Private Credit: India's Unstoppable Financial Force Driving Growth

Private Credit: India's Unstoppable Financial Force Driving Growth

In the dynamic landscape of Indian finance, private credit has transcended its niche status to become an indispensable force, actively reshaping the nation's credit ecosystem. Once considered an alternative, it is now a mainstream solution, addressing the evolving financial demands of a rapidly growing economy and filling crucial funding gaps left by traditional lenders.

Private credit, at its core, refers to privately negotiated, non-bank lending solutions tailored to specific borrower needs. Unlike public debt markets, these instruments are customized, flexible, and executed with speed. The market's significant ascent, particularly since the 2008 global financial crisis and reinforced by domestic bank deleveraging post-2016, highlights its criticality. As Indian banks became more risk-averse and focused on retail lending due to stricter regulations and legacy non-performing assets (NPAs), private credit stepped in to cater to underserved segments.

Status of Private Credit Market in India (Updated as of Mid-2025)

The private credit market in India continues its strong growth trajectory, solidifying its position as a vital financing alternative. Here's an updated status with details and statistics, keeping in mind the current date (July 2025):

Robust Growth Trajectory: India's private credit market is in a phase of significant expansion, driven by the structural changes in bank lending, the growth of the Indian economy, and increasing sophistication of both borrowers and lenders.

Investment Volume:

CY 2024: Calendar Year 2024 saw total private credit investments of approximately USD 9.2 billion across 163 transactions. This marked a 7% growth in value over CY 2023. While falling short of some initial USD 10 billion projections due to a few large deals shifting to early 2025, the overall trend was positive.

H1 CY 2024: Investments totalled USD 6 billion across 96 deals in the first half of CY 2024.

FY 2023-24: Private credit deals crossed an aggregate value of USD 8.5 billion.

Early CY 2025 / FY 2025 outlook: Experts are projecting a further 12% to 25% increase in deal volumes during 2025. Some large deals that were delayed from 2024 are expected to close in Q1 2025, contributing to continued growth. Market estimates suggest total private credit deals (including NBFCs) could reach up to USD 10 billion in 2025.

Examples of large deals in CY 2024/early 2025: Reliance Logistics and Warehousing (USD 697 million), Vedanta Semiconductors (USD 301 million), Matrix Pharma (USD 293 million), GMR Airports (USD 271 million), and Varde Partners' USD 500 million investment in Reliance Power (Foreign Currency Convertible Bonds). Several high-profile deals, including a second USD 500m tranche for Reliance Capital's acquisition by Hinduja Group, and fundraises by Shapoorji Pallonji Group (USD 3 billion) and TVS Mobility Group (USD 212 million), are being eyed for closure in 2025.

Assets Under Management (AUM): The AUM of India-focused private debt has skyrocketed, reaching approximately USD 17.8 billion by the end of 2023. Projections indicate that AUM by private credit firms in India could reach USD 60 billion by 2028, representing a significant portion of the total AIF industry AUM.

Average Deal Size: The average deal size in CY 2024 stood at approximately USD 29 million. Smaller transactions, particularly those below USD 10 million, constituted a significant portion of the landscape (114 deals).

Domestic vs. Global Players: A notable trend in late 2024 was the increasing dominance of domestic private credit players. In H2 2024, they accounted for approximately 63% of the total deal value and 61% of the deal count, outperforming global funds. This highlights the growing local expertise and capital availability.

Key Contributing Factors:

Bank Deleveraging and Risk Aversion: Traditional banks continue to be cautious with wholesale corporate lending due to past NPA issues and stricter regulatory norms, shifting focus towards retail lending. This creates a sustained credit gap.

Supportive Regulatory Frameworks: The Insolvency and Bankruptcy Code (IBC) continues to instill confidence by providing a more transparent and time-bound mechanism for debt resolution.

Government Focus on Infrastructure: Significant government capital expenditure in infrastructure (e.g., INR 11.11 lakh crore in FY25 budget) creates strong demand for project and ancillary financing.

Growing AIF Ecosystem: The flexibility of Alternative Investment Funds (AIFs) allows them to cater to diverse and complex financing needs.

