Private credit is rapidly emerging as an important alternative investment category for wealthy Indian investors, with assets under management estimated at $25 billion-$30 billion and double-digit growth over the past five years. The asset class, which involves loans provided by non-bank lenders, is attracting investors with potential returns that can reach as high as 22%, while giving businesses access to customized financing that may not be readily available from traditional banks and non-bank financial companies (NBFCs).
The growth, however, comes with a crucial trade-off: private credit is not a low-risk substitute for conventional fixed-income investments. Investors face credit, liquidity, manager and valuation risks, while funds can lock up capital for several years. With wealth managers increasingly offering private-credit products and India’s alternative investment fund (AIF) industry expanding, understanding the actual return, structure and downside risk has become increasingly important for investors considering the category.
India’s Private Credit Market Expands Rapidly
Private credit refers to loans extended by non-bank lenders, often through private funds and Category II AIF structures. The market has grown significantly as businesses increasingly seek financing that is faster, more customized or structured differently from conventional bank loans.
According to EY India data cited by Mint, India recorded 166 private-credit transactions worth $12.4 billion in calendar 2025, a 35% increase from 2024. Real estate was the largest segment, accounting for about 42% of private-credit deals, followed by healthcare and industrials at 15% each.
Key Private Credit Market Data
| Indicator | Latest Figure |
|---|---|
| Estimated private-credit AUM | $25 billion-$30 billion |
| Private-credit transactions in 2025 | 166 |
| Transaction value in 2025 | $12.4 billion |
| YoY transaction-value growth | 35% |
| Real estate share | ~42% |
| Healthcare share | ~15% |
| Industrial share | ~15% |
| Typical fund lock-in | 5-7 years |
| Minimum mandate often seen | 3 years |
| Potential advertised returns | Up to ~22% |
Moody’s has separately estimated India’s private-credit AUM at around $25 billion at the end of 2025, roughly double its level five years earlier. The ratings agency expects the market to continue expanding as companies seek alternatives to traditional bank financing.
Why Investors And Borrowers Are Turning To Private Credit
The expansion of private credit is partly structural.
Following the global financial crisis, banks faced tighter lending requirements. Lending conditions became more stringent in several areas after the Covid-19 period, creating financing gaps for businesses that needed large-ticket, long-duration or customized funding.
Private lenders can fill some of those gaps because they have greater flexibility in designing loan structures.
A borrower may seek private credit when it needs rapid financing, alternative collateral, refinancing, promoter financing or a structure that does not fit conventional bank lending criteria.
Private Credit’s Appeal
| For Borrowers | For Investors |
|---|---|
| Faster financing | Potentially higher returns |
| Flexible loan structures | Floating or fixed interest income |
| Customized repayment terms | Access to private-market opportunities |
| Alternative collateral | Portfolio diversification |
| Financing outside traditional bank criteria | Potential premium for illiquidity and credit risk |
| Large-ticket transactions | Structured downside protections in some deals |
This flexibility comes at a price. A borrower seeking private credit may carry more risk than a conventional bank borrower, and investors must therefore assess why the company needs alternative financing in the first place.
Private Credit Is Debt, But It Is Not Low-Risk Debt
The most important distinction for investors is between private credit and traditional fixed-income products.
Private credit is a debt investment because the investor lends money and expects interest and principal repayment. But the underlying borrowers, structures and collateral can carry considerably greater risk than conventional high-quality debt.
Mint notes that private credit should not be treated as a replacement for an investor’s low-risk debt allocation. Instead, it is an alternative strategy where higher expected returns compensate investors for accepting additional risk.
Traditional Debt
Lower Risk → Lower Expected Return → Greater Liquidity
Private Credit
Higher Credit Risk + Lower Liquidity + Manager Risk → Higher Expected Return
The distinction is especially important for investors who may interpret an advertised 15%-22% return as comparable to a guaranteed fixed-income yield.
It is not.
An Advertised 18% Return May Not Mean 18% In Your Pocket
The headline return of a private-credit fund can differ substantially from the investor’s actual post-tax and post-fee return.
For example, Mint notes that if the return is primarily interest income, it can be taxed at the investor’s applicable slab rate. An 18% interest return for an investor in the 30% tax bracket would effectively become about 12.6% before surcharge and cess.
Illustrative Return Impact
| Item | Illustrative Amount / Rate |
|---|---|
| Advertised gross return | 18% |
| Tax rate used for illustration | 30% |
| Return after 30% tax | 12.6% |
| Fees | Additional deduction |
| Default / recovery losses | Potential additional deduction |
| Idle-capital opportunity cost | Potential additional impact |
| Actual investor return | Can be materially below headline rate |
This is only an illustration based on the tax treatment described by Mint and does not represent a guaranteed or universal post-tax return. Actual taxation depends on the fund structure, nature of income and investor circumstances.
The broader point is that investors should compare private credit using net returns rather than headline yields.
Liquidity Is A Major Risk
Private-credit investments are typically illiquid.
Unlike listed bonds or publicly traded stocks, private loans do not have a daily market where investors can easily sell their positions. Private-credit AIFs can therefore have lock-in periods of five to seven years, with some mandates running for at least three years.
This creates a fundamental mismatch for investors who may need access to their money unexpectedly.
| Investment Feature | Traditional Listed Debt | Private Credit |
|---|---|---|
| Secondary market | Generally available | Limited |
| Daily pricing | More transparent | Often valuation-based |
| Liquidity | Usually higher | Low |
| Typical holding period | Varies | Often multi-year |
| Borrower transparency | Generally higher | Can be limited |
| Structure | Standardized | Customized |
| Investor access | Broad | Typically sophisticated investors |
EY has also highlighted valuation challenges in private-credit funds because underlying loans can be unrated, unlisted or higher-risk instruments. The lack of frequent market transactions can make it harder to determine the true market value of a portfolio.
