Private Credit Indias Boom Vs Usas Crash

TITLE: Private Credit: India’s Boom vs USA’s Crash? | Explained CHANNEL: Angel One Economics DATE: 2026-04-19 URL: https://www.youtube.com/watch?v=XTcxj8qLSrY ---TRANSCRIPT--- You know the most fundamental assumption in running a banking business? We learned this in class eight economics. Banks don’t actually keep your money. Four rupees out of every hundred go straight into the RBI. That’s the CRR, the cash reserve ratio. Eighteen rupees more gets locked into government bonds. That is the SLR, safe but frozen. The remaining seventy-eight rupees is lent out to businesses, builders, borrowers. So what actually sits in your bank vaults ready for you to withdraw right now? Almost nothing. The four went to RBI, the eighteen are frozen in bonds, and the seventy-eight are lent out. What remains in the vault is whatever the bank chooses to keep. There is no legal minimum, and of your hundred depositors, thirty-seven of them have savings or current accounts, which is called the CASA ratio, the current and savings account ratio, standing at thirty-seven percent as of March 2025. They all can walk in tomorrow and ask for their deposits back. Hence, the whole system works on one assumption, that all the thirty-seven of them will never show up on the same morning.

But what happens when they do? In case of Yes Bank, RBI put a cap of fifty thousand rupees per person withdrawal, and pumped in a sixty thousand crore rupees credit line to meet the depositors’ needs. In case of DHFL, it owed eighty thousand crore rupees to mutual fund houses, insurance companies, and other creditors. In the case of IL&FS, rupees ninety-one thousand crores was in debt. The collapse wiped out eight lakh crore in investors’ wealth in just ten days. So eventually, the regulators tightened the screws, and that led to the prevalence of private credit in India. The USA, which is the world’s largest private credit market, built the same thing after 2008. And their market grew by seven times since then. But for the first time, this market is showing cracks. The defaults are rising, the funds are trying to pull their money out, and they’re being told to wait.

Private credit, which is not a bank, not a money lender, not an old lending market either. In 2012, this market was worth roughly four thousand crore rupees in India. But today, it is two point five lakh crore rupees, out of which one lakh crore was added last year itself in 2025. Within India’s debt market, nothing is growing as fast or paying as much. So now the question is, what are the early signs of a failing private credit market, and can India build the buffer by learning from the US, or does it carry the same old cracks, but just really deep ones?

Let’s dive in. Hello and welcome back to Angel One Economics. My name is Utari, and today we will decode India’s private credit market and understand its stress signals. The first question is, does India have a credit problem? Look at our credit to GDP ratio, fifty-seven percent, which means that for every hundred rupees of economic output, fifty-seven rupees worth of credit is flowing through it. Now in the US, the number is 220 rupees. In China, it is 182 rupees, and the world average is 148 rupees. Experts in India say that India needs to reach around a hundred percent credit to GDP ratio to become a developed nation by 2047.

Which clearly shows that while we are running the world’s fastest growing large economy at seven percent, we are still sixty percent behind the world average, which further highlights that a credit gap is there, and also an opportunity waiting to be exploited in the credit market. Our credit is not as deep enough at fifty-seven percent, which also is a silver lining. And the private credit market has somehow found its way in this gap. After the age-old sahu kars or informal money lenders that charged up to forty percent interests, and the banks that run on defined templates like collaterals, credit ratings, paperworks, there comes a third layer, something that grew quietly in the decades after 2012, something that sits between the sahu kars and the banks, more sophisticated and flexible. Now it doesn’t take your deposits or needs any RBI permission to lend. It pools the money from wealthy investors, family offices, institutions, global funds, and then lends it directly to businesses on its own terms, at its own price, and that is private credit. In 2025 alone, under private credit, there were 166 transactions. Deal growth was thirty-five percent year-on-year, and sixty-four percent of the deal value came from domestic funds rather than capital from foreign.

So where did it come from in India, and why did it have to exist in the first place, and more importantly, is it the solution to India’s broken lending system? To answer that, let’s take an example of a businessman running a capital-intensive business in India. For example, a solar equipment manufacturer in Pune. He has an order worth fifty thousand crore rupees sitting on his desk, and a factory that can fulfill that order. Some months he’s making strong enough revenues, and some months, thin. But he walks into the bank. The bank looks at his file, the revenue is real, but not as consistent as a salaried man. Now this collateral is machinery and inventory, and he needs the money in six weeks to fulfill the orders. And the bank says no, but someone says yes at eighteen percent credit. So Rajan is now paying nearly double what a salaried borrower pays for a home loan. And that gap between eight percent and eighteen percent is the entire business model of a private credit fund house. Yields in India’s private credit market ranges from fourteen to twenty-two percent, and that premium reflects three things. The complexity of the borrower, the illiquidity of the loan, and the reality that if something goes wrong, getting your money back requires lawyers, courts, and years, not a simple asset seizure.

Now, let’s meet a family that has been building India for 150 years asking for a twenty-eight thousand crore rupees of loan, and hearing no from the bank. Shapoorji Pallonji, the family with eighteen point four percent stake in Tata Sons, which is worth over one point seven lakh crores on paper. Tata Sons is not listed on any stock exchange, and as per its own articles of association, that stake cannot be freely transferred. You cannot pledge it against a bank to get a loan, and the bank cannot easily liquidate it if something goes wrong. So in May 2025, they raised 3.4 billion dollars, roughly twenty-eight thousand crore rupees, through private credit. Now, he pays nothing for the next three years, but returns the money at 19.75, roughly twenty percent interest every year. One of the largest single private credit transactions in emerging market history.