Increased Domestic Investor Participation: High-net-worth individuals (HNIs) and family offices are increasingly allocating capital to private credit due to attractive returns and diversification benefits.

Corporate Balance Sheet Improvement: Many Indian corporates have strengthened their balance sheets, reducing overall debt and making them more attractive to lenders.

Sectoral Concentration (CY 2024):

Real Estate continued to lead, accounting for 28.3% of total deal volume in CY 2024.Utilities and Infrastructure followed with 15.7% and 10.7% respectively.

Other significant sectors include renewable energy, healthcare and pharmaceuticals, data centres, and logistics.

Emerging Trend :

Yield Compression: Increased competition and significant "dry powder" (uninvested capital) might lead to some compression in yields, although they are still expected to remain attractive compared to traditional debt.

Refinancing Opportunities: With the RBI signalling a potentially lower interest rate environment in 2025 (e.g., repo rate cuts in Feb and April 2025), there's a growing opportunity for corporates to refinance their high-cost private credit debt with cheaper bank loans, creating exit opportunities for private credit funds and allowing them to re-deploy capital.

Regulatory Scrutiny: As the market grows, regulators (especially RBI and SEBI) are maintaining vigilance to prevent systemic risks, particularly concerning the interconnectedness with regulated entities (banks and NBFCs) and potential misuse of AIF structures. There's a continued emphasis on "evergreening" prevention.

Sophistication in Deal Structuring: The market is seeing more complex high-yield offerings and innovative solutions, such as zero-coupon NCDs linked to equity.

Investor Education: Concerns remain about complex private credit deals being sold to retail investors who may not fully grasp the risks, highlighting the need for investor education.

Financial Instruments Issued in Private Credit Markets in India

While globally, private credit encompasses a wide array of instruments, in India, due to regulatory frameworks, the primary instruments used by private credit funds (often structured as Alternative Investment Funds - AIFs) are:

Non-Convertible Debentures (NCDs): This is by far the most common instrument. NCDs are debt instruments issued by companies that cannot be converted into equity shares. They represent a loan that the company must repay with interest on a specified date.

Private Placement: NCDs in the private credit market are typically issued on a private placement basis to AIFs or Foreign Portfolio Investors (FPIs). This allows for customized terms.

End-Use Restrictions (for FPIs): While proceeds from NCDs issued on a private placement basis can generally be used for any purpose, if the investor is an FPI, there are restrictions. The proceeds of an unlisted NCD cannot be used for real estate business, capital markets, or the purchase of land. These restrictions do not apply if the NCD is listed on a recognized stock exchange in India.

Minimum Maturity: Generally, NCDs must have a minimum maturity or duration of one year at the time of investment by an FPI.

Investment Routes for FPIs: FPIs can invest through the "Normal Route" or the "Voluntary Retention Route (VRR)." The VRR offers more flexibility in terms of concentration limits and single/group investor-wise limits, but requires a minimum retention period (currently three years) and a minimum investment of 75% of the allotted limit.

Securitized Debt Instruments (SDIs): These are financial products where loans or receivables (like future cash flows from a project or existing loan portfolios) are pooled, converted into marketable securities, and sold to investors. This allows for investors to gain exposure to a diversified pool of underlying assets.

Compulsorily Convertible Debentures (CCDs): While ultimately equity-linked, CCDs are debt instruments that must be converted into equity shares at a predetermined future date or upon the occurrence of a specific event. For foreign investors, investment in CCDs is allowed under FEMA guidelines.

Optionally Convertible Debentures (OCDs): These are debt instruments that give the holder the option to convert them into equity shares at a future date. Any investment by a foreign investor in an optionally convertible instrument is treated as an External Commercial Borrowing (ECB).

Other Structures:

Delayed Draw Facilities: Private credit providers often offer elongated availability periods, allowing borrowers to draw funds as needed over time, which provides flexibility.

Mezzanine Debt: While less common as a direct instrument for AIFs compared to NCDs, private credit funds can structure deals that effectively incorporate mezzanine characteristics, such as higher interest rates, equity-linked upside (e.g., warrants or profit participation rights), and a subordinated position in the capital structure.

Senior Secured Loans: These are often the core of direct lending, where the loan is secured by specific assets of the borrower and ranks highly in the event of liquidation.