Credit Risk Can Remain Hidden Until Maturity
One of the less obvious risks is that a private loan can appear healthy while the borrower is still servicing interest.
Consider a fund that lends ₹1 crore at 9% interest with principal due at maturity. As long as the borrower continues paying interest, the loan can remain classified as performing even though the underlying business may face stress.
In the example cited by Mint, the borrower could pay ₹9 lakh in annual interest while the more significant repayment risk becomes visible when the principal falls due.
How Credit Stress Can Develop
Loan Disbursed
↓
Interest Payments Continue
↓
Loan Appears Performing
↓
Borrower Faces Business Stress
↓
Principal Repayment Approaches
↓
Default / Restructuring Risk Emerges
This makes underwriting and collateral quality critical.
An investor should understand not only how much interest a borrower is paying, but also how the principal will ultimately be repaid.
Collateral Does Not Eliminate Risk
Private-credit loans can be secured against assets including unlisted shares, promoter equity and other forms of collateral.
However, the existence of collateral does not guarantee full recovery.
The actual value of collateral can fall, enforcement can take time, and legal or operational complications can delay recovery. Investors therefore need to assess the quality, liquidity and enforceability of the security rather than simply noting that a loan is “secured.”
The strength of covenants is equally important. Strong covenants can provide lenders with earlier intervention rights if a borrower’s financial condition deteriorates.
Fund Manager Selection Becomes Critical
Private credit places significant responsibility on the fund manager.
Two funds can advertise similar return targets while having dramatically different risk profiles because of differences in underwriting standards, borrower selection, collateral, concentration and recovery capabilities.
Investors should examine the manager’s historical record and ask how previous funds performed through stressed situations.
Questions Investors Should Ask
| Question | Why It Matters |
|---|---|
| Who are the borrowers? | Establishes underlying credit quality |
| Why did they seek private credit? | Identifies potential risk |
| What is the manager’s track record? | Tests underwriting capability |
| How many loans are in the portfolio? | Measures concentration risk |
| What sectors dominate? | Shows exposure to industry cycles |
| What collateral is available? | Indicates potential recovery support |
| How strong are covenants? | Determines lender protections |
| What happened in past defaults? | Tests recovery experience |
| What are all fees? | Determines net return |
| Is there a conflict of interest? | Identifies governance risk |
| How long is the lock-in? | Measures liquidity risk |
Mint also highlights the importance of checking whether advisers recommending private-credit funds have relationships with or affiliations to the fund managers, which could create potential conflicts of interest.
Private Credit Is Becoming More Important To India’s Businesses
The rise of private credit is not solely an investor story.
For businesses, it is becoming a meaningful alternative source of capital. Moody’s said the market has evolved from primarily financing distressed companies to serving financially stable businesses seeking refinancing, expansion capital and other customized funding.
Real estate remains the largest private-credit category, while infrastructure, utilities and promoter financing are also important segments.
This broader borrower base could support continued market growth, but it also means managers must maintain underwriting discipline as competition for deals increases.
Private Credit And AIFs Are Closely Linked
Category II AIFs have become an important vehicle for private-credit investing in India.
AIFs are privately pooled investment vehicles that can invest in private equity, venture capital, real estate, private credit and other alternative assets. Category II includes private-equity, private-credit and real-estate strategies that do not fall into the other AIF categories.
Unlike mutual funds, AIFs generally cater to sophisticated investors and typically require a minimum investment commitment of ₹1 crore. They can also have multi-year lock-ins, allowing managers to invest in less-liquid assets.
This structure makes private credit more accessible to high-net-worth individuals, family offices and institutional investors than it would be through direct lending.
India’s Market Has Room To Grow, But Risks Are Rising
India’s private-credit market remains small relative to major global markets, despite doubling in size over five years.
Moody’s expects continued expansion because banks and NBFCs can face constraints when providing large-ticket, long-tenure or customized financing. At the same time, the ratings agency warns that market growth could increase leverage, opaque deal structures, valuation challenges and liquidity pressures.
Avendus Wealth Management has similarly argued that India’s private-credit market is relatively insulated from some of the redemption pressures seen in parts of the US market, partly because Indian portfolios have significant exposure to hard collateral and visible cash flows. However, it cautioned that intensifying competition could eventually test underwriting discipline.
The key issue is therefore not simply how quickly private credit grows, but whether managers can preserve credit quality as more capital enters the sector.
The Bigger Picture
Private credit is becoming an established part of India’s alternative-investment landscape, offering businesses a flexible source of capital and investors the possibility of higher returns. The market’s growth to roughly $25 billion-$30 billion in AUM and the $12.4 billion of transactions recorded in 2025 show how quickly the asset class is gaining traction.
But the higher return comes with a different risk profile. Investors face the possibility of borrower defaults, weak collateral, long lock-ins, valuation uncertainty, manager underperformance and returns that fall substantially below advertised yields after fees, taxes and losses. Private credit can therefore complement a sophisticated portfolio, but it should not be mistaken for conventional low-risk debt.
Looking Ahead
The private-credit market is likely to continue expanding as Indian companies seek customized financing and wealthy investors search for alternatives to traditional fixed-income products. The growth of Category II AIFs, stronger insolvency processes and increasing institutional participation could support the market, while greater competition among fund managers is likely to put more pressure on underwriting quality.
For investors, the central question should remain whether the additional return adequately compensates for the additional risk and illiquidity. A high headline yield is not sufficient on its own; borrower quality, collateral, covenants, manager history, fees, taxation, diversification and the ability to hold the investment until maturity will determine whether private credit actually delivers attractive risk-adjusted returns.
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