Private Credit in India: Growth, Risks & Opportunities in 2025
Beyond the familiar realms of stock markets and traditional bank loans, a new and powerful financial force is rapidly coming of age in India: private credit. Once a niche asset class, it has exploded into a thriving, multi-billion-dollar industry, attracting a wave of global and domestic investors eager to fund Indian businesses. This surge is not just a fleeting trend; it represents a structural shift in how capital is being deployed to fuel corporate growth, real estate development, and special situations financing across the country.
The recent buzz around Shapoorji Pallonji Group’s staggering $3.4 billion private credit deal in May 2025—one of the largest of its kind in emerging markets—brought this once-shadowy market into the global spotlight. But what exactly is private credit? Why is it growing so fast in India, and what are the opportunities and risks for investors and the broader economy? This article delves into the rise of India’s private credit market, exploring the drivers, the key players, and the regulatory guardrails being put in place by bodies like the RBI and SEBI.
What is Private Credit and Why is it Booming?
Private credit, in simple terms, refers to non-bank lending where debt is not issued or traded on public markets. Lenders are typically specialized investment funds—often registered as Alternative Investment Funds (AIFs) in India—that provide capital directly to companies. These funds raise money from institutional investors like pension funds, endowments, insurance companies, and high-net-worth individuals (family offices).
The growth of this market in India is being fueled by a confluence of factors:
-
A Structural Financing Gap: Traditional banks and Non-Banking Financial Companies (NBFCs) have become more cautious, especially when it comes to lending to sectors like real estate or companies with complex financial situations. Regulatory restrictions and risk aversion have created a void that private credit funds are perfectly positioned to fill. They offer flexible, customized financing solutions that banks often cannot.
-
Stronger Insolvency Framework: The implementation of the Insolvency and Bankruptcy Code (IBC) has given lenders greater confidence in their ability to recover dues in case of a default. This has made distressed lending, a key segment of private credit, a more viable proposition.
-
Favorable Reforms: Recent legislative and tax reforms, including provisions in India’s Finance Bill 2025, have improved the market conditions and bolstered investor confidence in the asset class.
-
Attractive Yields: In a world of fluctuating interest rates, private credit offers investors the potential for higher returns (yields) compared to traditional fixed-income investments. The Shapoorji Pallonji deal, for instance, offered a yield of 19.75%, showcasing the high-return potential that is drawing in capital.
Private credit funds have evolved from being short-term financiers for small firms to players capable of handling billion-dollar, investment-grade deals. Their ability to structure bespoke solutions for businesses with unique funding needs or irregular cash flows gives them a significant competitive advantage over traditional lenders.
The Other Side of the Coin: Risks and Regulatory Concerns
The rapid, unbridled growth of any financial market inevitably raises questions about risk, and private credit is no exception. A major concern is that the industry has flourished during a period of robust domestic economic growth and has not yet been tested by a significant downcycle. A recession or a sharp credit crunch could lead to a wave of defaults, and the true resilience of these funds would be put to the test.
Several specific risks are on the regulators’ radar:
-
Systemic Risk: While the private credit market’s direct interconnectedness with the broader banking system is currently considered limited, there are growing concerns about potential spillover effects. The complex web of direct and indirect funding between banks and non-bank entities like AIFs could create blind spots and weaken the transmission of monetary policy, especially in a crisis.
-
Regulatory Blind Spots: In India, the Securities and Exchange Board of India (SEBI) regulates AIFs, while the Reserve Bank of India (RBI) regulates banks and NBFCs. This division of oversight could potentially lead to gaps in monitoring leverage, credit risk, and counterparty exposure across the entire financial system.
-
Covenant-Lite Deals: Intense competition for deals, not just from other private credit funds but also from equity markets and debt mutual funds, has led to an increase in “covenant-lite” transactions. These deals offer fewer protections for lenders, increasing the risk of losses if a borrower’s financial health deteriorates.
-
Retail Investor Risk: A growing number of family offices and high-net-worth individuals are participating directly in structured credit trades, often bypassing the traditional fund structure. A limited understanding of the complex and illiquid nature of these assets could lead to panic selling or a “fire sale” during a market downturn, amplifying instability.
The Path Forward: Balancing Growth with Stability
Recognizing these risks, Indian regulators are actively working to strengthen the framework governing this sector. Both the RBI and SEBI are focused on enhancing oversight to ensure that the growth of private credit does not undermine financial stability. The RBI’s proposed new regulations for guarantees in cross-border transactions are one example of efforts to rationalize the rules governing financial commitments under FEMA.
The journey of private credit in India is a classic story of financial innovation meeting economic need. It is channeling vital capital to under-served segments of the economy, fostering entrepreneurship, and providing investors with new avenues for returns. However, its continued success will depend on navigating the inherent risks. For investors, it offers a high-risk, high-return opportunity that requires deep due diligence. For the economy, it is a powerful new engine of growth, but one that regulators must watch closely to ensure it runs smoothly and doesn’t overheat. As the market matures, the key will be to strike the right balance between encouraging this dynamic flow of capital and building robust guardrails to protect the stability of the entire financial system. Check Bank IFS Code here.