Unitranche Financing: This combines senior and junior debt into a single loan facility, simplifying the capital structure for the borrower.

Security typically provided in Private Credit transactions in India:

Immovable Property: Mortgages (English, simple, equitable) over land and buildings.

Shares and Securities: Pledges created through pledge agreements.

Movable Property: Hypothecation over receivables, plant and machinery, stock, cash deposits, and bank accounts.

Benefits of Private Credit

Let's reiterate and elaborate on the benefits for both borrowers and lenders/investors:

Benefits for Borrowers:

Flexibility and Customization:

Tailored Solutions: Unlike rigid bank loans, private credit solutions can be precisely structured to match a company's specific cash flow patterns, growth plans, or unique business cycles. This includes customized repayment schedules, interest rate structures, and even specific covenants.

Innovative Loan Structures: Private credit providers are adept at structuring complex deals, including those involving multiple tranches of debt (e.g., combining senior and junior debt in a unitranche), which can simplify a company's capital stack.

Beyond Collateral: While collateral is often involved, private credit lenders are often more willing to focus on a company's growth potential and cash flow generation, rather than solely on tangible asset security, which is particularly beneficial for asset-light businesses.

Speed and Certainty of Execution:

Quicker Approvals: The private nature of the market often translates to faster due diligence and approval processes compared to the bureaucratic layers of large banks.

Reduced Red Tape: Fewer regulatory hurdles and internal approvals mean deals can be closed more quickly, which is critical for time-sensitive transactions like acquisitions or bridge financing.

Dedicated Capital: Private credit funds typically have committed capital pools, offering a high degree of certainty that financing will be available once terms are agreed upon.

Access to Capital (Filling the Credit Gap):

Underserved Segments: Private credit is a lifeline for mid-market companies, startups, and businesses with higher-risk profiles that may be overlooked or inadequately served by traditional banks due to stricter regulations and risk aversion.

Alternative to Equity Dilution: For growing companies, private credit allows them to raise significant capital without diluting existing equity ownership, which is a major advantage for founders and existing shareholders.

Special Situations Funding: It provides crucial financing for niche or challenging situations that banks might avoid, such as distressed debt, turnaround financing, or complex M&A deals.

Long-Term Partnerships:

Lender Expertise: Private credit providers often bring significant industry expertise and a longer-term perspective, acting more as partners than just lenders. They may offer strategic insights and operational support.

Relationship-Driven: The private nature encourages more direct and ongoing relationships between borrowers and lenders, leading to better understanding and potential for future financing.

Benefits for Investors/Lenders:

Higher Yields and Attractive Returns:

Illiquidity Premium: Private credit investments are less liquid than publicly traded bonds, and investors are compensated for this by earning higher interest rates and fees.

Risk Premium: Lending to mid-market or higher-risk companies also commands a premium, leading to superior risk-adjusted returns compared to traditional fixed-income instruments.

Floating Interest Rates: Many private credit loans feature floating interest rates, which means their returns increase in a rising interest rate environment, providing a hedge against inflation.

Portfolio Diversification:

Low Correlation: Private credit generally has a low correlation with public equity and bond markets. This diversification can help stabilize overall portfolio returns, especially during periods of public market volatility.

Access to New Opportunities: It provides access to a segment of the market (private companies) that is not accessible through public markets, expanding investment opportunities.

Downside Protection and Predictable Income:

Seniority and Collateral: Many private credit loans are senior in the capital structure and secured by collateral, offering a degree of protection in case of borrower default.

Covenants: Robust loan covenants provide lenders with early warning signs and mechanisms to intervene if a borrower's financial health deteriorates.

Steady Income Stream: Contractual interest payments and fees provide a consistent and predictable income stream, which is attractive for institutional investors like pension funds and insurance companies with long-term liabilities.

Control and Influence:

Direct Negotiation: Lenders directly negotiate terms and conditions, allowing them to tailor agreements to their specific risk appetite and ensure protective measures are in place.

Information Rights: Private credit agreements often include comprehensive information rights, allowing lenders to closely monitor the borrower's performance.

Board Representation/Observation: In some cases, especially with larger or more complex deals, lenders may have board observation rights, providing an additional layer of oversight.

