As regulatory changes step up lending competition in India, private credit could prove its mettle and thrive

The infrastructure sector has emerged as the primary beneficiary of this capital influx, followed by real estate and healthcare. This expansion reflects the growing significance of private credit.

It bridges India’s funding gap: The emergence of private credit in India can be traced to a confluence of factors that have created substantial opportunities for alternative lending, including regulatory restrictions on regulated entities from lending to specified business sectors.

Traditional lenders have faced liquidity constraints, while financial sector crises, notably those involving IL&FS and DHFL, have left a lasting impact on conventional lending channels. These disruptions created a significant funding vacuum that private lenders have sought to fill.

The evolution of India’s regulatory framework: The development of a legal framework has been instrumental in the industry’s rise. In January 2025, the Reserve Bank of India (RBI) issued a master direction on non-resident investment in debt instruments, liberalizing rules to enhance the participation of foreign portfolio investors (FPIs) in private credit and structured finance.

These directions allow FPIs to invest in Infrastructure Investment Trusts and Real Estate Investment Trusts through both the general and voluntary retention routes, which is a significant shift from the earlier framework. This enhances flexibility and broadens participation in the sectors of infrastructure and real estate. FPIs can now also invest in government securities with no minimum residual maturity.

Distressed asset opportunities: The regulatory framework has also evolved to facilitate investments in distressed assets. The Securities and Exchange Board of India (Sebi) introduced Special Situation Funds as a distinct sub-category under Category I AIFs in January 2022.

These funds target investments in financially distressed assets or those undergoing resolution, including stressed or non-performing loans, security receipts issued by asset reconstruction companies and securities of entities subject to insolvency proceedings under the Insolvency and Bankruptcy Code (IBC).

Further, the IBC (Amendment) Bill of 2025 envisages comprehensive reforms to create a more creditor-friendly regime while laying out a group insolvency framework and stricter timelines; IBC reforms could also fill gaps that led to some controversial judicial interventions. These changes, combined with the flexibility of private credit, can reshape India’s distressed asset ecosystem and create a more efficient and investor-aligned market.

Environmental, Social and Governance (ESG) integration standards: Investors increasingly demand robust corporate governance and sustainability standards in deal structures, with regulatory frameworks now supporting ESG-compliant private credit investments.

Borrowers are expected to adopt global best practices, including enhanced compliance with anti-bribery laws, anti-money laundering protocols, counter-terrorism measures and sanctions.

Sebi’s Business Responsibility and Sustainability Reporting framework mandates the top 1,000 listed companies to disclose ESG metrics, including greenhouse gas emissions, water usage, waste management and governance safeguards. In June, Sebi also introduced a framework for ESG debt securities, including social bonds, sustainability bonds and sustainability-linked bonds, creating new avenues for ESG-focused private credit investments.

The outlook: India’s private credit market is projected to expand to $27.5 billion by 2031. Its competitive advantage lies in the speed of execution, flexible structuring and willingness to finance complex transactions that banks may find challenging due to regulatory constraints. But their legal and regulatory framework must evolve to address emerging risks.

Competition in the field of private credit is intensifying as RBI considers permitting banks to engage in acquisition financing. This would enable banks to finance mergers, acquisitions and leveraged buyouts, directly competing with private credit funds in high-yield transactions. Banks’ access to lower-cost deposit funds and established corporate relationships could increase competitive pressure.

The proposed liberalization of the external commercial borrowings (ECB) regime will change the financing landscape further. RBI’s reforms aim to reduce minimum maturity requirements, expand eligible borrower and lender categories and streamline approval processes, making foreign currency borrowings more accessible and cost-effective for Indian corporates. Enhanced ECB flexibility could provide cheaper alternatives to domestic credit, especially for large-ticket requirements where currency hedging costs are manageable.

Ultimately, the entry of Indian private and public sector banks to acquisition financing, coupled with RBI’s regulatory liberalization, will create a more competitive funding ecosystem for India Inc. Intensifying competition will work to the benefit of borrowers as they will have access to diverse and cost-effective financing solutions. Hopefully, this will enable private credit to shed its image as a high-risk and high-cost option.

The authors are partners, Cyril Amarchand Mangaldas.