Now from Rajan and Shapoorji, let’s move on to the US credit market. Shapoorji’s deal was one deal in two point five lakh crore market of India, right? Now that market is globally 3.5 trillions, close to India’s GDP. And the country that built it first is the US. It is now showing some cracks.

So what is the US’s deal? Private credit in the US was born in the ashes of 2008, and it is now one of the most significant corner of the global markets. Now this entire asset class has never been tested through a full credit cycle before, leading to three major cracks in the private credit market of the US.

Crack number one. Let’s say Rajan goes to the US market to borrow on private credit, and after two years, when he was supposed to start paying, he still can’t pay. But instead of defaulting, he offers the lender a bigger promise later, but no cash today. It’s like saying, you know, I can’t pay the hundred dollars, but how about I pay you 150 dollars next week? This is called PIK, which is payment in kind. By late 2025, PIK income had hit 8.8 percent across the US private credit market. Nearly one in ten rupees of interest being paid was not actually being paid, it was being deferred, dressed as income and hidden behind a promise.

Crack number two. Think about the valuation. Who is pricing Shapoorji’s loans and eighteen percent stake in Tata Sons, which is unlisted, untransferable, impossible to price in a public market? But the lenders accepted it. And since these loans don’t trade publicly, the fund managers get to mark their own valuations and decide what their portfolio is worth. BlackRock, the world’s largest asset manager, held the debt of a company called Renovault at full face value right up until it was marked down to zero. Same story with Infinite Commerce, a $25 million loan whose full value went to zero in just 3 months. That kind of opacity doesn’t just hurt one investment, it destroys the trust in an entire asset class.

Then comes crack three, a slow-motion bank run. Learn from Blue Owl, runs a semi-liquid private credit fund. Unlike a traditional private credit fund where your money is locked in for 5 to 7 years, Blue Owl told its investors that you can ask for your money back every quarter. The money Blue Owl collected from investors was lent to companies. Now, these companies borrowing from Blue Owl doesn’t expect to be asked for the money back in 90 days, which is within a quarter, right? So, Blue Owl’s balance sheet looked like this. Liabilities, short-term. Investors who can ask for their money back every quarter. Assets, which is long-term. Loans that mature in 3 to 7 years. And this mismatch has a name, exactly what banks face and exactly why CRR or SLR exists in the first place. Banks are forced to keep such buffers because of such situations, unlike the private credit funds. So, in 2025 as the USA’s economic pressure increased and sentiments dropped, the investors asked for their money, fairly enough, all at once. Blue Owl’s flagship $36 billion credit income fund received redemption request for 21.9% of total shares in a single quarter. So, now Blue Owl had $36 billion cash lent out to long-term loans and couldn’t pay back in 90 days. To return cash to investors, the underlying assets were illiquid by design. So, Blue Owl capped the withdrawal at 5% per quarter. Does that ring a bell? Same as Yes Bank’s bank run, right?

Now, let’s understand if India is as vulnerable as US. Before we get into that, let me just give you a good news because there genuinely is. India has some real structural buffers that make a US-style crisis very unlikely in the near term. So, the first is that India has zero retail penetration in the private credit market. There are no structures in India where a regular investor can put their savings into an illiquid credit fund with a quarterly redemption promise. Private credit here is accessible only to sophisticated investors, institutions, family offices, HNIs with significant minimum ticket sizes. The second buffer is that the RBI’s regulatory ring is pretty awesome. The fence that came into effect in January 2026. The RBI’s AIF directions, which is the alternative investment funds directions, cap how much bank exposure can flow into private credit funds. 10% per funds and 20% collectively, and that requires 100% provisioning for certain exposures. Now, this firewall is critically important because it protects India’s banking system from being dragged down if the private credit faces stress. The third buffer is that India’s private credit market is still largely driven by domestic capital. About 64% comes from local AIFs, family offices, and institutions. Now, that makes it far less exposed to a sudden pullback from global LPs. And finally, India hasn’t seen the US-style explosion in the PIK loans or the payment-in-kind loans where the borrowers are kept alive artificially. The underwriting discipline, while not perfect, is considerably better than what we’ve seen in the US cycle.

But India is not immune. Let’s see the risks. Risk number one is real estate. There’s a concentration of 38 to 42% of all the Indian private credit flows into this one sector. And the very sector which also gave us the IL&FS crisis. If there’s a property downturn or a construction financing freeze, the asset-liability mismatch that brought down IL&FS can reappear again. Risk number two is the evergreening via the AIFs banks, which is the alternative investment funds banks. Now, they are routing stressed loans through AIF structures instead of recognizing them as bad debt. The loan looks healthy on paper until it is not. RBI’s AIF directions targets this, but the incentive to hide the bad loans never really fully disappears. Then comes his risk number three, which is a deal slowdown. India’s investment banking fees already fell 31% year-on-year in quarter one of 2026. The mergers and acquisition deal value has dropped by 21% and deal count fell by 32%. The private credit deal flow will likely soften further in the second half of 2026 as the sentiments adjust.

So, to conclude, India needs this market. It needs the credit market. Rajan, a typical Indian businessman, needs this market. But India’s MSME sector has a credit gap of 30 lakh crores, which is a starking gap for a sector that roughly generates 30% of GDP of India and 45% of exports. And only 14% of Indian MSMEs historically had access to formal credit. Now, there is a gap of roughly 80 to 100 lakh crores rupees in aggregate credit demand unmet across MSMEs, infrastructure, housing, energy transition, and health care. So, the policy imperative is that India must build deeper, liquid, long-duration debt market and dramatically expand non-bank credit channels if it hopes to finance the transition from the $3.9 trillion economy to a $30 trillion economy within the two decades.

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