Disadvantages of Private Credit for a Borrower in India :

While private credit offers significant advantages, borrowers in India should be aware of several potential drawbacks:

Higher Cost of Capital:

Elevated Interest Rates: This is the most significant disadvantage. Private credit loans typically command higher interest rates than traditional bank loans. This "illiquidity premium" compensates lenders for the bespoke nature, higher risk profile of the borrowers, and the lack of a liquid secondary market for these instruments.

Fees and Charges: Beyond the interest rate, borrowers may incur various fees, including upfront arrangement fees, commitment fees (for undrawn capital), and exit fees, which further increase the effective cost of borrowing.

Equity Kickers: Some private credit deals, especially mezzanine or growth-stage financing, may include "equity kickers" (e.g., warrants, convertible options, or a share of future profits). While this can align interests, it means the lender benefits from the company's upside, which could be considered a form of equity dilution or a higher overall cost if the company performs exceptionally well.

Strict Covenants and Reporting Requirements:

Stringent Covenants: Private credit agreements often come with more restrictive and granular covenants than bank loans. These can include financial covenants (e.g., debt-to-EBITDA ratios, interest coverage ratios), operational covenants (e.g., restrictions on capital expenditures, dividend payments, asset sales, or incurring additional debt), and reporting covenants (frequent and detailed financial reporting).

Close Monitoring: Lenders typically engage in close monitoring of the borrower's business. While this can sometimes be beneficial as a form of "smart capital," it can also be perceived as intrusive and place a significant administrative burden on the borrower to comply with frequent reporting.

Consequences of Breach: Breaching covenants can lead to severe consequences, including default, acceleration of loan repayment, higher penalty interest rates, or even the lender taking control of the company.

Less Transparency and Valuation Challenges:

Opaque Market: The private nature of these deals means there's less public information available on pricing, terms, and market comparables, making it challenging for borrowers to benchmark offers effectively.

Subjective Valuation: Unlike publicly traded debt, private credit instruments lack readily available market prices. Valuations are often less frequent and based on internal models or third-party assessments, which can be subjective.

Illiquidity and Limited Exit Options for Lenders (Indirect Impact on Borrowers):

Held to Maturity: Private credit loans are typically held to maturity by the lenders, as there is no deep secondary market for these instruments. While this provides stability for the borrower, it means less flexibility for the lender if their needs change, which could indirectly impact the borrower's ability to renegotiate terms or secure follow-on funding from the same lender.

Challenges in Early Exit/Refinancing: If a borrower needs to exit the private credit facility earlier than planned, it can be more complex and potentially costly, as finding a replacement lender for a customized, private deal can be challenging.

Regulatory Nuances for Borrowers:

End-Use Restrictions (especially for FPIs): As mentioned, if the private credit comes from FPIs investing in NCDs, there might be restrictions on the use of funds (e.g., not for real estate business, capital markets, or land acquisition). Borrowers need to ensure their proposed use of funds aligns with these regulations.

Compliance Burden: While AIFs are regulated entities, borrowers themselves must comply with all loan covenants and Indian corporate laws, which can be substantial.

Potential for "Evergreening" Concerns (Regulatory Scrutiny):

The RBI has taken steps to prevent banks and NBFCs from "evergreening" their non-performing loans through AIFs (by lending to an AIF that then invests in the original borrower). While aimed at lenders, this regulatory scrutiny might add a layer of complexity or caution to deals involving regulated entities and private credit funds.

Regulations relating to Private Credit market in India :

In India, the private credit market is primarily regulated by:

Securities and Exchange Board of India (SEBI): Domestic private credit funds are largely structured as Alternative Investment Funds (AIFs) and are regulated by SEBI. This includes regulations on licensing, continuous disclosure requirements, investment conditions, and reporting. SEBI has also issued guidelines to prevent the misuse of AIF structures, for instance, by restricting "senior-junior structures."

Reserve Bank of India (RBI): The RBI plays a role, particularly in regulating foreign investments and preventing systemic risks. Foreign investors can participate by registering as Foreign Portfolio Investors (FPIs) with SEBI or by lending through their offshore entities under the External Commercial Borrowings (ECBs) route. The RBI has also focused on preventing "evergreening" of loans by regulated entities (banks and NBFCs) through misuse of private credit structures. The RBI's regulations aim to safeguard the financial system, though the regulatory approach for private credit funds is different from that for banks and NBFCs due to the nature of investors (typically high-net-worth individuals and institutions with higher risk appetite).

