India’s private credit market set for sustained growth, AUM doubles to $25 billion in 5 years: Moody's

India’s private credit market is emerging as a major alternative financing channel for businesses, expanding rapidly over the past five years and evolving beyond its earlier role of funding distressed companies, according to a report by Moody's Ratings.

According to the latest assessment of the sector, India’s private credit assets under management (AUM) doubled to around $25 billion by the end of 2025, supported by rising demand for long-term and flexible financing solutions. Annual transaction value crossed $11 billion in 2025, reflecting growing adoption across sectors.

Although still relatively small compared with global private credit markets, the segment is expected to witness sustained growth amid India’s strong macroeconomic outlook, infrastructure expansion and increasing corporate funding requirements.

Shift from distressed financing to mainstream credit

Private credit in India has transitioned from being a niche financing option for stressed assets to becoming an established source of capital for financially stable businesses seeking refinancing, growth capital and customised financing structures.

The market has seen strong activity in capital-intensive sectors such as real estate, infrastructure and manufacturing, where borrowers often require large-ticket, long-tenure funding that traditional lenders may be unable to provide because of regulatory and balance sheet constraints.

Promoter financing — including bridge funding, liability management, and stake acquisition financing — has also emerged as a significant segment of the market.

Regulatory reforms strengthen market confidence

Legal and regulatory changes have played a key role in accelerating private credit growth.

The implementation of the Insolvency and Bankruptcy Code (IBC) in 2016 significantly strengthened India’s insolvency framework by improving creditor rights, enhancing recovery mechanisms and introducing a more time-bound resolution process. The reforms have improved lender confidence and supported growth in special situations, restructuring and refinancing transactions.

Additionally, domestic private credit funds operating under the Category II Alternate Investment Fund (AIF) framework have benefited from tighter regulatory oversight, including restrictions on fund-level leverage, improving transparency and market credibility.

Regulatory measures under the Foreign Exchange Management framework have also widened access to offshore capital by easing rules for foreign participation in debt markets and cross-border lending. However, withholding tax continues to remain a constraint for foreign investor returns.

Banks and NBFC constraints open new opportunities

Industry analysts expect limitations faced by banks and non-banking financial companies (NBFCs) to create further opportunities for private credit providers.

Traditional lenders continue to face borrower concentration norms, sector exposure limits and asset-liability management challenges that restrict their ability to provide large, long-duration and tailored financing solutions.

Private credit funds, with access to patient capital and greater structural flexibility, are increasingly stepping in to bridge this gap.

Real estate and infrastructure continue to lead

Real estate remains the largest segment of India’s private credit market, accounting for nearly 40% of total transaction value, driven by persistent funding gaps and reliance on structured financing.

Infrastructure and utilities form the next major segment, benefiting from predictable cash flows and strong asset backing that appeal to long-term investors.

Large refinancing transactions have also supported market activity. Recent examples include fundraising by infrastructure and promoter-led groups through private credit instruments to refinance debt and support liquidity requirements.

Risks expected to increase with market expansion

While private credit currently does not pose systemic risks due to its relatively small size, analysts caution that risks will grow as the market scales. Potential concerns include rising leverage, complex transaction structures, valuation opacity and liquidity constraints.

Although Category II AIF regulations restrict fund-level leverage, leverage can still build indirectly at the borrower level through layered financing structures and aggressive capital arrangements.

Increasing competition among private credit providers may also lead to weaker underwriting standards and fewer covenant protections, potentially affecting recovery outcomes during periods of financial stress.