The long due 30th meeting of India’s Financial Stability Development Council (FSDC) may be held in May 2026, and the agenda is expected to include private credit given its increasing volume.
Global Private Credit:
Currently, private credit’s global market size is US Dollar 3.6 trillion. Private credit is debt financing provided by non-banking lenders directly through private negotiations. Private credit came before formal banking; rather, it existed precisely because formal banking hadn’t yet developed.
Between 1960s to 1990s, modern banking developed into a formal and fully regulated system. In the middle, between 1970s to 1980s, the hitherto fragmented bond markets also advanced. As modern banking and bond markets matured, private credit dwindled.
As banking system advanced, it created regulations and systemic limitations such as tighter lending norms, credit rating, sanction delays, rigid credit cycles, higher intermediation costs and complex procedures. The limitations brought private credit back to the limelight by the end of 1990s. Transactions not fitting in the banking space and not meeting bond issuance regulations explored private credit.
Post Financial Crisis:
Gradually, private credit emerged into a sector. The 2008 global financial crisis helped it expand widely as banks became more cautious about lending. On the contrary, US was at the forefront and has been the largest private credit market in the world. Europe, UK, Canada, Australia, Singapore and Gulf Cooperation Council countries also saw significant increase in the private credit volumes.
Types of Private Credit Lenders:
Private credit funds are run by asset managers or venture debt lenders, who raise capital from high-net-worth individuals or corporates and deploy it directly as loans to mid-market borrowers. The names include Blackstone, Apollo, KKR and HPS.
Large private equity firms also started lending a share of their portfolio in private credit. Sovereign wealth funds (SWFs) are active in the space limiting to a specified share within their overall fund. Private credit arms of banks started taking advantage of their parent network to strike private credit deals. The latest entrants into this space are Alternative Investment Funds (AIFs), which became active since 1990s.
AIFs are private equity funds, real estate funds, hedge funds and private credit funds. They aggregate funds from sophisticated investors, such as high-net-worth investors, family offices, pension funds, corporates and institutions, who are skilled in predicting liquidity and market risk. Since majority of private credit transactions are secured, credit risk is relatively low.
Attractions of Private Credit:
The continued increase in the number and volume of private credit is due to lower regulation, faster execution, structured transactions, end-use flexibility and minimal intermediation costs. While majority of the deals in private credit are for leveraged buyouts and acquisitions, needs are met for special situations such as restructuring, bridge financing, distressed debt, land purchases and unusual capital gaps.
AIFs in India:
Started in 2012, AIFs have seen high growth after 2015. Currently, there are 1,700 registered AIFs. There are also many unregistered private credit funds lending in the guise of inter-corporate deposits (ICDs). Estimates put the private credit commitments in India at ₹20 trillion, which is 10 per cent of total bank credit size.
Influenced by higher returns in AIFs, Indian banks started investing in them to diversify their loan books and earn leveraged returns.
A healthy market requires both intermediated and disintermediated credit. However, if major intermediaries like banks invest in AIFs, systemic risks arise. Mainstream credit, which is supposed to be channelled credit, suffers.
Since AIF investments have higher liquidity risk, banks may face bank-runs and insolvency challenges. In fact, such reverse disintermediation involves higher costs. The net burden is borne by the deposit holders and the system and not by the borrowers or fronting lenders.
Caps on Bank Investments in AIFs:
Certain non-bankable proposals are indirectly funded through AIFs with the funds indirectly routed from the banks. Reserve Bank of India (RBI) found lapses in risk provisioning, evergreening, yield pressures and exit deferments.
The country’s central bank imposed restrictions capping cumulative investments by banks in any single AIF scheme at 20 per cent and for each individual bank at 10 per cent. AIF deployments dropped by 30 per cent in the year 2025 and trend remained same till the first month of 2026. However, due to the crisis created out of US-Iran war, the private credit is again rising high and certain highly risky deals are surreptitiously transacted.
Conclusion:
Any distress in private credit markets can indirectly affect bank depositors, as banks may respond by withdrawing or reducing their exposure. Such situations may cause credit crunch, bankruptcies and long-lasting economic disturbance. Instead of flat or blanket caps, specific measures should be explored by the regulators at their forthcoming FSDC meeting. Until then, the structures and volumes may continue in the high-risk and high-return AIF space.
(Dr. Kishore is also the Regional Director of PRMIA, US for Hyderabad Chapter covering Telangana and Andhra Pradesh in India. Views expressed by him are personal)
