M&A Funding Rules to Squeeze Private Credit Returns in India Says Moody's

Mumbai: India's private credit market is increasingly becoming a popular alternative to traditional bank loans doubling in size in the past five years to about $25 billion in assets under management (AUM) as of the end of 2025.

However, the new RBI norms which allow banks to finance acquisitions will increase competition in a segment that was historically dominated by alternative capital.

As per the new RBI rules effective July 1, RBI, for the first time, has allowed banks to fund strategic acquisitions of equity shares and compulsorily convertible debentures, subject to certain conditions.

"While the new rules may benefit borrowers by lowering costs for financing and increasing funding availability, they could compress yields and reduce deal flows for private credit providers for acquisition financing,” said Devang Rajkotia, AVP-Analyst, Moody’s Ratings.

"Although India's private credit market has grown rapidly in the past five years to more than $11 billion in annual transaction value in 2025 and about $25 billion in AUM as of the end of that year, it remains small by global standards. Yet its growth will accelerate as funding needs in the country increase amid strong economic conditions," said Moody's.

Borrowing by real estate and infrastructure companies, and promoter financing will continue to dominate India's private credit market. The real estate sector accounted for about 40 per cent of the total value of private credit, while infrastructure and utilities companies make up the next largest shares. Financing led by promoters across various sectors – often for refinancing, liability management or stake acquisitions – is another key part of the private credit market in India.

The report said that the implementation of the Insolvency and Bankruptcy Code (IBC) in 2016 has significantly enhanced India’s insolvency framework. This has boosted lender confidence, including private credit funds' ability to provide financing for stressed companies or underwrite complex loans, supporting growth in transactions for special situations, restructuring and refinancing. Also, regulations for domestic private credit funds under the Category II Alternate Investment Fund (AIF) framework have strengthened market credibility. Regulatory easing has improved access to cross-border funding, although withholding tax remains a key constraint on foreign investor returns.

Another factor that helped private credit grow was the limitations of banks and non-bank finance companies (NBFCs) that face tenor, sector and borrower concentration constraints that hinder them from providing large, long-dated and bespoke financing. Private credit with long-term capital and structural flexibility is filling that gap.