Private credit loses edge as new funding options open up for companies

Mumbai: High-yielding private credit deals appear to be on the wane as growing competition and regulatory changes widen financing options for such borrowers that helped create this lending segment.

In the first half of 2026, 67% of private-credit deal volume was priced below 18%, compared with 80% priced above 18% in 2023, a report by global investment bank Houlihan Lokey showed. To be sure, India's risk-free rates ranged from 6.69% to 7.19% in the September quarter, averaging 6.89% through the period, according to investing.com data.

Competitive pressure is set to intensify further after banks were permitted to finance acquisitions from July, while the liberalisation of external commercial borrowing (ECB) rules in February expanded the pool of capital available to borrowers.


Houlihan Lokey expects greater lender participation to produce more differentiation in private-credit yields rather than uniform compression, with private credit retaining a role in complex and tailored transactions.

This expansion of competing sources of capital comes as private-credit yields have already moved lower. The changing yield environment is prompting managers to target areas where structuring capabilities and specialist expertise can generate differentiated returns, seeking what the report describes as a "complexity premium."

"The sweet spot lies in capturing both the illiquidity premium and the complexity premium, where structuring capability drives differentiated return," Aakash Desai, CIO and head of private credit at 360 ONE, said in the Houlihan Lokey report.

The shift in pricing is taking place even as private-credit deployment has slowed sharply from the previous year's elevated level. Deployment stood at $4.6 billion, or about ₹44,350 crore, across 144 deals in the first half of 2026. That's down 54% from a year earlier. This followed a record $15.6 billion, or about ₹1.5 lakh crore, across 256 deals in 2025, when deployment increased 63%.

Houlihan Lokey attributed the first-half moderation primarily to normalisation after outsized issuances in 2025 rather than a broad-based retreat in underlying credit demand. Shapoorji Pallonji Group alone accounted for $3.6 billion, or about ₹34,700 crore, representing 23% of private-credit volume in 2025.

Under the acquisition-finance framework effective from July 2026, banks can finance up to 75% of the independently assessed acquisition value. A bank's aggregate acquisition-finance exposure is capped at 20% of its eligible capital base, while the acquiring company's consolidated debt-to-equity ratio after the acquisition cannot exceed 3:1.

The liberalisation of external commercial borrowings in February also raised borrowing limits, introduced market-based pricing and widened eligibility, expanding the financing options available to Indian borrowers. The report said ECBs had been opened to more borrowers and transaction types.

Houlihan Lokey said private credit remains a relatively small part of India's corporate financing market.