Private credit yields are experiencing significant compression as the market becomes increasingly competitive. According to a report by global investment bank Houlihan Lokey, 67% of private-credit deal volume was priced below 18% in the first half of 2026, compared with 80% priced above 18% in 2023. This shift occurs despite India's risk-free rates ranging from 6.69% to 7.19% in the September quarter, averaging 6.89% through the period. The changing yield environment is prompting managers to target areas where structuring capabilities and specialist expertise can generate differentiated returns.
Private credit deployment has experienced a sharp decline from previous year levels. According to the Houlihan Lokey report, deployment stood at $4.6 billion, or about ₹44,350 crore, across 144 deals in the first half of 2026, representing a 54% decline from the previous year. This follows a record $15.6 billion, or about ₹1.5 lakh crore, across 256 deals in 2025, when deployment increased 63%. The report attributes the first-half moderation primarily to normalisation after outsized issuances in 2025 rather than a broad-based retreat in underlying credit demand. Notably, Shapoorji Pallonji Group alone accounted for $3.6 billion, or about ₹34,700 crore, representing 23% of private-credit volume in 2025.
Several regulatory developments are reshaping the competitive landscape for private credit. Banks were permitted to finance acquisitions from July 2026, with the framework allowing banks to finance up to 75% of the independently assessed acquisition value. Under this framework, a bank's aggregate acquisition-finance exposure is capped at 20% of its eligible capital base, while the acquiring company's consolidated debt-to-equity ratio after the acquisition cannot exceed 3:1. Additionally, the liberalisation of external commercial borrowing (ECB) rules in February expanded borrowing limits, introduced market-based pricing and widened eligibility, expanding financing options available to Indian borrowers. The report indicates that ECBs had been opened to more borrowers and transaction types, significantly expanding the capital landscape for borrowers.
Private credit managers are adapting their strategies to maintain competitive advantages. As reported by Houlihan Lokey, the sweet spot lies in capturing both the illiquidity premium and the complexity premium, where structuring capability drives differentiated return. Aakash Desai, CIO and head of private credit at 360 ONE, stated that the focus is on capturing both the illiquidity premium and the complexity premium, where structuring capability drives differentiated return. The report expects greater lender participation to produce more differentiation in private-credit yields rather than uniform compression, with private credit retaining a role in complex and tailored transactions. This expansion of competing sources of capital comes as private-credit yields have already moved lower, prompting lenders to identify areas for superior returns while adapting their strategies to maintain competitive advantages in the evolving market environment.
Despite the current challenges, private credit remains a relatively small part of India's corporate financing market. According to the Houlihan Lokey report, the sector is expected to maintain its role in complex and tailored transactions, with managers focusing on areas where specialist expertise can generate differentiated returns. The changing competitive landscape is driving lenders to identify areas for superior returns while adapting their strategies to maintain competitive advantages in the evolving market environment, where high-yielding private credit deals appear to be on the wane due to intensified competition and regulatory measures that widen financing options for borrowers.
