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India's private credit market is likely to expand further as banks and NBFCs continue to leave funding gaps in specialised segments, but investors are expected to become increasingly selective about collateral quality, contractual protections and their ability to influence insolvency outcomes, according to an EY research report.
The report said that recent changes to the Insolvency and Bankruptcy Code (IBC) could shift private credit strategies away from relying primarily on security towards stronger documentation, structural protections and voting influence. India's private credit market remains relatively small at an estimated $25-30 billion as of March 2025, compared with around $1.4 trillion in the US. However, the Indian market has developed rapidly following periods of stress in the banking and NBFC sectors, with private credit funds increasingly providing refinancing, promoter financing, special-situation funding and financing for real estate and infrastructure. Unlike the US, where private credit has become deeply integrated into mainstream capital markets and increasingly uses semi-liquid structures, India's market is dominated by closed-ended Category II AIFs. These funds are primarily backed by institutional investors, high-net-worth individuals and family offices, with limited leverage and fixed tenures. EY noted that this structure has helped shield Indian private credit from the redemption pressures seen in the US, where withdrawal requests exceeded $20 billion in early 2026 and several funds imposed redemption limits. The report, however, highlights a major change for lenders following the IBC Amendment Act, 2026, which came into effect on May 26. The amendments alter the recovery economics for dissenting secured creditors and clarify that secured status will be limited to the realisable value of collateral. Any portion of a claim exceeding that value would rank as unsecured under the liquidation waterfall. EY expects lenders to place greater emphasis on loan-to-value discipline, periodic collateral valuation, additional-security triggers and carefully drafted inter-creditor agreements. The reduced value of dissent could also make voting power within the Committee of Creditors more important, encouraging private credit investors to favour bilateral loans, club deals and concentrated lender groups where they can exert greater influence over resolution outcomes. The report also flagged valuation as a potential new area of litigation, as disputes could increasingly centre on the methodology and timing used to determine the realisable value of security. This could make portfolio construction, contractual seniority and insolvency process readiness as important as the underlying collateral itself for India's next phase of private-credit growth. (ANI)
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