Proposal to grant more powers to private credit funds for loan recovery

The Government of India is considering granting more powers to regular private credit funds for loan recovery to increase credit options for businesses and accelerate the lending process, according to a report by Mint.

A high-level panel led by NITI Aayog member Rajeev Gauba is considering a proposal to grant 'secured creditor' status to private credit funds under loan recovery laws. Two people familiar with the matter provided this information.

This relief could be provided by amending the SARFAESI Act (Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002). If this status is granted, loan recovery will become easier, which will reduce the risk for these funds, lower the cost of lending, and increase the flow of loans to small and medium enterprises (SMEs). This move would provide private credit funds with parity with banks and Non-Banking Financial Companies (NBFCs) and help them find new sources of funding.

The panel is considering the pros and cons of this proposal and will take a final decision soon. Some protective measures or safeguards may also be included to ensure that the amendment is not misused when implemented. Once the proposals are finalised, they will be shared with the relevant ministries and departments for necessary action.

Currently, private credit funds do not have the same powers as banks or NBFCs. If a loan defaults, they cannot take possession of assets without a complex legal process. Due to this high risk, these funds either charge higher interest or remain more cautious while lending, which increases the cost of credit for medium-sized companies.

Ishwar Karra, Deputy Managing Director of Kotak Alternate Asset Managers, called this move a practical and long-awaited reform. He stated that secured high-grade investments should have enforcement rights equal to secured bank loans. This parity will remove artificial risk premiums and make resolutions faster. Vivek Iyer, Partner at Grant Thornton India, also said that current rules are unequal because banks or NBFCs can enforce security without going to court, which is not possible for private credit funds.

Rajeev Gauba leads two high-level committees that suggest reforms in non-financial sectors and an action plan for the goal of a developed India. These committees were established in August 2025. These committees believe that to make India a developed economy by 2047, all credit channels will have to work together to ensure sufficient and affordable credit for continuous economic growth.

Private credit funds are funds that raise money from wealthy individuals and institutions and lend directly to businesses, especially medium-sized businesses that face difficulty in obtaining bank loans. These funds are regulated by SEBI and are known as close-ended Category-II Alternative Investment Funds (AIFs). They invest through privately negotiated deals.