Introduction
Private credit, once an asset class reserved for institutional investors and ultra-wealthy family offices, is now quietly making its way into the retail investing universe. In India, digital investment platforms, fintech innovations, and SEBI’s push toward democratizing alternative assets have opened the gates for individual investors to participate in lending directly to companies and projects — often promising returns of 8–15% annually.
But with opportunity comes complexity. Unlike traditional fixed deposits or bonds, private credit operates in a space with less regulation, lower liquidity, and higher dependency on borrower performance. Add tokenization — the process of converting loans into tradable digital assets — and you have a financial revolution brewing, but one that carries real risks if misunderstood.
Let’s break down the what, why, and how of private credit for retail investors — and how to avoid the traps while seizing the opportunities.
What is Private Credit?
Private credit refers to debt provided by non-bank lenders to businesses, typically outside of traditional public bond markets. Instead of borrowing from a bank, a company might raise funds from private credit funds or directly from investors via platforms.
The appeal?
- Higher yields than bank deposits or government bonds.
- Diversification beyond public markets.
- Direct exposure to corporate borrowers.
However, with higher returns comes higher credit risk — and far less liquidity.
Opportunities in Private Credit for Retail
🔸 Higher Yield in a Low-Deposit-Rate World
One of the primary attractions of private credit is the yield premium. While banks might offer 6–7% on fixed deposits, private credit deals can offer 9–15%, depending on borrower risk and loan structure. For an investor frustrated with inflation eroding savings, this extra return can be compelling.
But it’s essential to remember — the yield premium is the market’s way of compensating you for taking on additional risks such as default probability, lack of collateral, or industry volatility. A 12% yield should make you ask, “What risk am I being paid for?” rather than just, “How soon can I invest?”
🔸 Diversification Beyond Public Markets
Most retail portfolios are overloaded with equities and bank deposits. Private credit provides an alternative income stream that isn’t directly correlated with stock market volatility. Even if the Nifty 50 drops 10%, your corporate loan to a stable manufacturing company might still pay its monthly interest without disruption.
That said, diversification only works if your private credit exposure spans different borrowers, industries, and tenures. Lending all your funds to one borrower in a cyclical sector defeats the purpose.
🔸 Tokenization and Fractional Access
Tokenization is a game-changer for private credit accessibility. By converting a large loan into blockchain-based tokens, platforms can allow retail investors to buy fractional shares for as little as ₹10,000. This means you can spread your exposure across multiple loans without needing lakhs of rupees per borrower.
Tokenization also theoretically allows for secondary market trading, giving investors a chance to exit before maturity. However, these secondary markets are still thinly traded in India, meaning liquidity is more promise than reality — for now.
The Liquidity Trap
🔸 Why Illiquidity is Both a Feature and a Risk
Private credit is designed for patient capital. Illiquidity protects the borrower from sudden fund withdrawals, allowing them to focus on running the business instead of constantly refinancing.
However, for the investor, it means your capital is locked until the loan matures. Even with tokenized private credit, a lack of active buyers can trap you in an asset you can’t sell. This becomes a problem if you suddenly need funds for an emergency or if the borrower’s financial health declines.
🔸 Market Stress = Vanishing Buyers
During economic downturns or credit events, liquidity can evaporate. Even if your platform offers a resale marketplace, you might find no takers — or you might be forced to sell your loan at a deep discount. This is why private credit shouldn’t be treated like a savings account.
How Retail Investors Can Approach Private Credit Safely
🔸 Start Small
When entering private credit, begin with a small “test allocation” — say, 5–10% of your investable surplus. This ensures you can observe repayment patterns, interest crediting, and platform reliability without risking core savings. Think of it like trial driving a car before committing to a purchase.
🔸 Understand the Borrower Profile
Know exactly who you are lending to. Are they an SME, a mid-sized corporation, or a startup? What industry are they in? How stable is their revenue stream? For example, lending to a logistics company with government contracts is less risky than a seasonal fashion retailer.
Ask for financials, repayment history, and any collateral backing the loan. A flashy yield is meaningless if the borrower’s cash flow can’t sustain repayment.
🔸 Check Platform Credentials
The platform is your gatekeeper. Look for:
- SEBI registration or regulatory oversight.
- Transparent fee structures.
- Regular updates on borrower performance.
Platforms with their own capital invested in the same deals often have better risk alignment with investors.
🔸 Plan for Illiquidity
Lock-in periods are a core feature of private credit. Only invest funds you won’t need for the next 1–3 years. Avoid using emergency funds or short-term capital for these investments. If you think you might need the money quickly, this is not the right product.
The Future of Private Credit in India
Private credit is set to grow rapidly in India, driven by SMEs seeking faster funding, fintech innovation, and regulatory openness to alternative investment products. Tokenization could eventually solve liquidity issues, but until then, retail investors should treat this asset as a long-term yield enhancer — not a short-term cash park.
If approached with caution, private credit can be a powerful addition to a retail portfolio — delivering steady income and diversification in a world where both are increasingly hard to find. But in chasing the extra yield, always remember: capital protection comes first.
