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India’s corporate financing landscape is going through a quiet but significant transformation. The once-niche domain of private credit — debt capital from non-bank and non-public market sources — is fast becoming a cornerstone in the country’s capital ecosystem. For mid-sized companies, special situations, and even performing credit opportunities, and for the start-ups, private capital is stepping in where traditional channels are falling short.
What’s driving the shift?
Several structural and cyclical factors have contributed to the rise of private credit. Over the past decade, India’s traditional lenders— banks and non-banking financial companies (NBFCs) — have faced pressure from rising non-performing assets (NPAs), tighter regulation, and liquidity challenges. While large, well-rated corporates continue to enjoy access to cheap capital, a growing pool of mid-sized and unrated businesses have found themselves underserved.
Simultaneously, India’s economic growth, regulatory reforms, and deepening capital markets have attracted increasing interest from global alternative asset managers, sovereign funds, and institutional investors. Private credit — by offering tailored, flexible financing structures — is filling the credit gap, especially for companies that need structured debt for growth, refinancing, or transition capital.
Tailored capital for complex needs
Private credit is distinct in its ability to provide customised solutions. Unlike standard bank loans or public bond issuances, these transactions are bespoke structured to match cash flows, risk appetite and strategic objectives. Financing may take the form of secured loans, privately placed debentures, or hybrid instruments with performance-linked payouts, equity kickers, or back-ended components.
Such structures have enabled businesses to raise capital for refinancing legacy liabilities, funding acquisitions, or even supporting operational turnarounds. The speed and flexibility of execution — coupled with investor alignment — make private credit especially attractive to borrowers with time-sensitive needs or unconventional profiles.
The role of high-yield debt: Blurring boundaries
While private credit typically implies unlisted, bilateral financing, India’s regulatory landscape has fostered an interesting overlap. A significant portion of high-yield corporate financing — particularly from offshore investors — is structured through listed non-convertible debentures (NCDs) or private placements. These transactions mirror private credit in terms of risk, return, and deal complexity, but are issued in listed format to comply with FPI investment guidelines.
This structure enables foreign portfolio investors to participate in sub-investment grade opportunities while maintaining regulatory eligibility. The lines between private credit and high-yield debt thus blur in practice — even though one is “private” and the other technically “public.” Offshore funds increasingly favour such listed structures for credit exposure to Indian corporates, especially when the underlying borrowers are not yet investment grade but offer strong collateral and structured payout potential.
Tax considerations: The silent catalyst
Another underappreciated factor influencing investor allocation is the tax inefficiency of traditional debt investing in India. Fixed income returns — whether from bonds or deposits — are taxed at the investor’s marginal income tax rate, making them significantly less attractive than equity or long-term capital gain-oriented instruments. Equity investments benefit from favourable tax treatment on long-term gains, while other alternative asset classes offer deferral or capital gains mechanisms.
This asymmetry has led many HNIs, family offices, and AIF platforms to gravitate toward high-yield credit and private credit strategies that justify the tax cost through higher post-tax yields. In effect, the pursuit of after-tax alpha is pushing capital away from traditional debt and toward structured, higher-yielding instruments that deliver risk-adjusted returns in a more tax-efficient manner.
Lessons from market disruptions: The liquidity mismatch
India’s credit market evolution hasn’t been without its setbacks. In 2019–2020, a widely followed episode involving a set of high-yield-focused debt mutual fund saw a sudden suspension of redemptions due to severe liquidity strain. These funds, while open-ended in structure, had significant exposure to lower-rated and illiquid bonds. When redemption pressure spiked amid deteriorating credit markets, fund managers found themselves unable to liquidate positions, forcing a wind-down and prolonged repayment process.
This event underscored a fundamental risk in the high-yield debt space: the mismatch between the liquidity offered to investors and the liquidity of underlying assets. It prompted tighter oversight, greater transparency requirements, and a shift in market behaviour. Investors began favouring closed-end or AIF structures that offered better asset-liability alignment and allowed fund managers to hold illiquid credit without daily redemption pressure.
Implications for borrowers
For Indian borrowers — especially those in the mid-market or non-rated space — this shift has expanded financing options beyond traditional banks and NBFCs. Businesses now have access to long-term capital that is tailored to their needs and not bound by the regulatory restrictions of conventional lending. It allows companies to take on structured debt for capex, acquisitions, or even equity buybacks, without diluting ownership or pledging excessive collateral.
However, this flexibility comes at a cost. Interest rates for private credit or high-yield debt typically range between 15 and 18 per cent or higher, depending on the borrower’s risk profile and the nature of the instrument. The trade-off for speed, structure, and access is a higher cost of capital, often accompanied by tight covenants and monitoring provisions.
The changing role of traditional lenders
Banks and NBFCs are not being replaced — but their role is evolving. With their growing focus on lower-risk retail lending and higher regulatory scrutiny, traditional institutions are increasingly partnering with private capital providers. In several cases, banks originate senior-secured portions of credit while private funds take on junior risk or special situation exposures.
Additionally, regulatory moves — such as the formation of a national bad bank and the introduction of the Insolvency and Bankruptcy Code (IBC) — are streamlining distressed asset resolution, creating space for both traditional and alternative capital providers to collaborate on complex restructurings.
A market at an inflection point
India’s private credit and high-yield debt markets are now integral to its capital formation story. With the economy poised for sustained growth, demand for flexible and risk-tolerant capital is only going to rise. Estimates suggest India could see tens of billions of dollars in new private credit deployment in the coming years, especially as AIF platforms scale up and offshore managers deepen their presence.
The evolution is being driven not just by supply constraints in traditional lending, but by a deeper recognition among borrowers and investors alike: structured private capital — whether in private or listed format — is essential to building resilient and dynamic businesses in an increasingly competitive economy.
For companies, it opens new financing pathways. For investors, it offers differentiated risk-adjusted returns. And for India’s credit markets, it marks a shift toward more sophisticated, hybrid models of corporate lending — shaped by flexibility, discipline, and innovation.
As one observer dryly noted, “Who needs a bank when your debt fund knows your EBITDA better than your CFO?” Another quipped, “In private credit, there are no bad borrowers — just badly structured deals.” That’s the future of India’s credit market: smarter, sharper, and unmistakably more bespoke.
And if the market can evolve to offer periodic liquidity without compromising the return profile, it may just unlock the next phase of scale — bridging the gap between fixed income and private capital, and making structured credit not just an alternative, but a mainstream choice.
Published on May 25, 2025
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