Private credit in India: where it fits beside your bank
Private credit funds have become a permanent part of India's capital markets. Used well, they complement a banking relationship rather than replace it.
A decade ago, an Indian mid-market company that could not raise what it needed from a bank had few options between bank debt and selling equity. That gap is now filled by a substantial private credit market, most of it organised as Category II Alternative Investment Funds registered with SEBI.
The scale of the shift
SEBI's published data on alternative investment funds show commitments across all AIF categories climbing past ₹15 lakh crore by December 2025, with Category II — which includes private credit, private equity and real estate strategies — accounting for the largest share. Private credit has been one of its fastest-growing segments.
What private credit does well
Private credit is priced above bank debt, often considerably. What it offers in return is flexibility. Funds can lend against cash flows where collateral is thin, structure repayments around a project's ramp-up, and fund purposes that bank credit policies typically exclude or limit — acquisitions, promoter-level funding, bridge finance ahead of an equity round or a stake buy-back.
Decisions are made by a small investment committee rather than a layered credit hierarchy, so timelines can be measured in weeks.
Where it goes wrong
The flexibility comes with covenants, and those covenants are enforced. Private lenders commonly require tighter financial tests, more frequent reporting, security over shares and, in some structures, equity-linked returns. A company that uses private credit to paper over a business problem will find that problem amplified.
Private debt can also complicate an existing banking relationship. Inter-creditor terms, the ranking of security and the treatment of cash flows must be negotiated with the existing lenders, not presented to them afterwards.
The right order
For most established companies, bank finance should remain the foundation of the capital structure, because it is the cheapest and most durable. Private credit belongs on top of that foundation, for a defined purpose and a defined period, with a clear route to refinancing it into cheaper money once it has done its work.
This article is general information about the financing landscape, current as of its publication date. It is not financial, legal or tax advice; regulations change, and every company’s position is different.
