High yields of up to 22% from private credit in India come with illiquidity risks and credit defaults; what investors must know

A yield-hunt is underway among India’s leading family offices and boutique wealth advisory outfits. The playground is private credit—currently a hotbed of bespoke, flexible deal structures. Asset managers are racing to lend to Indian companies starved of traditional sources of funds.

For those willing to take a bite, juicy returns await. But don’t let the fat yields mask the risks lurking beneath.

From niche to mainstream

Private credit refers to loans or debt that are not issued or traded in public markets. It plugs the financing gap for businesses that mainstream lenders typically shy away from. Private credit has increasingly filled the space vacated by banks and non-banking financial companies (NBFCs). Amid low interest rates, heightened investor appetite for yield and diversification has pushed this segment from the fringes to the mainstream.


This is evident in the deal flow. Nearly $9 billion got deployed across 79 deals in the first half of 2025 alone—a 53% jump over the previous year, as per EY. The industry now boasts assets of nearly $25 billion, up 35-fold over 2010. Partha Sengupta – Joint MD & CEO, Systematix Private Wealth, observes, “A key driver of this expansion has been the structural pullback by banks from mid-market lending due to tighter regulatory norms and capital requirements. This has created a persistent funding gap, particularly for infrastructure, real estate, and manufacturing companies that require customised and flexible capital solutions.”

In the real estate sector, for instance, the Reserve Bank of India (RBI) restricts bank lending to private developers for land acquisition, even for housing projects. Consequently, real estate-related transactions now dominate India’s private credit sector.

Yields in private credit are mouth-watering. These vary widely depending on credit risk, deal structure, collateral, and duration. Shantanu Sahai, Executive Director & Head – Private Credit, ASK Alternates, points out, “Performing credit may offer yields of 14-16% while other categories such as special situations/distressed debt/venture debt may seek higher risk adjusted returns and may yield 18-22% (or beyond) depending on the risk profile and complexity of the situation.”

With private credit deals averaging yields of 14-22%, they represent a significant premium over AAA and AA corporate bonds. “In a low-interest rate environment, private credit offers the only bright spot to earn a meaningful real rate of return,” remarks Amit Kansal, Head – Alternate Investments, Fixed Income, Aditya Birla Sun Life Asset Management. Further, the credit profiles of borrowers have improved post-deleveraging in recent years, helping credit funds make better investments.

Private credit funds have flourished under the Category II Alternative Investment Funds (AIFs) framework, supervised by the Securities and Exchange Board of India (Sebi). This vehicle allows asset managers to deploy capital into unlisted corporate debt. The minimum investment required is Rs.1 crore.

Category II AIFs receive pass-through tax treatment, meaning the investor pays taxes based on the applicable tax bracket. The investor pool in India-registered AIFs is split almost equally between foreign investors (50.3%) and domestic investors (49.7%) such as corporates, family offices, high net worth individuals and finance companies, finds a report by S&P Global.

Many family offices participate directly via structured credit trades, bypassing traditional fund structures.

Private credit deals are growing bigger
US$9 billion was deployed across 79 deals in H1 2025—a 53% jump over H1 2024 and three times the level seen in H2 2024.

Fund managers are upbeat about private credit, says survey
What is the overall sentiment for private credit over the next one to two years, and two to five years?

High yields not without risk

Remember the flak credit risk funds got a few years ago? Many of these funds were hit by defaults in poor-quality bonds, eroding returns. This earned credit risk funds a bad rep. But if credit risk funds are debt’s wild child, private credit funds go a step further.

Private credit funds or deals explore far lower on the credit risk ladder. This involves riskier companies that traditional lenders might not lend to—often unrated and not listed.

Private credit’s differentiating feature is its flexibility. It is a specialised vehicle that satisfies the unique funding needs of businesses facing irregular cash flows or other challenges. Borrowers can negotiate bespoke covenants, repayment profiles, or asset-backed structures that public bond markets may not permit.

Joydeep Sen, a corporate trainer in financial markets, insists, “The high yield itself is an indicator of the risk. If the rate offered is higher compared to issuers with similar credit rating or profile, it indicates the business fundamentals are weak.” This is why yields in private credit are so much higher. “That premium reflects compensation for taking credit risk, accepting illiquidity, and lending to borrowers that are often sub-investment grade,” remarks Sengupta. “Private credit is solution capital. The premium is for pain points it solves for the borrower, providing flexible capital that caters to an unmet need,” indicates Kansal.

