The architecture of resilience: Why India’s private credit stands apart

Globally, the private credit market has entered a phase of heightened uncertainty. This has occurred as the sector is increasingly being exposed to vulnerabilities in leveraged credit structures in developed markets due to rapid interest rate increases, ongoing geopolitical tensions, and tightening liquidity. From the United States to parts of Europe, the sector is grappling with a “triple threat” of excessive leverage, loose lending terms, and a mismatch between when investors want their money back and when the underlying loans actually mature. As defaults rise and redemption pressures mount, there is a natural tendency to assume that India will follow the same path.

Yet, the current turbulence in global private credit markets is, in many ways, being misdiagnosed. The stress has not been driven primarily by borrower defaults or deteriorating credit quality. In many affected funds, underlying loans have continued to perform, covenants have held, and repayment discipline has remained intact. What has failed is not the credit, it is the structure of the funds themselves, their design, leverage, and liquidity promises.

Against this backdrop, India’s private credit ecosystem is not just a smaller version of the global market; it is built on a fundamentally different blueprint. To understand why India is resilient, we must look beyond the credit itself and focus on the architecture of how these funds are built. The scale of the opportunity here is still in its infancy. Private credit in India currently accounts for roughly 0.6% of GDP and just 1% of total bank credit. In contrast, in the US, private credit has expanded to nearly 5% of GDP. This vast difference highlights that, while the global market may be facing saturation and leverage issues, India is operating within a significant margin of safety. In this market, the structure of the fund matters just as much as the underwriting.

The primary difference lies in how funds are organised. Globally, many funds operate under perpetual or semi-liquid structures, which allow investors to withdraw their money relatively quickly. This creates a dangerous loop. When the macro environment gets tough, investors rush to withdraw their cash just as banks withdraw leverage. This forces funds to sell assets at a loss, creating acute liquidity pressure.

India learned this lesson the hard way during the shadow banking crisis of 2018. In response, the market shifted towards the Category II Alternative Investment Fund (AIF) structure. These funds are closed-ended by mandate, meaning the money is locked in for a fixed period that aligns with the maturity of the underlying loans. By aligning these timelines, the Indian framework effectively removes the risk of a “run on the fund” during volatile times.

Another major differentiator is leverage. While global funds often rely on heavy borrowing to boost their returns, a practice known as financial engineering, Indian regulations are remarkably strict. Under Sebi rules, Category I and II AIFs are generally prohibited from borrowing money to make investments. This ensures that returns in India are driven primarily by the actual performance of the companies being funded, rather than by layers of debt. Because there is no hidden leverage, a problem in one fund is unlikely to trigger a systemic collapse.
In India, we also recognise that while a financial model is a helpful map, the promoter or business owner is the actual terrain. In our market, performing credit is anchored by hard collateral and predictable cash flows. Unlike the covenant-light loans seen in some Western sectors, Indian private credit usually comes with strong protections and shorter repayment periods. While venture debt for startups carries its own risks, the core of India’s performing credit is backed by companies with healthy balance sheets and clear paths to exit through our robust public markets.An infrastructure analogy helps put this into perspective. Economies must build highways to sustain growth. The occurrence of accidents does not invalidate the need for roads, it highlights the importance of design, regulation, and discipline. Similarly, adverse events in private credit should be viewed as exceptions, not systemic failures.

We are just at the beginning of delivering performing private credit via the AIF route and becoming a reliable source of alternative capital for Indian corporates. The global private credit stress of 2026 will likely be remembered as a lesson in both market dynamics and regulatory design. Jurisdictions that embraced open-ended structures and expansive leverage inadvertently embedded fragility into their systems. India, by contrast, adopted a more calibrated approach, one that now appears prescient. The broader lesson is clear: private credit is not broken, but poorly designed structures are. In this market, architecture matters as much as underwriting.

(Sandeep Agarwal is CEO at Modulus Alternatives)

(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of Economic Times)