Private credit: the real edge

Highlights

• Private credit is not competing with banks on pricing, nor is it attempting to replace the traditional banking system. Instead, it is carving out a distinct position based on flexibility, customisation, and the ability to address complex financial situations that fall outside the scope of standardized lending.
• In the long run, the sustainability of private credit will come from continued investor's appetite for higher yields. As investors become more familiar and comfortable with the asset of class, they tend to seek better risk-adjusted returns.
• Private credit is not anchored to any specific sector. Instead, it responds to specific business situations where traditional banking solutions may not be the most suitable. This is why private credit funds typically remain sector-agnostic.
• Private credit funds approach risk with a fundamentally different lens than banks. Where banks often incorporate broader macro and sector-level indicators into their credit frameworks, private credit operates with a micro-focused, situation-specific mindset.

Pricing: Not a battle private credit is fighting

Contrary to popular perception, private credit funds are not engaged in a race to undercut banks on the cost of capital. Bank-led transactions in India typically fall in the 10–11% IRR range, while private credit deals usually begin at 12% and go upward. This means the appeal of private credit does not lie in cheaper funding; it lies in what accompanies that capital.

What differentiates private credit is the ability to deliver tailored solutions. These include customised structures, specific end-use planning, bespoke repayment designs, and enhanced security packages. Private credit thrives in situations that demand creativity, agility, and precision rather than template-driven lending.

In the long run, the sustainability of private credit will come from continued investor's appetite for higher yields. As investors become more familiar and comfortable with the asset of class, they tend to seek better risk-adjusted returns. This naturally nudges the industry toward offering superior, timely, and highly customised solutions, not cheaper capital.

Sector-agnostic by design: driven by situations, not industries

Private credit is not anchored to any specific sector. Instead, it responds to specific business situations where traditional banking solutions may not be the most suitable. This is why private credit funds typically remain sector-agnostic.
Companies across diverse industries turn to private credit when they face circumstances such as:

• Acquisition financing
• Promoter or shareholder financing
• Growth or expansion capital
• Refinancing or recapitalisation
• Bridge financing, including bridge-to-IPO needs
• Any situation requiring speed, flexibility, or customised structuring

If businesses encounter these scenario-driven requirements, private credit remains a relevant and valuable financing option across virtually all industries.

A distinct approach to credit risk

Private credit funds approach risk with a fundamentally different lens than banks. Where banks often incorporate broader macro and sector-level indicators into their credit frameworks, private credit operates with a micro-focused, situation-specific mindset.

Because private credit funds execute far fewer deals annually, each individual transaction carries meaningful concentration risk. This naturally leads to deeper due diligence, thoroughly examining:

• The company’s business model
• Promoter strength and governance
• Cash-flow predictability
• Purpose and structuring of the financing
• Security and covenant architecture

Not a parallel system—part of a broader capital ecosystem

Private credit’s role is best understood by looking at how India’s financing system has evolved. NBFCs were originally created to address needs the banking system couldn’t fully serve. Over time, they began participating in areas where banks could lend—but where NBFCs were often structurally better positioned.

Private credit functions in much the same way. It is not an alternative banking system, nor a regulatory loophole. Instead, it is one of many capital sources, complementing:

• Banks
• BFCs
• Mutual funds
• Private equity
• Bond and capital markets

Private credit becomes relevant only when a borrower’s situation requires a tailored, flexible, or time-sensitive solution that traditional lenders may not be structured to provide.

Cost competition: pressure, not risk-taking

In most industries, intense competition on cost signals increases competitive pressure, not an inclination toward risk-taking. The same holds true within the private credit space.

Any pricing-related competition largely occurs between private credit funds themselves, not between private credit and banks. Since both operate with fundamentally different liability structures and return expectations, their pricing bases are not comparable. Intra-industry competition within private credit mainly compresses margins; it does not inherently increase risk appetite.

Systemic risk is not a concern—at least not today

Private credit does not undercut banks on pricing, nor does it operate on a scale that could pose systemic risks to the financial system. In India, total private credit AUM amounts to less than 1% of banking system AUM—far too small to create systemic vulnerabilities.

Given its size, structure, and role in the broader ecosystem, private credit currently poses no threat to financial stability. Instead, it fills a well-defined gap by serving specialized, situation-specific financing needs.

Conclusion: A complementary force, not a competing one 

Private credit in India is emerging as a sophisticated, solution-oriented segment of the financing ecosystem. It does not compete with banks on pricing, nor does it seek to replace them. Instead, it provides value where complexity exists—offering flexibility, speed, customisation, and deeper engagement with borrower-specific circumstances.
Its continued growth will be driven not by cost arbitrage, but by performance, investor's appetite, and the ability to deliver capital that fits the need—not the cheapest capital available.