Risks, Returns & Covenants: Inside the Private Credit Boom in India

In May 2025, a large refinancing deal caught the attention of Indian dealmakers. Porteast Investment, part of the Shapoorji Pallonji Group, raised $3.1 billion, the biggest onshore private credit transaction the country had seen. What made it remarkable is that it came at a time when bank lending was cautious, bond markets were largely shut to most borrowers and the exuberance in the equity market was also considerably tempered. 

Over the last two years, private credit or direct lending - the practice of raising debt from a non-bank investor rather than a bank or through bonds - has become increasingly commonplace in India. In doing so, private credit is overcoming its traditional stereotype as a way to fund ventures that institutional lenders consider too risky. Indeed, the trend has not remained unnoticed by global players in this space, with KKR raising a $2.5 billion private credit fund for Asia-Pacific in January this year, with India firmly on its map. 

The picture that seems to be emerging is one where traditional sources of capital are narrowing, and private credit is stepping in to fill the void with tailored structures and quicker decision-making, giving companies an alternative that did not exist earlier.

The numbers back up the rising prominence of private credit in India. According to data sourced from EY, deal activity in the private credit space in India rose from $6.04 billion across 123 deals in 2022 to $8.70 billion across 133 deals in 2023. This momentum accelerated further in 2024, when $9.63 billion was recorded across 263 deals. The trend continued in 2025, albeit with a bias towards bigger deals, with the first half of 2025 registering 78 deals worth a whopping $9 billion. 

Backing Risky Bets

Vishal Bansal, Partner, Debt and Special Situations at EY India, points out that private credit offers greater flexibility and involves lower risk for younger companies. “A key driver on the demand side is the persistent credit gap faced by mid-sized companies, new-economy businesses, and asset-heavy platforms that are often constrained by the standardized underwriting frameworks and regulatory capital requirements of banks,” he explained. 

“In contrast, private credit providers offer significantly greater flexibility in structuring transactions - whether through customized repayment schedules, bespoke covenants, cash-flow linked instruments and hybrid debt structures, making them better suited to address complex or transitional financing needs,” Bansal added.  

To understand this better, imagine an infrastructure company executing a capital-heavy road project. If it goes to a traditional bank, there will be restrictions such as fixed timelines of repayment etc.. In such a situation, private credit - with a flexible repayment schedule - can allow the company to start repayment after toll collections stabilize.

Further, instead of rigid monthly EMIs, the deal may be linked to traffic growth and cash flows from a specific stretch of road. Such flexible terms create a win-win for both parties. For the developer, it keeps the project moving without fresh equity dilution, whereas for the lender, the higher yield compensates for the risk and longer duration.

Raghunath T, senior portfolio manager at Vivriti Asset Management, also agrees that private credit is a boon for young companies that are yet to gain access to the bond market and have to rely on equity fundraising, which often leads to the dilution of the promoter’s stake. 

“These businesses also rely on a few banks for all their standard debt needs and that is also not fulfilled at times. A case in point is the increased focus of banks on the retail borrowers at the expense of the corporate [segment] in the last few years. The availability of flexible debt capital opens up many more avenues for such mid-corporates, resulting in a more dynamic business landscape in the country,” he explained.  

Private credit is even being availed of by companies looking for expansion or a step up in their operations. Consider a promoter-led manufacturing company in western India planning to expand its capacity. Banks may be hesitant if the balance sheet is already stretched, while private equity investors will likely demand a meaningful stake. This is where a private credit fund may step in with a customised loan that allows a brief repayment break and an exit once the new plant is up and running. In this way, the promoter keeps control, the expansion plan moves ahead, and the lender exits after the company’s finances improve. Here, PC fits in by adjusting to business needs in ways traditional lenders often cannot.

Seeking Alpha

Over the last few years, private credit has shaped up as a separate asset class within alternatives with distinctive features such as timely return of capital and downside protection - one of the reasons for the growth. The investor interest in credit alternative funds is being driven by family offices and ultra-high-networth individuals (UHNIs). 

“In an environment where traditional instruments deliver around 7% and public markets remain volatile, structured private credit strategies offering 14-18% pre-tax returns with defined cash flows and downside protection are becoming a steady portfolio allocation,” noted Ankit Kedia, founder and lead investor of Capital-A.  

In fact, even players like insurance companies have started allocating funds to private credit as the returns on public bonds and deposits have shrunk considerably, according to market experts.  

One of the key reasons for the rise of PC is the implementation of India’s Insolvency and Bankruptcy Code, which has materially strengthened lender confidence by improving recovery visibility and enforcement discipline. “IBC has helped institutionalise private credit as a more predictable asset class rather than a special-situations product,” said Kedia. 

The Insolvency and Bankruptcy Code, 2016 strengthened the position of creditors by bringing greater discipline and structure to debt resolution mechanisms. According to an S&P report, post IBC, the average debt resolution time is now under two years, compared with six to eight years under previous resolution regimes. Further, recovery values have also improved to 33% from 15%-20% before the Insolvency and Bankruptcy Code 2016.  

“Investors get the benefit of being senior lenders akin to public debt; however, the return profiles are equity-like due to careful selection of emerging companies and/or situations which provide significant alpha over other products,” said Raghunath. 

As for borrowers, the strongest traction is seen among mid-to-late-stage startups that have stable or predictable cash flows but want to avoid dilution at a time when equity fundraising has become more selective. 

“PC is also increasingly used by asset-heavy businesses such as those in renewable energy, manufacturing, and real estate-led platforms where traditional banks may be cautious and equity capital can be expensive. In addition, sponsor-backed companies are using private credit alongside private equity to finance acquisitions, expansion and refinancing needs,” said Bansal.  

Key draws include the flexibility and speed private credit offers, tailored structures, customised repayment terms, and quicker decision-making compared to traditional lenders.  

Keeping the Books Clean

While the private credit scenario is evolving in India, the risks involved are hard to ignore. Increased competition and capital inflows into debt markets could lead to yield compression and weaker underwriting standards. Similarly, the quality of assets can come under pressure during economic slowdowns, particularly in sectors with cyclical cash flows.  

“There is a need for greater transparency, robust governance, and disciplined risk management, especially as the market evolves and more first-time borrowers access private credit. Long-term sustainability will depend on investor discipline, regulatory clarity, and the ability of fund managers to balance growth with credit quality,” says Bansal. 

From an investor perspective, points out Kedia, illiquidity is an inherent feature of private credit. In order to avoid debt defaults, asset managers will have to carefully rotate among sectors and companies in the next downcycle.

“Unlike public markets, these assets are not designed for rapid exit, which means fund managers and investors must remain aligned on tenure and liquidity expectations. Strategies that are clear about duration and cash-flow visibility will be better positioned across cycles,” Kedia said. 

With private equity fundraising remaining soft, experts believe that more companies are expected to approach the private credit providers for their capital needs and thus keep the deployment pipeline fairly healthy. Kedia believes that the market is likely to evolve toward greater sector diversification, moving beyond concentration in real estate and promoter financing into better performing credit across mid-market enterprises:

“We expect more innovation in product design, including hybrid structures that combine credit with selective upside participation. Overall, private credit is moving from being a niche alternative to becoming a core component of India’s private capital ecosystem, particularly for businesses seeking flexibility and founders focused on long-term ownership.”