Give credit where it’s due: Why India’s private debt market shares none of the structural problems driving current US stress

The most dangerous errors in credit investing come from drawing false equivalences across markets. The current noise around US private credit stress is real. But applying it wholesale to India is a category mistake.

Stress in the US is not a story about bad loans but about bad fund architecture. Over the last several years, a number of major US managers created semi-liquid vehicles, products that promised investors periodic redemption windows while deploying capital into long-dated, illiquid direct loans.

The logic worked in a low-rate, low-volatility world. When redemption requests at some of these vehicles climbed to nearly 12% against a 5% quarterly cap, the mismatch became unmanageable. Investors are now discovering that the exit they were promised was theoretical.

Meanwhile, publicly-traded business development companies (BDCs) are trading at some of the steepest discounts to NAV since the post-Covid period. The sector concentration story makes it worse. Software's one of the largest sector exposures across several BDCs, with SaaS lending a substantial component across some platforms. When agentic AI began threatening SaaS business model assumptions, fault lines appeared fast.

So, does this spill over into India? This question is understandable. When a large market sneezes, the instinct is to check whether rest of the room catches a cold. But contagion works through shared vulnerabilities. And the Indian private credit market shares none of the specific structural problems driving current US stress.

Structurally, private credit in India operates exclusively through Sebi-regulated Category 2 AIFs, closed-end vehicles with fixed tenures. There are no semi-liquid evergreen products, no periodic redemption windows, no non-traded BDCs. An investor who commits to an Indian private credit fund commits for life of that fund.

The liquidity architecture that is causing manager distress in the US simply does not exist here. This is not a coincidence. Sebi's framework was deliberately designed to prevent maturity mismatches of the kind that periodically destabilise credit markets elsewhere.

The investor base is also structurally different. AIFs in India require a minimum commitment of ₹1 cr, which effectively limits participation to institutions, family offices, HNIs and global allocators. There is no retail money in this market. No bank depositor in India has exposure to a private credit strategy. That matters because retail participation is precisely what converts a fund-level stress event into a system-level event, the panic becomes self-reinforcing. India has insulated itself from that dynamic by design.

Then, there's the question of what the money is actually financing. A material part of the US direct lending market is leveraged lending to PE-sponsored companies, often in technology, software and services sectors, on covenant-lite structures where the credit underwriting is secondary to the sponsor relationship.

India's private credit, by contrast, is predominantly growth capital - manufacturers expanding capacity, healthcare companies building infrastructure, consumer businesses scaling across the country. IT services is not a meaningful sector exposure. There is no SaaS concentration, no agentic AI risk. The underlying demand for capital is structural, rooted in India's real economic growth, and not a function of financial engineering.

Even the yield premium in Indian private credit funds typically target returns of 14-20%, well above bank lending rates. Sceptics sometimes point to this spread as a sign of hidden risk. It reflects something more specific: this capital serves borrowers and use cases that banks are structurally unable to finance - that is, acquisition bridge financing, working capital for rapidly scaling businesses, growth capital for companies that have not yet reached the size where capital markets become accessible. The risk is real, and is underwritten.

These are not spread-compressed loans where structuring discipline was sacrificed for deal flow. Every investment we make is fully secured, typically with 1-3x collateral cover, earning regular cash coupons, with servicing directly tied to operating cash flows.

None of this means India private credit is without risk. But in this market, it's loan-level risk, managed through underwriting and structuring, active portfolio construction and monitoring, not systemic risk amplified by leverage, liquidity promises or specific sector exposure. India's banking system has negligible direct exposure to private credit, which removes another transmission channel that investors should be watching in the US.

There is another dimension to this moment that is worth naming. If global allocators reduce their private credit exposure to the US - and some will - that capital doesn't disappear. It looks for markets that offer the same yield premium with better structural protection and genuine portfolio diversification. India is one of very few markets that can credibly make that case right now.

The deal flow is deep, growth trajectory intact, and a decade of institutional framework-building by Sebi has made this one of the more disciplined private credit markets in the world.

India's private credit market has AUM of $25-30 bn as of 2025 at about 0.6% of GDP, with annual deal volumes reaching around $12 bn, up 35% y-o-y. It's a growth market, not a late-cycle overleveraged one.

So, is this a good time for India private credit, or a dangerous one? It is a moment for clarity, not contagion. The stress in the US is exposing the specific mistakes that were made there. India didn't make those mistakes. That distinction is now visible to every global allocator paying attention. And most of them are.

The writer is founder-head,Ascertis Credit Group