Foreign Exchange Management Act (FEMA): This act and its associated rules regulate foreign investments in AIFs.

Key regulatory considerations include:

AIFs cannot lend in the form of direct loans. They typically invest in Non-Convertible Debentures (NCDs) or other debt instruments.

Restrictions on downstream investments by AIFs if the sponsor, manager, or investment manager is not Indian "owned and controlled" (though this generally doesn't apply to NCD investments).

Compliance and reporting requirements for FPIs and AIFs.

Minimum residual maturity for NCDs invested by FPIs (above one year).

Concentration limits and single/group investor-wise limits for FPI investments in NCDs under the Normal Route, with more flexible conditions under the Voluntary Retention Route (VRR).

Types of Borrowers:

Private credit in India is highly versatile, stepping in where traditional lending may fall short. It caters to a broad spectrum of borrowers and is increasingly being utilized across diverse sectors.

Mid-Market Companies: This is arguably the sweet spot for private credit in India. These companies are often too large for small-ticket bank loans but may not meet the stringent eligibility criteria (e.g., credit ratings, size, collateral) or scale requirements for large syndicated bank loans or public bond issuances. They are often growing rapidly and need flexible capital for expansion.

Growth-Stage Companies (including Startups): Especially those with venture capital or private equity backing, seeking non-dilutive capital for scaling operations, product development, or market expansion. This includes "venture debt" which is a specialized form of private credit for startups.

Companies with Specific / Complex Financing Needs:

Acquisition Financing: Funding for mergers, acquisitions, or leveraged buyouts (LBOs), often involving private equity sponsors.

Refinancing Existing Debt: Replacing higher-cost or maturing debt, including existing private credit facilities or even legacy bank loans.

Working Capital and Growth Capital: Beyond conventional bank limits, especially for businesses with lumpy cash flows or rapid inventory cycles.

Promoter Funding: Loans to promoters (founders/owners) against their shares or other assets, often for personal liquidity, business expansion, or to buy out other shareholders.

Bridge Financing: Short-term loans to bridge a funding gap until a larger, more permanent financing event (like an IPO or a larger equity round) can be completed.

Companies in Special Situations / Distressed Assets:

Turnaround Situations: Businesses facing temporary financial distress that require capital for restructuring, operational improvements, or to bridge a liquidity crunch.

Pre-NCLT / IBC Resolution: Providing financing to companies undergoing pre-insolvency resolution or those with assets being acquired out of insolvency.

Secondary Purchases of Debt: Acquiring debt instruments from existing lenders, often at a discount, with a view to restructuring or participating in recovery.

Asset-Heavy Businesses: Those requiring capital for significant capital expenditures (CapEx) or asset purchases, where traditional lenders might be hesitant due to sector-specific risks or scale.

Sectors in India :

Private credit's ability to offer customized solutions makes it suitable for a wide array of sectors. Prominent ones include:

Real Estate: Consistently a top sector. This includes financing for land acquisition, project development (residential, commercial, retail), construction finance, and refinancing for developers and projects.

Infrastructure & Utilities: With India's massive infrastructure push, sectors like roads, ports, airports, power generation (including renewable energy), and water management require substantial, long-term, and flexible financing.

Manufacturing: Traditional manufacturing industries seeking capital for plant expansion, modernization, working capital, or diversification. This includes various sub-sectors from automobiles to textiles.

Healthcare and Pharmaceuticals: A rapidly expanding sector that needs capital for hospital expansion, R&D in pharma, acquisition of medical equipment, and other growth initiatives.

Technology, Media, and Telecommunications (TMT): As India's digital economy grows, tech startups and established players in SaaS, e-commerce, fintech, and media often require growth capital that is less dilutive than equity.

Consumer Durables & Consumer Goods: Companies in this sector often need flexible capital to manage inventory, distribution networks, and seasonal demand fluctuations.

Logistics and Supply Chain: Growing demand for modern warehousing, cold chains, and efficient transportation networks drives the need for capital in this sector.

