Private credit
Also called: Non-bank lending · Topic: Banking Regulation, NPAs and Financial Stability · NCERT: Beyond NCERT
Meaning
Private credit is lending by non-bank investment funds directly to companies. The fund and the borrowing firm agree the loan terms privately. The loan is not bought and sold on a market like a bond, and no deposits pay for it. The money comes from investors such as pension funds and insurers. These funds sit outside bank regulation, so the rules are lighter and no deposit insurance protects anyone. It is part of shadow banking, which means lending done outside regular banks. Banks often lend to private credit funds. So banks carry indirect exposure to the firms those funds lend to, even if the banks never lend to those firms themselves. The RBI's Financial Stability Report of December 2025 listed private credit among the emerging risks to financial stability.
Example
Large cloud companies building AI data centres have borrowed heavily from private credit funds, and banks lend money to those funds. If AI investments fail to earn enough, the fund's loans go bad. The fund may then struggle to repay its bank, so a problem in one sector reaches the banking system through a back door.
Don't confuse with
- Private equity: the fund buys an ownership share in a company. In private credit the fund only lends and must be repaid with interest.
- Bank loan: the lender is a bank that takes deposits and follows Basel capital and liquidity rules. A private credit fund takes no deposits and follows much lighter rules.