India's private credit market is rapidly moving into the mainstream as companies increasingly bypass traditional bank loans for large and customised financing, with Moody's Ratings saying the asset class is poised for sustained growth as funding needs rise in the country's expanding economy.In a report published Thursday the ratings agency said private credit has doubled in size over the past five years to about $25 billion in assets under management (AUM) by the end of 2025 and has evolved from a niche source of funding for distressed companies into an important financing avenue for healthy businesses seeking capital for expansion, acquisitions and refinancing."Private credit in India is increasingly becoming a popular alternative to traditional bank loans," Moody's said in a report released Thursday.Also Read: RBI flags emerging fault lines in private credit market, calls for close monitoringPrivate credit investments surged 53% year-on-year to about $9 billion during the first half of 2025, led by Shapoorji Pallonji Group's record fundraising, even as deal activity broadened across infrastructure, renewable energy, healthcare and technology.Banks leave a funding gapMoody's said the biggest driver behind the rise of private credit is the changing approach of banks and non-banking finance companies (NBFCs).After years of stress from corporate and infrastructure loans, banks have become more selective, preferring retail and MSME lending while avoiding large, long-tenure and complex financing structures."Banks have increasingly prioritized retail and small business loans that are easier to originate, underwrite, and scale, while shifting away from more complex wholesale and project-linked financing," Moody's said.The report said private credit funds are increasingly filling that gap. "Banks and NBFCs 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."Also Read: How AI is helping banks detect payment system failures before they happenUnlike conventional loans, private credit transactions can be structured around the specific needs of borrowers, allowing longer repayment periods, customised security arrangements and quicker execution.Although such funding is generally more expensive than bank loans, companies are increasingly willing to pay a premium for certainty of funding, especially for acquisitions, promoter financing and refinancing.According to Moody's, the market itself has transformed."The market has also evolved materially in terms of the types of transactions, transitioning from a source of financing primarily for distressed companies to a provider of credit for a wider mix of financially stable businesses seeking refinancing and funding for growth."The report estimates private credit still accounts for only about 1% of India's corporate debt market, compared with banks' 47% share, indicating significant room for expansion.Industry executives have also told ET that India's private credit market remains significantly underpenetrated relative to developed markets, with growing interest from pension funds, sovereign wealth funds, insurers, family offices and domestic high-net-worth investors seeking higher yields.Bigger deals, broader investor baseThe expansion is increasingly visible in some of India's biggest financing transactions.Moody's highlighted Shapoorji Pallonji Group's ₹28,600-crore private credit fundraising backed by its Tata Sons stake, GMR Group's nearly $1-billion refinancing, Vedanta Resources' $1.25-billion refinancing facility and Greenko founders' $660-million financing as examples of the market's growing scale.India's private credit boom has been driven by a string of marquee deals over the past year. Other marquee deals include the Adani Group's $750-million financing and Manipal Education and Medical Group's $600-million growth capital raise. Such transactions helped private credit investments reach a record $9 billion in the first half of 2025, highlighting the growing role of alternative lenders in funding large corporate transactions, according to an EY report published in August 2025.Real estate continues to dominate the market, accounting for around 40% of outstanding private credit exposure, while infrastructure, renewable energy and utilities are emerging as major borrowers because they require long-term capital that often falls outside banks' lending appetite.Promoter financing has also become an important segment, with controlling shareholders increasingly borrowing against shareholdings to refinance debt, acquire strategic stakes or improve liquidity.Moody's said regulatory reforms have also supported the industry's expansion."The implementation of the IBC in 2016 has significantly enhanced India's insolvency framework" by strengthening creditor rights and improving recovery mechanisms, the report said.Alongside insolvency reforms, the growth of Category II Alternative Investment Funds (AIFs), easier cross-border lending rules and the development of GIFT City have widened funding sources for private credit managers, although withholding tax on interest income continues to remain a hurdle for overseas investors.Growth brings new risksThe rapid expansion, however, is also drawing greater scrutiny.The concerns are no longer limited to rating agencies and market participants. In its June 2026 Financial Stability Report, the Reserve Bank of India (RBI) flagged emerging fault lines in the rapidly expanding private credit market, citing rising defaults and increasing redemption requests from investors, and called for close monitoring of the sector.The RBI said private credit has evolved into a complex ecosystem of interconnected banks, non-bank financial institutions and investment funds, making it difficult to fully assess linkages and risks because of the market's opacity and varying levels of leverage."It is difficult to identify and assess the interlinkages between these entities because of the opacity of these markets and the presence of multiple participants with varying levels of leverage," the central bank said.The RBI's observations echo concerns raised by market participants earlier this year. An ET Bureau report published in March said India's roughly $25-billion private credit market was beginning to show early signs of stress, with a handful of transactions turning sour. Industry executives had flagged concerns around limited disclosures, covenant monitoring and transparency as competition among lenders intensified. The report said at least two transactions of around ₹100 crore each had slipped into default, signalling that credit risks were beginning to emerge as the market expanded.Moody's also warned that as the market matures, India will increasingly face risks already seen in developed private credit markets."As private credit expands in India, investors will increasingly face risks that are common in more developed markets."The agency identified higher leverage, weaker lending covenants, opaque deal structures and liquidity pressures as key vulnerabilities, but said these risks are "not systemic, largely because the market is still small."The RBI struck a similar note, saying the current stress is not expected to pose systemic risks, but stressed that "continued monitoring is vital to identify vulnerabilities and limit broader financial system impact."