Financial Services (NBFCs): Private credit funds also lend to Non-Banking Financial Companies (NBFCs) themselves, enabling them to further lend to their customers.

Education (EdTech and Traditional): While some past high-profile cases have highlighted risks, the education sector still requires capital for scaling platforms, developing content, or expanding physical infrastructure.

Specialty Finance: Niche areas like litigation finance, royalty financing, or asset-based lending against specific illiquid assets.

Outlook for Private Credit Markets in India

The outlook for private credit markets in India remains exceptionally positive and robust, poised for continued strong growth over the next few years. This optimism stems from a confluence of structural, economic, and regulatory factors:

Persistent Credit Gap: Traditional banks in India, post a period of cleaning up non-performing assets (NPAs) and facing stricter regulatory capital norms, are increasingly risk-averse towards wholesale corporate lending. They are prioritizing retail loans and well-rated large corporates. This creates a substantial "credit gap" for mid-sized companies, growth-stage businesses, and those with unique or complex financing needs, which private credit is perfectly positioned to fill. The RBI's recent proposal to tighten lending criteria for project financing by banks and NBFCs further highlights this opportunity.

Strong Economic Growth and Capital Demand: India's sustained economic growth trajectory translates into a continuous demand for capital from businesses across various sectors, requiring funds for expansion, working capital, acquisitions, and refinancing. The government's continued thrust on infrastructure development (with substantial budgetary allocations) also fuels demand for project financing where private credit can play a significant role.

Maturing Alternative Investment Fund (AIF) Ecosystem: The AIF framework in India has gained significant traction, making it an attractive vehicle for domestic and international investors to deploy capital into private credit. The rise of sophisticated domestic AIF managers with deep local expertise and networks is a key driver.

Supportive Regulatory Environment (with continuous evolution):

Insolvency and Bankruptcy Code (IBC): The IBC (2016) has been a game-changer, providing a more transparent and time-bound framework for debt resolution and creditor rights, significantly boosting investor confidence in the Indian credit landscape.

Regulatory Adaptation: While the RBI and SEBI maintain vigilance (e.g., preventing "evergreening" through AIFs), their approach is generally evolving to accommodate and regulate the growing private credit space, recognizing its importance in the broader financial ecosystem.

Rising Investor Appetite for Yield and Diversification:

Global Capital Inflow: Global institutional investors (pension funds, sovereign wealth funds, asset managers) are increasingly looking at India as an attractive destination for private credit due to its growth potential and higher yields compared to developed markets.

Domestic HNI/Family Office Participation: High-net-worth individuals and family offices in India are allocating more capital to private credit AIFs, seeking diversification and attractive risk-adjusted returns in a volatile market environment.

Illiquidity Premium: The illiquidity premium offered by private credit, coupled with often floating interest rates (which protect against rising rates), remains a strong draw for long-term investors.

Refinancing Opportunities: As interest rates fluctuate, there will be opportunities for corporates to refinance existing high-cost private credit debt with potentially cheaper bank loans (when regulations permit and bank appetite returns), providing exit avenues for private credit funds and allowing them to redeploy capital.

Key Projections:

AUM Growth: The Assets Under Management (AUM) by private credit firms in India is projected to reach USD 60 billion by 2028, constituting about a quarter of the total AIF industry AUM.

Deal Volumes: Expect continued growth in deal volumes, likely exceeding USD 10 billion in 2025 and increasing further in subsequent years.

Potential Headwinds/Considerations:

Yield Compression: With increasing competition and a large pool of "dry powder," there's a risk of yield compression, though returns are still expected to remain attractive relative to traditional debt.

Credit Risk and Legal Enforcement: While IBC has improved, challenges related to the speed of legal enforcement and recovery in certain distressed situations (as highlighted by cases like Byju's) remain a watch factor for foreign investors.

Regulatory Evolution: The regulatory landscape will continue to evolve, and market participants need to stay agile and compliant with new guidelines.

