India’s private credit market is emerging as a dynamic force in the financial landscape, stepping in where traditional banks hesitate. Non-Banking Financial Companies (NBFCs) and Alternative Investment Funds (AIFs) are filling critical financing gaps for mid-sized, high-risk, and emerging companies, offering high-net-worth investors (HNIs) a compelling avenue for high returns.
With investments reaching $9.2 billion across 163 transactions in 2024, the market is maturing into a $10 billion-plus asset class annually. However, with opportunities come risks like liquidity mismatches and regulatory scrutiny from the Securities and Exchange Board of India (SEBI). As players like Edelweiss and Piramal lead the charge, the market’s evolution hinges on balancing growth with stability.
Private credit funds, often structured as AIFs, cater to borrowers underserved by banks due to stringent regulations or risk aversion post the 2018 IL&FS crisis. Unlike banks managing extensive loan books, private credit funds focus on smaller, tailored portfolios—typically 8-10 active investments—enabling hands-on risk management through flexible structuring, collateralization, and equity-linked payouts. This flexibility appeals to businesses needing non-dilutive capital for mergers, acquisitions, or pre-IPO bridge funding.
For HNIs, the allure lies in internal rates of return (IRRs) 4-6% higher than traditional fixed-income products like bonds, especially after the 2023 removal of indexation benefits for debt mutual funds. SEBI reports AIF investments across categories hit $50 billion by March 2024, with private credit expected to double in five years.
Edelweiss and Piramal exemplify the market’s dynamism. Edelweiss raised $1.3 billion for its Special Situations Fund, targeting distressed assets, while Piramal leverages its real estate and corporate finance expertise to structure high-yield deals. These firms capitalize on regulatory shifts, such as SEBI’s 2022 introduction of Special Situation Funds (SSFs), which allow AIFs to acquire stressed loans, boosting recovery rates under the Insolvency and Bankruptcy Code (IBC).
However, intense competition—evidenced by 11 new credit-focused AIFs registered with SEBI in late 2023—has led to aggressive pricing, with deals like Hubergroup’s ₹1,500 crore debt at a 12.5% IRR, down 300-400 basis points from prior norms. This race to the bottom raises concerns about mispriced risks.
Liquidity mismatches pose a significant challenge. AIFs often invest in illiquid assets, with lock-in periods and thin secondary markets limiting exit options. SEBI’s regulations, requiring a ₹1 crore minimum investment, restrict participation to HNIs and institutions, further constraining liquidity. The Reserve Bank of India (RBI) flagged systemic risks in its 2024 Financial Stability Report, citing private credit’s interconnectedness with banks and NBFCs, riskier borrower profiles, and opaque deal structures.
To curb loan evergreening, the RBI mandated regulated entities to liquidate AIF investments linked to debtor companies within 30 days or face 100% provisioning, impacting NBFCs like Piramal and Edelweiss. SEBI’s 2024 consultation paper further tightens norms to prevent AIFs from bypassing financial regulations, signaling a clampdown on regulatory arbitrage.
Looking ahead, the private credit market’s evolution will depend on regulatory balance and technological innovation. SEBI’s push for deeper bond markets and mandatory listing of non-convertible debentures (NCDs) post-January 2024 aims to enhance transparency and liquidity.
Meanwhile, private credit funds are leveraging AI and data analytics for faster credit decisions and cost efficiencies, potentially partnering with digital lending platforms to streamline operations. Despite short-term challenges like strong equity markets diverting capital, optimism persists. A January 2025 EY survey of 28 credit fund leaders highlighted confidence in medium- to long-term growth, driven by maturing wealth management and rising institutional participation.
For HNIs, private credit offers diversification and superior returns but demands caution. Thorough due diligence, as emphasized by Neo Asset Management’s Ashutosh Ojha, is critical to navigate relaxed underwriting standards. As the market evolves, expect tighter regulations, deeper integration with digital platforms, and a broader asset class reach, positioning private credit as both a hidden gem and a high-stakes venture in India’s shadow banking sector.