Navigating India's complex special situations market for private credit investors
In the bustling landscape of India's financial sector, a significant shift is underway. The private credit market, particularly in the distressed assets and special situations segment, is experiencing rapid growth, attracting both global and domestic investors.
The transformation began with the enactment of the Insolvency and Bankruptcy Code (IBC) of 2016, which revolutionised distressed asset resolution in India. The code provides creditors with enhanced recovery mechanisms and time-bound processes, making it easier to recover their investments.
This evolution has been spurred by structural gaps in traditional lending, with banks and NBFCs retreating from large-ticket and complex exposures. Private credit funds are stepping in to fill these gaps, expanding the market for distressed and special situations investing.
In the first half of 2025, private credit investments surged to a record US$9.0 billion, a 53% increase over the previous year. This growth is driven by large refinancing deals in the infrastructure, real estate, and healthcare sectors, such as the US$3.1 billion deal by Shapoorji Pallonji and significant funds raised by Adani Group and GMR Infrastructure.
The market is supported by an evolving credit ecosystem. Global funds dominate large and structured deals, while domestic funds focus on the mid-market and opportunistic deals. This diversity provides opportunities to tailor risk and returns in distressed and special situations portfolios.
Asset management in private credit has grown over 2.5 times from 2018 to 2023, reflecting sustained demand for alternatives to traditional bank lending amid rising bad loans and macroeconomic volatility.
The private credit market in India, with over $25 billion in assets under management, is expected to reach $60-70 billion by 2028. The expected internal rates of return (IRRs) in the distress, high-yield, and special situations segment range from 15-24%, while performing credit to stressed borrowers aims for 12-18% expected IRRs.
However, the rapid expansion of the private credit market has drawn regulatory attention. Concerns about its growth with limited oversight and potential risks to financial stability are being addressed.
Success in India's distressed assets market requires deep local expertise, legal acumen, operational capabilities, and a long-term mindset. Special situations funds in India employ diverse strategies, including acquiring non-performing loans at discounts, providing rescue financing, offering performing credit to companies undergoing restructuring, and aggregating distressed assets into sector-specific platforms.
Manufacturing companies with sound businesses facing temporary operational challenges and lack of growth capital are a target for private credit investments. Real estate projects with strong underlying demand but facing temporary liquidity issues also offer potential for private credit investment.
Recent regulatory changes allow securitization of stressed retail loans, opening new avenues for private credit in high-yield consumer debt markets. Turnarounds often involve negotiations with multiple stakeholders, including promoters, employees, creditors, and regulators, which can lead to conflicts. Opaque distressed asset valuation and lack of standardized pricing add complexity to private credit investments.
Despite these challenges, the private credit market in India is capitalizing on a unique blend of regulatory reform, market maturation, and capital scarcity. The infrastructure sector, with its lack of new capacity and growing economic activity, presents significant opportunities. The special situations market, characterised by distressed assets and underperforming companies, is attracting growing interest from global and domestic investors.
Investors are increasingly drawn to India's private credit market, particularly in the distressed assets and special situations segment, due to the enactment of the Insolvency and Bankruptcy Code (IBC) of 2016 and the evolution of time-bound processes that make it easier to recover investments.
The growth in private credit investing is evident in the surging investments, which reached a record US$9.0 billion in the first half of 2025, a 53% increase over the previous year.
