India’s private credit market has emerged from a niche segment into a significant alternative financing channel. As of March 2025, private credit AUM stands at approximately $25–30 billion, a dramatic increase from just $0.7 billion in 2010, reflecting a 25x growth over 15 years. This growth trajectory is fueled by India's rapid economic expansion and the increasing limitations on traditional bank lending, especially to sectors like real estate and infrastructure.

The market is characterized by a mix of domestic and global investors, with Alternative Investment Funds (AIFs) being the predominant investment vehicle. The investor base is almost evenly split between global (50.3%) and domestic (49.7%) participants, underscoring widespread confidence in this asset class. Private credit deals in H1 2025 alone reached $9 billion, a 53% increase compared to H1 2024, driven by large-ticket transactions such as Shapoorji Pallonji’s $3.4 billion zero-coupon bond issuance yielding 19.75%.

Sectoral distribution reveals real estate as the dominant borrower, accounting for over one-third of transaction values, followed by infrastructure, energy, renewables, and healthcare. Deal purposes are diversified: acquisition financing (35%), growth capital (25%), and refinancing/working capital (39%). Regulatory nudges, including RBI’s risk weight reductions for NBFC lending and restrictions on bank funding for equity acquisitions, have further propelled private credit’s significance.

Despite its growth potential, private credit in India carries unique risks that retail investors and financial professionals must evaluate carefully.

- Credit Risk: Borrowers in sectors like real estate and infrastructure may face cash flow volatility, impacting timely debt servicing. - Liquidity Risk: Private credit instruments are generally illiquid, with lock-in periods and limited secondary markets. - Regulatory and Oversight Gaps: Limited RBI oversight on AIFs and enforcement challenges in collateral-backed deals create potential blind spots. - Market Volatility: Competition from cheaper equity and wholesale lenders may lead to covenant-lite deals, increasing risk exposure. - Macroeconomic Risks: Inflation, interest rate fluctuations, and geopolitical tensions could affect borrower creditworthiness and investor returns.

The regulatory landscape in India is evolving to accommodate the growing private credit market, balancing investor protection with growth facilitation.

Key regulatory developments in 2025 include:

- RBI Risk Weight Reduction: Lower risk weights on bank exposures to NBFCs encourage banks to lend more to NBFCs, indirectly supporting private credit funding. - Finance Bill 2025 Tax Reforms: Enhanced tax incentives and clarity for Alternative Investment Funds (AIFs) have broadened retail participation. - Restrictions on Bank Funding for Equity in Acquisitions: This has funneled acquisition financing towards private credit providers, boosting demand. - Limited RBI Oversight on AIFs: While this enables flexibility, it raises concerns over transparency and systemic risks.

Retail investors in India can capitalize on the expanding private credit market by adopting informed strategies that balance return potential with risk management.

Key actionable strategies include:

- Invest via Regulated AIFs: Given the dominance of AIFs in private credit, retail investors should focus on SEBI-registered AIFs offering private debt schemes with transparent structures and track records. - Diversify Across Sectors: While real estate dominates, emerging sectors like renewables, healthcare, and data centers offer attractive risk-adjusted returns. - Focus on Mid-Market Deals: Mid-sized transactions often provide better covenant protections and yield profiles compared to mega deals. - Monitor Regulatory Developments: Staying updated on RBI and SEBI regulations helps anticipate market shifts. - Consider Tenor and Liquidity: Align investments with personal liquidity needs, given the illiquid nature of private credit.

Understanding sectoral dynamics is crucial for selecting private credit investments. In 2025, the following sectors have been prominent:

- Real Estate: Continues to dominate with ~35% of deal value, driven by commercial and residential projects. - Infrastructure and Energy: Account for around 25%, including renewables and utilities. - Healthcare and Education: Emerging sectors with growing private credit penetration.