Private Credit Boom: 7 Shocking Risks That Could Derail India’s $25 Billion Power Play

India’s private credit surge, fueled by headline deals like Shapoorji Pallonji and Manipal, faces a critical inflection point. While filling crucial gaps for complex financing and founder stake-building (e.g., Zepto, Zetwerk), the $25 billion market now grapples with intense pressure: too much capital chasing fewer quality deals, shrinking returns due to competition and RBI rate cuts, and inevitable underwriting mistakes. Though smaller relative to GDP (0.6%) than Western markets, reducing immediate systemic risk, the breakneck growth and sector concentration create vulnerabilities.

The next phase demands fund specialization, stricter covenants, and navigating resurgent bank competition. Success hinges on moving beyond simple lending to true expertise in sourcing, structuring, and managing risk – especially during inevitable downturns. The era of easy returns is over; sustainable winners will be defined by operational skill and disciplined execution.

Private Credit Boom: 7 Shocking Risks That Could Derail India’s $25 Billion Power Play

The headlines are impossible to ignore: $3.4 billion for Shapoorji Pallonji, $600 million for Manipal, founders of Zepto and Zetwerk seeking loans to boost their stakes. Private credit funds, once niche players, are now dominant forces in India’s financial landscape, seemingly feasting on opportunities traditional banks bypassed. They’ve “tasted blood,” as the metaphor goes, but the real question is: What’s on the menu after the initial frenzy? 

The surge is undeniable. Fuelled by global capital seeking yield and a perception of India’s resilient growth, assets under management have ballooned to $25 billion. Yet, as Seetharaman G insightfully highlights in The Ken, beneath the glitzy deal announcements, storm clouds are gathering. This isn’t just growth; it’s a market entering a critical, potentially perilous, phase. 

The Perfect Storm Brewing: 

• The Gold Rush Effect: More capital than ever ($25 billion AUM and climbing) is chasing a finite pool of truly high-quality, complex deals that justify private credit’s higher costs. This scarcity is the core driver of the coming tension. 

• The Squeeze on Returns (IRRs): Intense competition means funds are forced to accept lower interest rates and potentially looser covenants to win deals. Simultaneously, the RBI’s rate cuts (down to 5.5%) and liquidity injections (releasing ~$29 billion) empower traditional banks to re-enter spaces they previously ceded, further compressing yields. The “private credit premium” is shrinking. 

• The Inevitability of Mistakes: When capital is abundant, underwriting standards can subtly erode. Funds chasing deployment targets might stretch on risk assessment or structure. Complex sectors like real estate (a major borrower) or ambitious startups seeking founder financing (like Inmobi, Zepto) inherently carry higher risks. As EY’s Bharat Gupta warns, “Mistakes are bound to happen.” The question is scale and systemic impact. 

• The Founder Financing Gambit: The trend of founders using private credit to increase their ownership (rather than dilute via equity) is fascinating but adds another layer of risk. It concentrates exposure – if the company struggles, both the fund and the founder’s leveraged stake are imperiled. 

Why India Isn’t the West (Yet), But Can’t Ignore the Echoes: 

Global regulators (IMF, SEC) sound alarms, fearing private credit could amplify financial crises. India’s regulators remain relatively calm, and rightly so on pure scale: $25 billion is just 0.6% of India’s GDP, dwarfed by the US’s 4%. This smaller scale provides a crucial buffer. 

However, complacency is dangerous. The speed of growth and the concentration of deals in specific sectors (infrastructure, real estate, stressed assets) create potential vulnerabilities. A significant downturn in one of these sectors could test multiple funds simultaneously. 

What Comes Next? Navigating the Turbulence: 

The next phase of Indian private credit won’t be defined by mega-deal announcements, but by how the industry navigates these converging pressures: 

• The Great Differentiation: Funds will be forced to specialize. Generic capital will struggle. Winners will develop deep expertise in specific sectors (renewables? manufacturing? special situations?), unique structuring capabilities, or unparalleled workout/restructuring skills for when things go wrong. Operational value-add beyond cash will become crucial. 

• Covenants Comeback: As competition eases slightly or mistakes surface, expect a renewed focus on stronger lender protections. The era of “covenant-lite” creeping into India might be short-lived. 

• The Bank Rivalry Reshapes the Market: Banks, flush with cheaper capital, won’t cede the entire mid-market. They’ll likely target the less complex, lower-risk segments of the private credit universe, forcing funds further up the risk curve or into more intricate, operationally intensive deals. Collaboration (club deals, syndication) might also increase. 

• The Distress Opportunity (and Test): An economic slowdown or sector-specific downturns are inevitable. This is where private credit’s flexibility should shine – providing rescue financing or restructuring solutions. However, this will be the true test of underwriting quality and workout capabilities. Poorly underwritten loans from the boom phase will become glaringly obvious. 

• Regulatory Scrutiny Intensifies: While not panicking, Indian regulators (RBI, SEBI) will closely monitor systemic linkages, leverage within funds, and potential contagion risks. Transparency requirements might increase. The industry should proactively engage, demonstrating robust risk management. 

The Human Insight: Beyond the Billions 

The real story isn’t just the billions deployed; it’s the fundamental shift in how Indian businesses access capital. Private credit fills critical gaps: 

• Funding Complexity: Banks often shy away from intricate acquisitions, turnarounds, or project finance needing bespoke structures. 

• Founder Control: Enabling founders to retain ownership via debt instead of dilution is a powerful, albeit risky, tool. 

• Speed & Certainty: Especially vital for time-sensitive deals or borrowers needing discreet solutions. 

However, this capital comes at a cost – higher interest rates and often tighter control mechanisms. The current euphoria risks masking the essential truth: Private credit is high-risk capital demanding high-risk returns. The coming years will reveal which funds truly understand and price that risk appropriately, and which get caught in the crosshairs of competition and complacency. 

The Bottom Line: 

India’s private credit market has proven its viability and necessity. The “blood” it tasted was from carving out a significant niche. But the feast is transitioning. The next course involves consolidation, specialization, and navigating a landscape where easy returns vanish and true skill in sourcing, structuring, and managing risk (especially during downturns) becomes the only sustainable differentiator. The funds that master this shift will thrive; those that mistook a cyclical boom for permanent easy pickings will face a harsh reckoning. The era of sophistication in Indian private credit is just beginning.