Private credit may get more teeth to recover loans

India’s private credit industry is growing, but funds lack the recovery powers available to banks and NBFCs. A proposed Sarfaesi Act change could help close that gap, lower borrowing costs and widen business funding options.

India is considering giving regulated private credit funds greater loan-recovery powers to boost lending and widen funding options for businesses. A high-level panel, headed by Niti Aayog member Rajiv Gauba, is weighing a proposal to grant them secured creditor status under the loan recovery law, two people aware of the discussions said.

Easier credit recovery could reduce these funds’ risks, lower borrowing costs and boost loan flow to small and medium enterprises, the people said on the condition of anonymity. For the funds, easier loan recovery could offer some parity with banks and non-banking financial companies (NBFCs), and help them find new funding sources.

“The panel is considering the pros and cons of such a proposal. It will take a final call soon,” said one ofthe persons cited above. Any such relaxation may require an amendment to the Sarfaesi Act (Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002), the person said, adding the relaxation may come with some safeguards to ensure the status isn’t misused.

The proposals, once finalized, will be shared with relevant ministries and departments for necessary action, the people added.

Queries emailed to Gauba’s office remained unanswered. Gauba heads two high-level committees to suggest reforms in the non-financial sectors and also on the action plan for the Viksit Bharat goal. The committees, set up in August 2025, reckon that for India to become a developed economy by 2047, all credit channels need to fire together to ensure adequate and cheaper loans for sustained economic growth, said the people cited above.

Hard recovery

Private credit funds pool money from wealthy individuals and institutions to lend directly to businesses, mainly mid-sized, often those struggling to secure bank loans. Regulated by the Securities and Exchange Board of India (Sebi), these close-ended category-II alternative investment funds (AIFs) lend through privately negotiated deals, usually held to maturity. They do not qualify as “secured creditors” under the Sarfaesi Act, and hence cannot enforce security against a defaulter as easily as other lenders. Unlike banks or NBFCs, they can’t take possession of assets in the case of a default without a complex legal process.

This higher recovery risk forces such funds to either charge more for funds or remain cautious in lending, which pushes up borrowing costs, especially for mid-sized companies that often require customized funding solutions and struggle to get them from banks.

Experts welcomed the move to ease private credit recovery.

“Sarfaesi access for regulated private credit funds is a pragmatic, long-overdue reform,” said Eshwar Karra, deputy managing director at Kotak Alternate Asset Managers.

AIFs don’t lend in the traditional sense; they invest the money. “But secured high-grade investments should carry the same enforcement rights as secured bank loans. Parity would remove an artificial risk premium, speed up resolutions, and strengthen LP confidence,” he said, also pitching for opening pension and insurance funds to private credit.

The change to Safaesi Act is long overdue, said Vivek Iyer, partner and financial services risk advisory leader at Grant Thornton Bharat. “Today, the rules are uneven. A bank, an NBFC or the debenture trustee of a listed secured NCD can enforce security without going to court. A category-II AIF holding the same loan through an unlisted instrument usually cannot.”

Small share

In India, private credit is mainly used for refinancing, growth capital, acquisition financing, structured credit transactions and special situations. Some of India's prominent domestic AIFs with private credit funds are Edelweiss Alternatives, Kotak Alternate Asset Managers, Motilal Oswal Alternates, 360 ONE Asset and ICICI Prudential.

While India’s private credit market doubled over the five years through December 2025, it remains small, with $25 billion in assets under management (AUM), about ₹ 2.34 trillion, according to Moody’s. For perspective, India’s current commercial bank loan market is at ₹227 trillion.

Rakshat Kapoor, head of the private credit business & chief investment officer at Motilal Oswal Alternates, said that India’s private credit industry has grown to a sizeable scale warranting greater regulatory attention. “Historically, when these acts, laws and regulations were made, private credit funds did not exist at this scale. But now, private credit funds have become a sizable segment, and these amendments may be carried out,” he said.

“Private credit today is not simply credit capital; it increasingly serves as ‘growth capital’, which is much needed to accelerate economic growth and help entrepreneurs expand their businesses,” said Manish Aggarwal, partner and leader (financial services and infrastructure transactions) at Deloitte India.

Sunil Gidwani, partner (financial services) at consultancy firm Nangia Global, said: “This would address an enforcement gap, rather than create a recovery framework.” He added that any extension of powers should define eligible funds and exposures, while ensuring “borrower safeguards, transparent valuation and sale processes, and effective judicial oversight”.

According to the EY Private Credit Report H1 2026, the market remained resilient despite the West Asia crisis, with investments reaching $3.5 billion in the first half of 2026, broadly in line with $3.4 billion recorded in the second half of 2025. Some notable private credit transactions in the first half of 2026, as per the report, were $176 million raised by Kalpataru Properties for refinancing; $156 million raised by HyFun Foods Group for refinancing and working capital requirements; $150 million secured by the GMR Group to fund group firms; $124 million raised by the Manipal Group for refinancing; and $113 million raised by Inspira Group’s Lenexis Foodworks for acquisition financing.

India’s private credit market is projected to nearly triple from $21.8 billion in 2025 to $56-65 billion by 2030, with a CAGR of 21-24%, according to a CareEdge report dated 2 November.

The penetration of this credit pathway remains weak in the country. According to a Kotak Mutual Fund study in March, private credit in India accounted for roughly 1% of the total credit as of 2025, about one-tenth of the level in the US.