Impact of RBI's Project Finance Norms on Private Credit in India

The Reserve Bank of India (RBI) recently (effective October 1, 2025) introduced harmonized and stricter norms for project financing by banks and NBFCs. This is a critical development that will directly influence the private credit market:

Increased Opportunity for Private Credit: The new norms mandate higher provisioning requirements for under-construction projects (1% vs. 0.4% earlier, though initially proposed at 5%), and additional provisioning for delays in Date of Commencement of Commercial Operations (DCCO). This will increase the cost of project finance for borrowers from traditional lenders.

Banks' Caution: Banks and NBFCs, facing higher capital charges and increased risk for project finance, are likely to become even more cautious and selective in their project lending. This widens the funding gap for infrastructure and other large-scale projects, creating a significant opportunity for private credit funds.

Focus on Operational Projects: Banks may further shift their focus towards financing operational projects (where provisioning is lower), leaving under-construction and greenfield projects with a greater need for alternative financing.

Tailored Solutions for Project Delays: Private credit funds are typically more agile and can structure bespoke solutions to account for project delays, which are common in infrastructure. They can incorporate more flexible repayment schedules, moratoriums, or even equity-linked upside to compensate for the higher risk of delayed projects.

Specialized Project Finance Funds: We can expect to see an increase in dedicated private credit funds focusing specifically on infrastructure and project finance, leveraging their expertise in risk assessment, structuring, and monitoring these complex deals.

Higher Cost for Borrowers: While private credit offers flexibility, the increased risk aversion from banks will likely translate into higher costs for borrowers seeking private credit for projects, as these funds will demand a premium for taking on the risks banks are shying away from.

Consortium Lending: There might be an increased trend of private credit funds participating in consortiums with banks (where permitted) or even leading deals for projects that fall outside the new, stricter bank lending appetite.

Overall, the RBI's project finance norms, while aiming to strengthen the financial system, are a structural tailwind for the private credit market, pushing more demand for flexible, alternative financing into its purview.

The Role of Technology and Digitalization in Private Credit Growth

Streamlined Underwriting and Due Diligence:

Data Analytics and AI: Private credit lenders are increasingly leveraging data analytics and artificial intelligence (AI) to analyse vast amounts of financial and operational data from potential borrowers. This allows for faster and more accurate risk assessment, identifying creditworthy businesses even in underserved segments.

Account Aggregator Framework: India's Account Aggregator framework provides a secure and consent-based mechanism for sharing financial data. This significantly simplifies the data collection process for lenders, enabling quicker due diligence and more informed lending decisions.

Efficient Deal Sourcing: Digital platforms and networks can help private credit funds identify and connect with potential borrowers more efficiently, especially in the vast mid-market segment across various geographies.

Automated Loan Servicing: Technology can automate aspects of loan servicing, monitoring, and reporting, reducing operational costs for lenders and improving efficiency.

Enhanced Monitoring and Risk Management: Real-time access to financial data and automated alerts can enable private credit funds to monitor borrower performance more closely and proactively manage potential risks.

Investor Reporting: Digital platforms can streamline reporting to investors, providing greater transparency and insights into portfolio performance.

This digital transformation not only makes private credit operations more efficient but also allows funds to cater to a larger volume of deals, including smaller ticket sizes, thus broadening market access.

Future of Foreign Investment in Indian Private Credit

Foreign investment is a critical component of the Indian private credit market's growth, and its future looks promising, albeit with some navigating of nuances:

Continued Attraction for Global Funds: Global private credit funds, particularly those focusing on Asia and emerging markets, view India as a key growth market due to its strong economic fundamentals, large domestic market, and the "credit gap" created by traditional banks.

Higher Yields Compared to Developed Markets: India typically offers higher yields (e.g., in the mid-to-high teens for some strategies) compared to the single-digit returns often seen in developed private credit markets, which is a major draw for international capital seeking alpha.

Increasing Sophistication of Local Partners: Global funds are increasingly partnering with or investing in Indian-domiciled AIFs, leveraging the local expertise and networks of Indian fund managers to originate and manage deals effectively.

Structuring Through NCDs and VRR: Foreign investors will continue to utilize instruments like unlisted NCDs and routes like the Voluntary Retention Route (VRR) for debt investments, which offer more flexibility under FPI regulations, though they need to be mindful of associated end-use restrictions.

