Private credit in India has become a powerful player in the country's financial world, with the market size reaching $25 billion in 2023. Non-bank lenders and private credit funds have expanded rapidly and created fresh opportunities for businesses that need alternative financing solutions. India's businesses face a major funding gap between traditional banking and their capital requirements, which this growing sector effectively addresses.

Multiple financing channels make up India's private credit market, including venture debt funds, domestic funds, and investments from High Net Worth Individuals (HNIs). These funding sources help various segments of the economy grow stronger. Small businesses need capital, and established companies look for growth opportunities through these channels. Private credit has become a vital part of India's financial ecosystem that provides flexible lending solutions and boosts economic development.

The Rise of Private Credit in India

India's private credit market showed impressive expansion as private credit deals reached an unprecedented USD 6 billion across 96 deals in the first half of 2024. This growth stands especially notable compared to the previous year's total investment of USD 8.6 billion.

The market's development can be seen through increased participation from global and domestic funds. Global funds contributed 53% of total investments during H1 CY2024. Domestic funds have gained more influence, especially when you have the corporate middle market segment. The market saw several major transactions in 2024:

• Reliance Logistics and Warehousing: USD 697 million
• Vedanta Semiconductors: USD 301 million
• Matrix Pharma: USD 293 million
• GMR Airports: USD 271 million

Market maturity reflects in its changing patterns, and funds now engage more in sub-18% IRR transactions. Real estate and manufacturing sectors emerged as the main beneficiaries that attracted about 60% of deal flow. A supportive regulatory environment, including the Insolvency and Bankruptcy Code 2016 implementation, has helped this growth.

Alternative Investment Funds (AIFs) are vital to this expansion. Category II AIFs showed remarkable year-over-year growth of 34% and represented 73% of overall funds raised. Record deal flow in 2023 further proves the market's strong performance with 108 deals valued at USD 7.8 billion, up from 77 deals worth USD 5.3 billion in 2022.

Key Drivers of Private Credit Growth

Multiple key factors drive India's private credit market expansion. The government's regulatory reforms have created a resilient infrastructure for growth. The Insolvency and Bankruptcy Code (IBC) has improved debt recovery systems and boosted investor confidence. The market will grow at a CAGR of 15-20% over the next five years.

Infrastructure development is a vital growth catalyst. The government plans to double infrastructure investment to Rs 140 trillion by 2030. Private sector must play a major role since India needs to invest 8-10% of GDP in infrastructure to maintain high single-digit growth rates.

The market growth stems from these regulatory and economic reforms:

• Implementation of the Make in India initiative
• Production-linked incentive (PLI) scheme with an outlay of ₹2 lakh crore
• Better corporate governance standards through SEBI regulations
• A stronger financial institution framework

Digital lending platforms and advanced analytics have changed private credit operations. This progress shows clearly in the real estate sector. Credit funds focus heavily on this sector and deploy substantial capital to major developers like Prestige Group and Puravankara Group.

Private credit has become a prime asset class for high-net-worth investors and family offices. Fund managers' confidence shows the market's maturity. 58% feel positive about fund availability and 91% express confidence in near-term investments.

Impact on Economic Growth and Development

Private credit's rise has brought major changes to India's financial world. It plays a key role in filling the credit gap for Micro, Small, and Medium Enterprises (MSMEs). The current deficit stands at ₹20,941.43 to 300 billion. This gap has allowed Alternative Investment Funds (AIFs) to step in as reliable providers of patient and flexible debt capital.

Private credit shows its strength in several ways:

• Transaction values grew from USD 33 billion in 2016 to USD 73 billion in 2020
• MSMEs created 13.5-14.9 million new jobs yearly
• Gross NPAs dropped to a seven-year low of 5% by September 2022
• Expected private credit investments range between ₹418.83 and ₹837.66 billion next year

Tech advancement in financial services has boosted private credit's reach and made finance more accessible. Fintech companies have changed MSME lending through advanced technologies. They use data analytics and AI to evaluate credit risk. Traditional banks previously gave only 6% of their total lending to MSMEs, which makes this change important.

Real estate and manufacturing sectors benefit the most from these developments due to their capital needs. Large companies now access debt through corporate bond markets. Meanwhile, medium and small-sized enterprises find their funding through private credit channels. This creates a balanced lending environment.

Challenges and Opportunities in the Indian Private Credit Market

India's private credit market continues to evolve with its share of challenges and opportunities. The market shows steady growth, yet regulatory oversight has increased. This is evident as 75% of amendments to SEBI (AIF) Regulations have been implemented since 2020. These regulatory changes aim to enhance governance, transparency, and investor protection in the private credit sector.

The market faces several challenges:

• Borrowers struggle with high interest rates. One-third of them have interest costs that exceed their cash flow
• Lenders face tougher competition, with 73% reporting more competitive deals
• Limited comparable transactions create asset illiquidity and valuation complexities
• AIFs face exposure limits from regulatory restrictions on regulated entities

The high-yield segment offers promising opportunities despite these hurdles. Experts project private credit investments between ₹418.83 and ₹837.66 billion next year. Domestic family offices have become more active players in this space. The sector now leans toward performing credit deals and funds participate in sub-18% IRR transactions.

Risk management has matured in this market. Alternative lenders now use portfolio diversification strategies and structured deal mechanisms to maintain steady cash flows. Private credit funds offer loans with interest rates from 12% to 18%. Riskier segments generate higher returns between 20% to 24%.

Conclusion

Private credit has significantly transformed India's financial ecosystem. The market grew from $25 billion in 2023 and reached record-breaking deal volumes in 2024, which shows growing investor trust and market stability. This rise has brought major economic advantages to the country. MSMEs now have better funding access, more jobs are being created, and NPAs have decreased. The sector provides flexible financing options to support vital industries like real estate and manufacturing.

India's private credit market looks bright ahead, even with regulatory hurdles and market competition. The sector should grow by projected growth rates of 15-20% in the next five years. New technology and better governance systems will help drive this expansion further. These financial innovations strengthen India's economic base and support infrastructure growth while maintaining sound risk management.