Private credit is booming. But is the return worth the risk?

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Private credit refers to loans given by non-bank lenders. This investment class has seen double-digit growth over the last five years, with industry estimates placing assets under management at $25-30 billion, and most wealth managers now offer it in some form.

According to EY India, calendar 2025 saw 166 private credit transactions worth $12.4 billion, up 35% over 2024. Real estate funding accounts for about 42% of India's private credit deals, while healthcare and industrial each account for 15%.

Why the rapid growth? One reason is the less appealing expected returns on equity against the potential of up to 22% on private credit; the other is structural. After the 2008 financial crisis, the central bank tightened lending parameters for banks and NBFCs , and this became more stringent after covid-19, leaving a gap in funding businesses that fell outside conventional lending and needed quick money, flexible terms, different structures, or alternate collateral. Consequently, risk increases, but the investor is rewarded with potentially higher returns.

It is a debt product inherently, but riskier than conventional debt, so it cannot substitute for your low-risk debt allocation. The advantage private credit offers is greater flexibility in structuring loan terms for issuers, while meeting specific risk and return requirements for investors.

Unlike traditional lending, which is governed by the RBI's prescriptive lending rules, private credit sits under a disclosure-driven framework that relies on transparency from the fund, investor knowledge, and informed choice. In short, the risk to investors is that private credit is not closely regulated.

A few things are worth understanding before investing: the fund's underwriting philosophy, its track record, who it lends to, how tight its covenants are, how safe the collateral is (loans can be secured against unlisted shares, promoter equity and a lot more), and the lock-in period, typically five to seven years, with a minimum mandate of three.

On returns, an advertised 18% is not the same as an actual 18%. Fees and taxes take a bite, and if the return is largely interest income, it is taxed at your slab—18% interest income effectively becomes 12.6% for someone in the 30% bracket, before surcharge and cess. Delays, repayments, defaults, and the opportunity cost of idle capital also chip away at returns.

On risk, equity investors earn the highest potential return because they own the business, but they are last in line if it goes bankrupt—high risk, uncapped reward. A private credit investor takes real risk too, but with a cap on the upside.