The showpiece deal of last year, real estate and construction giant Shapoorji Pallonji’s $3.14 billion three-year zero-coupon bond, was priced at 19.75%. This was backed by the SP Group’s valuable stake in unlisted shares of Tata Sons. The bond structure further allows for monetisation of interim cash flows from SP Group’s real estate and energy businesses. Clearly, private credit is not for everyone. It demands a higher risk appetite and patience. Mitesh Shah, CEO, Equirus Family Office, remarks, “The patient and nimble capital that high net-worth individuals (HNIs) have is appropriate to take advantage of these scenarios by participating in the private credit market deals.”

Lessons learnt?

For investors craving high yields, private credit seems like a perfect catch. But the past continues to cast a long shadow over India’s credit markets. The credit defaults and downgrades post 2018 serve as a cautionary tale for those pursuing adventure in this segment. Sengupta observes, “The events of 2018 were an important inflexion point for India’s private credit market. Prior to that period, underwriting standards were relatively loose, structures were often back-ended with aggressive return assumptions, and covenant enforcement lacked rigour.”

Experts maintain that past episodes exposed several weaknesses and led to a meaningful reset across the market. Newer bond and credit structures now provide greater downside protection, especially compared to the lax standards of the past. Sengupta avers, “Underwriting discipline has strengthened considerably. Overcollateralisation has become standard practice, along with clearly defined security packages, promoter guarantees, and parent-level comfort where applicable.”

Transactions are typically secured by tangible collateral such as real estate, liquid securities, or charges on operating or holding companies. Promoter commitment is reinforced through personal guarantees, and cash flows are often routed through monitored escrow mechanisms to ensure servicing discipline, Sengupta adds.

“Private credit transactions are bespoke structures with heightened emphasis on strong collateral and well-rounded covenant packages. Transactions that are solutions for the promoters/ sponsors may come with adequate collateral/ guarantees provided by the promoters,” Sahai asserts. Kansal maintains, “Every situation is worth a price. When we do a private credit deal, we are prepared for the worst. We price it accordingly, add necessary covenants and ringfence the asset.”

Infra, real estate dominate private credit deals
Sector-wise split of private credit deals in H1 2025

Blind spots visible in hindsight

Despite better structures, some argue that risk is not diluted—only shifted. Even wellstructured deals can trap capital if markets turn or enforcement stalls. The fragility of investor sentiment in credit markets should not be underestimated. “Barricades work as long as the crowd behaves. If the crowd goes out of control, barricades fall apart,” points out Sen. “In the same way, covenants and structures can also break if the company itself is in bad shape and falling apart.” Shah avers, “The intent and ability to repay will take precedence over any covenant and structure one can put in place.”

In some transactions, enforceability may be challenging. The experience with the Insolvency and Bankruptcy Code (IBC) has sobered lenders. Investors have learnt that enforcement is often time-consuming and recovery uncertain, stretching into years.

Valuation gap is also a key risk, cautions Sengupta. “Unlike publicly traded bonds, private credit instruments are not marked to market. Investors rely on periodic valuations provided by fund managers, which may not always reflect real-time credit stress.”

Complex structures can create a false sense of safety for HNIs who don’t fully understand the mechanics. “A limited understanding of complex transactions and the illiquidity of the underlying assets may risk a broader drawdown in allocations if forced selling (or a fire sale) occurs in the private credit space,” observe analysts at S&P Global.

Illiquidity—a feature, not a bug

Private credit is illiquid by nature. Each deal is bespoke—tailored to a borrower,as set, or cash-flow profile. There is no natural secondary market for private credit. It is not easy to find buyers willing to step in mid-cycle, especially during stress. Even if a buyer exists, pricing usually involves a steep discount.

During benign periods, illiquidity feels theoretical. During stress—when defaults rise or markets freeze—illiquidity becomes absolute. Investors cannot exit, while recovery timelines stretch. Yet, this is what drives the higher yields, insists Sengupta. “Illiquidity should be viewed as a defining characteristic of private credit rather than a deterrent. The absence of a secondary market and the multi-year lock-in are precisely what create the yield premium in this asset class.”

In private credit, when the asset comes under stress, waterfall mechanics usually determine payouts. A repayment waterfall defines who gets paid, in what order, and under what conditions. Senior secured asbonds get first charge on assets or cash flows, followed by subordinated debt. In stressed scenarios, only the top of the waterfall matters. If cash flows are insufficient, lower layers may receive nothing. Understanding this matters far more than the coupon on the term sheet. It is the backbone of structured private credit—but also one of the least understood features among investors. Sahai says investors must carefully assess how they will exit an investment, as relying only on fresh equity or asset sales to get repaid is risky.

For investors, private credit presents a new frontier of diversification and yield. Even so, its resilience in a sharp market downcycle has not yet been tested. Keep that in mind before your next yield chase.