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In May the Shapoorji Pallonji Group, an Indian conglomerate, arranged a $3.4bn private-credit deal. The transaction, one of the largest of its kind in any emerging market, involved investors buying three-year bonds that paid no regular interest but offered a total yield of nearly 20%. To outsiders, it appeared to announce the arrival of an unexpected guest on the global financial stage. India was not known as a major player in private credit, which involves raising money from institutional investors and the wealthy to then lend directly to companies. The reality, as the deal showed, could not be more different.
India’s journey traces the global industry’s boom since interest rates began to climb in 2022. Once viewed as short-term financiers for small, risky firms, Indian private-credit funds have, from a low base, swelled to an estimated $25bn-30bn. That is still just 0.6% of gdp, a fraction of America’s market. But issuance last year ran to $8bn-10bn and is leaping higher. The deals are changing, too.
Their growing clout is down to an ability to structure loans for businesses with unique funding needs or irregular cash flows, particularly those that banks shun because of higher risk or regulatory limits.
A vast financing gap drives their growth. India is the world’s fastest-growing major economy and needs immense capital. In 2024, by one estimate, a quarter of private-credit deals provided growth capital; over a third financed acquisitions. Sectors like infrastructure and renewables present attractive opportunities. When Mumbai International Airport first sought private credit in 2021, it was a greenfield project with limited options. Four years later, as operations neared, it refinanced a $750m facility with private lenders for a second time, illustrating their foothold.
Regulatory constraints also push borrowers towards alternative funding. The Reserve Bank of India (RBI) restricts bank lending for land acquisition, even for housing. Consequently, real-estate deals now dominate the private-credit sector, accounting for more than a third of its value. Rules also prevent banks from funding the equity portion of acquisitions. Private credit has filled this void: about 35% of its deals are now related to mergers and acquisitions.
A stronger insolvency framework has provided further impetus. The Insolvency and Bankruptcy Code of 2016 shifted power towards creditors by imposing more rigour on debt-resolution. The average resolution time has fallen to under two years, from six to eight. Recovery values have leapt to 33%, from 15-20% before the reform. In this improved climate, private credit has funded borrowers shut out from traditional debt. Vedanta Resources, a mining group, raised $1.25bn in 2023 to aid a bond restructuring. Yet the framework remains imperfect. A Supreme Court decision in May to invalidate an acquisition completed through the insolvency process in 2021 shows lingering legal uncertainty.
Nonetheless investors are drawn by yields of 14% to 22%, much higher than those from banks. The premium reflects the incremental risk associated with the borrower, the collateral and the bespoke nature of the loans. Most private-credit platforms are structured as Category II Alternative Investment Funds (AIFs), which can tap offshore and domestic capital. The investor pool is split almost equally between foreign investors and domestic ones, such as corporates and wealthy families.
The domestic base has widened, with family offices and rich Indians seeking diversification and yield. Recent tax changes have boosted confidence. Yet India holds cautionary tales for inattentive investors. A default by Amtek Auto in 2015 eviscerated the value of debt funds with concentrated exposure, triggering an exodus. Despite exuberance about retail participation, doubts linger over its stability. A limited understanding of complex, illiquid assets may risk a wider sell-off under pressure.
Competition is intensifying, meanwhile. Resurgent equity markets provide issuers with a cheaper alternative. Borrowers can also turn to wholesale lenders, foreign banks and finance companies. Inevitably, this has squeezed demand for private credit and its yields, leading to an uptick in transactions with fewer investor protections.
The rapid growth could, in theory, undermine financial stability. The web of connections between banks and nonbanks might weaken the transmission of monetary policy and exacerbate systemic risk. AIFs are regulated by the Securities and Exchange Board of India, whereas the RBI oversees banks. Funds operating outside the central bank’s purview could create blind spots in monitoring leverage. A lack of disclosure and price-discovery mechanisms complicates risk assessment.
For now, though, limited interconnectedness will probably mitigate systemic dangers. Rules governing AIFs restrict banks’ exposure to them. Category II AIFs, which predominate in private credit, are not allowed to utilise leverage, except for temporary shortfalls. The RBI has also capped investments by regulated entities in AIF schemes. Such measures reinforce the sector’s isolation.
Private credit in India has developed during a period of robust economic growth. It has not been tested in a nasty downcycle. A mix of low domestic interest rates, ample liquidity as well as competitive bank funding will introduce greater competition. The cautionary tales experienced by peers in banking have shaped their risk tolerances. In time, private credit will endure the same challenges. Its performance in a market downturn will be the true measure of its fitness. Therefore, you can be sure of one thing: India’s next major private-credit deal will not be a surprise. The market has announced its arrival. ■
