The Rise of Private Credit in India

In recent years, the Indian financial ecosystem has witnessed a palpable shift with the emergence and growth of the private credit market. Once considered a niche component of corporate financing, private credit is now assuming a central role in funding small and mid-sized corporates that may not qualify for bank loans or public market debt, thereby bridging the gaps left by conventional bank lending channels.

What is private credit?

Private credit refers to non-bank financing/lending extended to companies by non-bank lenders viz. private funds, asset managers, or special investment groups through instruments like direct loans, structured debt, mezzanine debt, bridge financing etc. Unlike traditional bank financing, private credit transactions are typically bespoke and less standardized, offering higher yields and more flexible terms relating to maturity, covenants, structure, interest rates, repayment schedules, and collateral and caters to companies that might not fit the strict criteria of regulated banks. In the Indian context, private credit is primarily driven by private credit funds, alternative investment funds (AIFs) and non-bank lenders and in contrast to traditional banks who focus on well rated corporates, private credit players are increasingly addressing the financing needs of small and mid-market companies that require flexible capital solutions beyond the conventional banking framework.

Reasons for private credit gaining pace in India:

The following inter-linked factors have fuelled the rise of private credit in India:

1. Banking or regulation driven gap: traditional lenders and publicly regulated banks have abstained from certain types of exposures viz. long tenure credit, lending to sub-rated corporates, corporates with limited collateral, last-mile financing, cost overruns, or more complex structures. Regulatory risks, rise in non-performing assets (NPAs), and capital constraints have made banks cautious and the void created in corporate lending on account of the above is being filled by private credit providers.
2. Corporate demand for alternative financing: as Indian companies are scaling up, undertaking acquisitions, refinancing existing borrowings and expanding their capacity, they seek non-equity funding beyond standard bank credit and private credit offers exactly that in the form of non-dilutive financing, tailored solutions (e.g. bridge loans, structured debt, non-convertible debentures) and can often act faster than regulated banks.
3. Growing investor interest: on the supply side, investors are looking for yield and diversification and private credit offers returns (in many cases higher than traditional fixed income) and an alternative asset class. Thus, domestic AIFs (notably Category II AIFs) are increasingly targeting and tapping into India’s private credit opportunities.
4. Macro-economic tailwinds: India’s economic growth, infrastructure push and sector‐specific growth viz. real estate, infrastructure, renewable energy is generating demand for large ticket financing solutions that regulated banks alone cannot fulfil and thus the gap is being filled by private credit providers.

Legal and regulatory consideration

The rise of private credit in India is accompanied by unique legal and regulatory aspects including:

1. AIF framework: many private credit funds in India are structured as Category II Alternative Investment Funds (AIFs) under the Securities and Exchange Board of India (SEBI) regulations. These vehicles facilitate investments in private debt, among other instruments, and have been a key driver of the domestic private credit market’s growth. Category II AIFs typically command a premium reflecting the incremental risks associated with a borrower’s credit profile, the quality and enforceability of collateral, the probability of recovery in case of default, and the ability to design bespoke financing solutions for borrowers with uneven cash flows.
2. Banking Regulation and Credit Risk: increasing regulatory scrutiny on banks, particularly in relation to capital adequacy norms, risk-weighted asset requirements, and non-performing asset (NPA) provisions has constrained their ability to extend certain types of credit. This regulatory environment is, in turn, creating a growing opportunity for private credit providers to fill the resulting financing gap.
3. Contractual structuring:private credit transactions are highly customized, often involving negotiated term sheets, tailored covenants, collateral packages, payment-in-kind features, and refinancing provisions. This complexity makes legal documentation critical, necessitating the inclusion of robust covenants for security enforcement, cross-default structuring, and clear exit or redemption terms to safeguard investor interests.
4. Risk mitigation and disclosure: as the Indian private credit market remains relatively nascent, frameworks for investor protection, transparency, risk management, and secondary market liquidity continue to evolve. Strengthening these elements will be essential to sustaining investor confidence and market stability.

Benefits and risks of Private Credit

Private credit provides access to capital for companies that may not fall within the scope of bank lending and it thus supports economic growth, refinance, acquisitions etc. It thus contributes to diversification of the financial ecosystem and leads to less dependence on traditional lenders alone for corporate debt. It offers a faster and more customizable and flexible alternative for raising capital compared to traditional bank processes. However, the credit and default risk is much higher in private credit since the borrowers may be mid-market, sub-rated, or in stressed sectors. It also tends to be less liquid than public debt and exit options in such cases are limited. The deal structures are significantly more complex than those in traditional financing and may present unforeseen challenges if covenant enforcement or collateral realisation mechanisms are not robust. As private credit remains in its early stages of development, the regulatory framework continues to evolve, creating ambiguity in applicable laws and potential risks arising from tax or regulatory arbitrage.

The future of Private Credit in India

Given the current trajectory, several factors are likely to shape the evolution of private credit in India, including (i) Maturation of the market: private credit is expected to become more institutionalised with better standardisation of documentation, improved secondary markets for private credit exposures and stronger risk-management frameworks; (ii) Diversification beyond traditional sectors: while real estate and infrastructure currently dominate the market, future growth and new investment mandates for private credit may emerge from sectors such as renewable energy, data centres, logistics, healthcare and technology; (iii) Regulatory evolution: as private credit expands in India, regulators such as SEBI, Reserve Bank of India (RBI) and other regulators are expected to refine the regulatory landscape by clarifying the regulations around non-bank lending, distressed asset financing, fund structures, investor protection, and cross-border flows and such evolved legal frameworks for new structures will be critical to the growth of private credit in India; (iv) Focus on risk management: effective monitoring of underwriting standards, collateral enforcement, transparency of funds, and alignment of interests among the sponsor, borrower and investor will be essential to maintain market stability and avoid systemic stress in private credit.

The rise of private credit in India marks a significant shift in the country’s financing landscape. What began as a niche alternative is evolving into a dynamic asset class facilitating small and mid-market lending, refinancing, acquisition and capital growth, while offering investors differentiated return opportunities. For legal professionals, this evolution is driving demand for greater sophistication in deal structuring, documentation, regulatory compliance, and risk management. However, the sector’s rapid expansion underscores the need for disciplined underwriting, transparency, robust structuring and active oversight of legal and regulatory frameworks. Private credit does have the potential to complement traditional banking and support India’s next phase of economic growth but lapses in structuring or regulatory clarity could amplify systemic vulnerabilities.