Key Takeaways
- • India is weighing a proposal to grant regulated private credit funds secured creditor status under the Sarfaesi Act, which would give them loan-recovery powers comparable to banks and NBFCs, according to two people aware of the discussions.
- • A high-level panel headed by Niti Aayog member Rajiv Gauba is considering the proposal and will reach a final decision soon; any change may require an amendment to the Sarfaesi Act and could include safeguards against misuse.
- • Category-II alternative investment funds (AIFs) currently cannot enforce security against defaulters as easily as banks or NBFCs, a gap that forces them to charge higher rates or lend more cautiously, raising borrowing costs for mid-sized companies.
- • India's private credit market holds about $25 billion (roughly ₹2.34 trillion) in AUM according to Moody's, and EY reports $3.5 billion of private credit investment in H1 2026.
- • Industry participants including Kotak Alternate Asset Managers, Grant Thornton Bharat, Motilal Oswal Alternates and Deloitte India welcomed the reform, though Nangia Global cautioned it addresses an enforcement gap rather than creating a full recovery framework.
Summary
India is considering giving regulated private credit funds greater loan-recovery powers, a step that could lower borrowing costs and broaden funding options for businesses. According to two people aware of the discussions, a high-level panel headed by Niti Aayog member Rajiv Gauba is weighing a proposal to grant these funds secured creditor status under the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest (Sarfaesi) Act, 2002. The panel is weighing the pros and cons and will take a final call soon, after which the proposals will be shared with relevant ministries. Queries sent to Gauba's office went unanswered. The panel also heads two high-level committees on non-financial sector reforms and the Viksit Bharat action plan, set up in August 2025.
Private credit funds pool capital from wealthy individuals and institutions to lend directly to mostly mid-sized businesses, often those struggling to obtain bank loans. Regulated by the Securities and Exchange Board of India (Sebi), these close-ended category-II AIFs typically hold loans to maturity. Because they do not qualify as secured creditors under the Sarfaesi Act, they cannot take possession of collateral on default without a complex legal process, unlike banks or NBFCs. Sources say this higher recovery risk leads funds to charge more or lend cautiously, pushing up borrowing costs, particularly for mid-sized companies that need customized financing.
Industry figures broadly welcomed the proposal. Eshwar Karra, deputy managing director at Kotak Alternate Asset Managers, called it a "pragmatic, long-overdue reform," arguing parity would remove an artificial risk premium and strengthen LP confidence. Vivek Iyer, partner at Grant Thornton Bharat, noted that a bank, NBFC or debenture trustee of a listed secured NCD can enforce security without court involvement, while a category-II AIF holding the same loan through an unlisted instrument usually cannot. Nangia Global's Sunil Gidwani said the change "would address an enforcement gap, rather than create a recovery framework," and called for defined eligibility, borrower safeguards, transparent valuation and judicial oversight.
India's private credit market doubled over the five years through December 2025 but remains small, with $25 billion in AUM (about ₹2.34 trillion) according to Moody's, against a commercial bank loan market of ₹227 trillion. EY's Private Credit Report H1 2026 says investment reached $3.5 billion in the first half of 2026, broadly in line with $3.4 billion in H2 2025, despite the West Asia crisis. Notable transactions included $176 million for Kalpataru Properties (refinancing), $156 million for HyFun Foods Group, $150 million for the GMR Group, $124 million for the Manipal Group and $113 million for Inspira Group's Lenexis Foodworks (acquisition financing). A CareEdge report dated 2 November projects the market will grow from $21.8 billion in 2025 to $56-65 billion by 2030, a 21-24% CAGR. A Kotak Mutual Fund study in March estimated private credit at roughly 1% of total Indian credit in 2025, about one-tenth the US level.
Private credit funds pool capital from wealthy individuals and institutions to lend directly to mostly mid-sized businesses, often those struggling to obtain bank loans. Regulated by the Securities and Exchange Board of India (Sebi), these close-ended category-II AIFs typically hold loans to maturity. Because they do not qualify as secured creditors under the Sarfaesi Act, they cannot take possession of collateral on default without a complex legal process, unlike banks or NBFCs. Sources say this higher recovery risk leads funds to charge more or lend cautiously, pushing up borrowing costs, particularly for mid-sized companies that need customized financing.
Industry figures broadly welcomed the proposal. Eshwar Karra, deputy managing director at Kotak Alternate Asset Managers, called it a "pragmatic, long-overdue reform," arguing parity would remove an artificial risk premium and strengthen LP confidence. Vivek Iyer, partner at Grant Thornton Bharat, noted that a bank, NBFC or debenture trustee of a listed secured NCD can enforce security without court involvement, while a category-II AIF holding the same loan through an unlisted instrument usually cannot. Nangia Global's Sunil Gidwani said the change "would address an enforcement gap, rather than create a recovery framework," and called for defined eligibility, borrower safeguards, transparent valuation and judicial oversight.
India's private credit market doubled over the five years through December 2025 but remains small, with $25 billion in AUM (about ₹2.34 trillion) according to Moody's, against a commercial bank loan market of ₹227 trillion. EY's Private Credit Report H1 2026 says investment reached $3.5 billion in the first half of 2026, broadly in line with $3.4 billion in H2 2025, despite the West Asia crisis. Notable transactions included $176 million for Kalpataru Properties (refinancing), $156 million for HyFun Foods Group, $150 million for the GMR Group, $124 million for the Manipal Group and $113 million for Inspira Group's Lenexis Foodworks (acquisition financing). A CareEdge report dated 2 November projects the market will grow from $21.8 billion in 2025 to $56-65 billion by 2030, a 21-24% CAGR. A Kotak Mutual Fund study in March estimated private credit at roughly 1% of total Indian credit in 2025, about one-tenth the US level.
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