan, it borrows money from non-bank lenders. These lenders are typically specialised investment funds, known as Alternative
Investment Funds (AIFs), that pool money from high-net-worth individuals and large institutions. Unlike a standard bank loan or a publicly traded bond, these deals are privately negotiated. This allows for more flexible and customised terms, tailored to the specific needs of the borrower, such as the size, timing, and structure of the loan.
Why Is It Growing So Fast in India?
Several factors are fuelling the private credit boom in India. For years, banks have been cleaning up their balance sheets and becoming more cautious about lending to certain sectors, creating a funding gap. At the same time, many mid-sized companies need capital for growth, acquisitions, or complex refinancing that doesn't fit the rigid criteria of banks. This created a perfect opportunity for private credit to step in. The enactment of the Insolvency and Bankruptcy Code (IBC) in 2016 also provided lenders with a stronger framework for recovering their money in case of default, boosting confidence. As a result, India's private credit market has expanded significantly, with investments in the first half of 2026 reaching USD 3.5 billion.
Who Are the Main Players?
The private credit market has two main sides: the lenders and the borrowers. The lenders are primarily domestic and global funds, including AIFs regulated by the Securities and Exchange Board of India (SEBI). These funds raise capital from sophisticated investors like family offices, wealthy individuals, and institutional investors. On the borrowing side are typically mid-market companies that are underserved by traditional banks. Key sectors tapping into this market include real estate, which accounts for the largest share, followed by healthcare, industrials, and even food and beverages.
How It Works in Practice
Private credit funds in India operate mostly as SEBI-regulated Category II AIFs. These are closed-ended funds, meaning investors commit their capital for a fixed period, usually three to five years. The minimum investment is typically high, often starting at Rs 1 crore, ensuring that only sophisticated investors who understand the risks are involved. The fund manager then identifies companies in need of capital, performs detailed due diligence, and negotiates a loan agreement. These loans are often secured against assets or cash flows, providing a layer of protection for the investors.
What Are the Risks Involved?
While offering attractive returns, private credit is not without risks. The high yields, which can range from 12% to over 18%, are an indicator of the underlying risk, as these funds often lend to companies that are considered sub-investment grade. One major risk is illiquidity; unlike stocks, these investments cannot be easily sold and capital is locked in for years. There is also credit risk—the chance that a borrower may default on its loan. Furthermore, since these instruments are not publicly traded, their valuation can be subjective. Regulators like the RBI and SEBI are keeping a close watch on the market to prevent risks like 'evergreening', where new loans are used to hide defaults on old ones.
Why It Matters for the Broader Economy
The rise of private credit is more than just a financial markets story; it’s a sign of a maturing economy. It provides a vital alternative source of capital for growing businesses that might otherwise struggle to get funding, helping to fuel job creation and economic expansion. By filling the gap left by banks, private credit helps ensure that capital is allocated to productive sectors of the economy. However, its rapid growth also brings potential systemic risks that regulators are monitoring to ensure financial stability. For now, it is a crucial pillar supporting India's growth ambitions.
