Introduction
A mid-sized developer in Bengaluru has a 90-day window to close a land acquisition before the seller walks. The project math works. The balance sheet is sound. But the bank sanction process alone typically takes longer than the window itself. This is not a hypothetical. It is the exact situation that has pushed a growing share of Indian real estate financing away from banks and toward private capital, and the shift shows up clearly in the numbers, not just in developer anecdotes.
For years, bank loans were the default route for construction finance. That default is breaking down, not because developers have stopped valuing cheap capital, but because banks have become structurally less able to provide it at the speed and shape that real estate projects now need.
The Case for Private Capital Over Bank Loans, in Numbers
A Market That Grew 35% in a Single Year
India’s private credit market closed calendar year 2025 at US$12.4 billion across 166 transactions, a 35% year-on-year increase in value, according to EY India’s Private Credit Market H2 2025 report. Real estate, alongside healthcare and industrials, was named among the largest contributors to that volume, with the report pointing directly to structural funding gaps left by banks as a driver of the growth.
Refinancing, acquisition financing and capital expenditure needs accounted for more than 35% of capital deployed in the second half of 2025 alone, per the same EY data. That is not distressed lending. It is developers with functioning projects choosing private capital for speed and structure over a marginally cheaper bank rate that comes with a much longer runway to disbursement.
The speed differential is the part developers feel most directly. A developer 80% through a project cannot wait out a six-month bank sanction cycle for a fresh credit line, and a promoter racing a competing bid on land does not have the runway for a committee-driven approval process. Private credit funds routinely execute in weeks rather than months because they underwrite the project and its cash flows directly, rather than routing the request through a standardised template built for a different risk profile.
Why Banks Have Become Structurally Selective
This is not a story of banks abandoning real estate. It is a story of banks becoming far more selective about which real estate they will fund, and the regulatory architecture behind that selectivity has tightened materially over the past year.
The Reserve Bank of India’s Project Finance Directions, 2025, effective from October 1, 2025, apply to infrastructure and non-infrastructure sectors, including commercial real estate and CRE residential housing, where a project has not yet reached financial closure. Under these directions, lenders must hold an additional specific standard-asset provision of 0.375% for infrastructure project loans and 0.5625% for non-infrastructure project loans, including commercial real estate, for accounts that avail deferment of their date of commencement of commercial operations. That is real, ongoing capital a bank must set aside for construction-stage lending, on top of standard provisioning.
The practical effect on the ground is a barbell. Top-tier developers with strong balance sheets and a track record of on-time delivery still get funded by banks at competitive rates. Everyone else, regionally strong builders, mid-stage projects and first-time special purpose vehicles, gets pushed toward promoter equity, customer advances or private credit, because the underwriting cost and provisioning burden of a bank loan to that borrower profile has simply gone up.
What This Looks Like on the Ground
In both cases, the deal itself sets the clock. A lender whose process does not fit inside that window is not a viable option, regardless of how competitive its rate looks on paper. This is why speed shows up as a genuine underwriting variable in real estate financing decisions, not a soft preference.
What Developers Are Actually Trading Off
Private capital is not free flexibility. It costs more, and any developer evaluating the choice should be underwriting that cost honestly rather than treating speed as free.
- Pricing on private credit typically runs meaningfully above bank term-loan rates, reflecting the faster underwriting, project-specific structuring and absence of the capital subsidy embedded in a bank’s cost of deposits
- Structures vary. Some private capital is senior secured against land or receivables. Some sits as mezzanine debt, ranking behind senior lenders but ahead of the promoter’s own equity, often used to bridge the specific gap between what a bank will sanction and what the project needs. Some is structured equity, blending a fixed coupon or buyback commitment with participation in project upside
- Disbursement is typically milestone-linked rather than upfront, tied to construction progress and RERA-mandated escrow compliance, which protects the lender but also means the developer must manage drawdowns against a real execution schedule, not a lump sum
For a developer, the decision is less about which source is cheaper and more about which source fits the deal’s actual constraints. Investors evaluating the other side of this trade, meaning what this financing gap looks like as an allocation opportunity, may find our piece on Why Investors Are Turning to Structured Real Estate Debt useful context on how these deals are typically structured and secured.
Why This Matters for the Investor Side of the Table
The same dynamic that is inconvenient for a developer chasing a bank sanction is the dynamic that has built an entire asset class for private credit investors. Capital deployed through SEBI-registered Category II Alternative Investment Funds sits directly in the gap banks are stepping back from, and it is deployed against real, secured collateral, not unsecured corporate exposure.
Deal sizing tells its own story here. Transactions exceeding US$100 million represented just 9% of total private credit deal count in H2 2025 but accounted for nearly 36% of aggregate deal value, per EY’s data, showing that while smaller mid-market deals are numerous, capital concentration still favours larger, more institutional-grade transactions. For an investor, that concentration pattern is worth understanding before assuming every private credit fund is exposed the same way.
None of this should be read as a return promise. Historical IRR figures reported across the market are backward-looking and directional, not a guide to future performance, and every allocation decision should be evaluated on the specific fund’s structure, security package and track record rather than the sector’s aggregate growth numbers.
The Road Ahead
The regulatory direction of travel does not suggest banks loosening their stance on real estate construction finance any time soon. The RBI’s 2025 project finance framework was designed specifically to bring more discipline and provisioning rigour to exactly this category of lending, which means the cost of a bank staying in this business at scale is going up, not down.
That points to private capital’s role in developer financing widening rather than narrowing over the medium term.
Conclusion
Developers are not choosing private capital over bank loans because banks have exited real estate. They are choosing it because banks have become structurally slower and more selective, and the RBI’s own 2025 provisioning framework makes that selectivity more expensive to reverse. A 35% year-on-year rise in India’s private credit market to US$12.4 billion, with real estate among its largest contributors, is not a marginal data point. It describes a financing market that has permanently repriced speed and certainty.
For developers, this means treating private capital as a legitimate part of the financing stack rather than a last resort and underwriting its cost against what a delay or a lost deal would cost. For investors, it means understanding that this financing gap is the foundation of a real, growing and regulated asset class, not a temporary dislocation.