Focus on Larger Deals: As the market matures, global players are increasingly looking at larger private credit deals (e.g., $100M+), as evidenced by recent major transactions. This is a shift from earlier days when they primarily focused on smaller, higher-yielding or distressed opportunities.

Importance of Legal and Regulatory Certainty: While the IBC has improved creditor rights, global investors still closely monitor the consistency and speed of legal enforcement and recovery mechanisms in India. Continued improvements here will further de-risk the market for them.

Tax Efficiency: Foreign investors constantly evaluate the tax efficiency of their structures. Any further simplification or clarity in tax policies related to private credit investments will be a positive catalyst.

Alternative to China: With geopolitical shifts, some global investors are diversifying away from China and are increasingly viewing India as an attractive alternative for private debt deployment.

How the Private Credit Markets Can Be Developed Faster in India

To accelerate the growth and deepen the private credit markets in India, a multi-pronged approach is necessary, focusing on regulatory clarity, market infrastructure, and increased participation:

Refine and Harmonize Regulatory Frameworks:

Greater Clarity for AIFs: Provide clearer, more consistent guidelines for AIFs involved in private credit, particularly concerning their interaction with regulated entities (banks/NBFCs) and the types of instruments they can deploy.

Standardization where Possible: While private credit thrives on customization, establishing some standardized documentation or processes for certain types of private credit transactions could improve efficiency and reduce legal costs, making deals easier to execute.

Streamline Foreign Investment: Further simplify and provide clarity on regulations for foreign investors (FPIs, ECBs) participating in private credit, including end-use restrictions for NCDs and tax implications, to attract more global capital.

Expedite IBC Process: Continued judicial and administrative reforms to further streamline and accelerate the insolvency resolution process under IBC will significantly boost creditor confidence, especially for distressed debt.

Enhance Secondary Market Liquidity:

Facilitate Trading of Private Credit Instruments: Develop mechanisms or platforms for the easier transfer and trading of private credit instruments (like privately placed NCDs or securitized assets). This would improve liquidity for investors, making the asset class more appealing.

Encourage Securitization and Syndication: Promote the securitization of private credit portfolios and enable easier syndication among private credit funds, which can help distribute risk and free up capital for new lending.

Improve Data Availability and Transparency:

Centralized Deal Database: Establish a robust and accessible database of private credit transactions (while respecting confidentiality) to provide better market benchmarks, enhance transparency, and aid in risk assessment for both borrowers and lenders.

Standardized Reporting and Valuation: Encourage more consistent reporting standards and valuation methodologies for private credit assets to provide greater clarity and comparability across funds.

Promote Investor Education and Awareness:

Educate : Conduct targeted awareness programs for domestic institutional investors (e.g., provident funds, gratuity funds, smaller insurance companies) and a broader base of high-net-worth individuals and family offices about the benefits, risks, and structures of private credit.

Showcase Success Stories: Highlight successful private credit investments and their impact on business growth to build confidence and attract more capital.

Foster Collaboration between Banks and Private Credit:

Co-lending Models: Encourage co-lending or syndication models where banks provide senior debt and private credit funds offer junior or mezzanine tranches. This leverages the strengths of both parties and effectively channels capital.

Referral Mechanisms: Develop formal or informal referral mechanisms where banks, due to their internal policies or risk appetite, can refer suitable corporate clients with complex needs to private credit providers.

Support Capacity Building and Talent Development:

Specialized Expertise: Invest in developing a larger pool of professionals with expertise in private credit underwriting, structuring, portfolio management, and distressed asset resolution.

Academic Programs: Encourage universities and financial training institutes to offer specialized courses in alternative finance and private credit.

Address Tax Efficiency Concerns:

While some parity has been achieved with the Finance Act 2023, continued review to ensure a competitive and consistent tax regime for* private credit investments can further attract domestic and foreign capital.

In conclusion, India's private credit market is charting an impressive course, transitioning from an alternative to a fundamental pillar of corporate finance. Its ability to provide bespoke, flexible, and efficient capital to a broad spectrum of borrowers, coupled with attractive returns for investors, ensures its continued robust expansion and crucial role in fuelling India's economic aspirations. By systematically addressing these areas, India can create an even more dynamic, efficient, and larger private credit market, supporting its economic ambitions.